Reserve Bank leaves OCR on hold + video

Reserve Bank Governor Graeme Wheeler has announced there will be no change to the Official Cash Rate, which sits at a record low 2.5pc.

The financial markets saw no chance the Reserve Bank would raise the official cash rate today so their focus will be on how the accompanying monetary policy statement describes the balance of risks going forward.

Read today's Monetary Policy Statement here.

The kiwi dollar dropped on the news.

"The overvalued New Zealand dollar is undermining profitability in export and import competing industries, and worsening drought conditions are creating difficulty in much of the country," Wheeler said. "At this point we expect to keep the OCR unchanged through the end of the year.

The central bank expects the 90-day bank bill, often seen as a proxy for the OCR, to start increasing in June next year, before accelerating in 2015 and rising to 4 per cent the following year. It had previously projected the rate staying on hold until December this year, rising to 3.3 per cent in March 2015.

Traders see 22 basis points of cuts over the next 12 months, based on the Overnight Interest Swap curve. The New Zealand dollar fell to 82.13 US cents after the statement from 82.60 cents immediately before. It fell to 79.66 Australian cents from 80.13 cents.

The economy grew faster than expected through the tail-end of last year, underpinned by the Canterbury rebuild, and that stronger domestic demand is seen as creating medium-term inflationary pressures, even as consumer prices remain subdued in the foreseeable future, the bank said in the monetary policy statement.

"Monetary policy settings must balance this low near-term inflation outlook and concerns about the exchange rate and weak labour market, against increasing signs that output will accelerate and inflationary pressures will pick up," the report said.

See a recent history of the Official Cash Rate changes here.

- BusinessDesk

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