OCR left at 2.5pc + video

Reserve Bank governor Graeme Wheeler has kept the official cash rate at 2.5 per cent, as expected, saying monetary policy is still focused on future inflation and that he's looking for any sign of more softening in prices.

"The bank is closely monitoring indicators for any sign of further moderation and is mindful of recent downside surprises to employment and inflation outturns," Wheeler told a briefing in Wellington in his maiden monetary policy statement.

Wheeler said economic growth has slowed in recent months, but is expected to accelerate over the coming two years with cheaper bank funding leading to lower interest rates and the Canterbury rebuild and heating Auckland housing market stoking investment.

"The overall outlook is for stronger domestic demand and the elimination of current excess capacity by the end of next year," he said. "This is expected to cause inflation to rise gradually towards the 2 per cent target midpoint."

In the October review, Wheeler zeroed in on the country's tepid pace of inflation, which fell below the central bank's 1 per cent to 3 per cent target band in the September quarter when the annual pace slowed to just 0.8 per cent.

The Reserve Bank is forecasting annual inflation to stay near the bottom of the band in the next year, rising to 2 per cent in the March 2015 quarter as building activity ramps up and as the currency starts running out of puff.

The bank has been under increasing pressure to cut the benchmark rate in a bid to stoke economic growth and bring down the kiwi dollar, and has had to weigh that up against an Auckland property market that's heating up.

Wheeler said the kiwi is a "significant headwind, restricting export earnings and encouraging demand for imports." The bank has changed its view on its projections for the currency, and sees it holding above 73 on a trade-weighted basis until December 2013, and falling to 71.40 in early 2015.

Traders have been gearing up for the bank to try and jawbone the currency lower after Wheeler indicated he would raise the kiwi at today's MPS when speaking to reports at last month's financial stability.

The currency has been at the whim of international events this year, including Europe's long-running sovereign debt crisis and the stalemate among US policymakers in reaching an agreement to stave off US$607 billion in spending cuts and tax hikes that could push the world's biggest economy back into recession.

The bank expects New Zealand's economy to grow by between 2.5 per cent and 3 per cent per annum over the next two years on the strength of the Canterbury reconstruction. That's being held by back the strong kiwi dollar, a dull global economy and cuts to fiscal spending.

Government figures this week gave a mixed outlook on the economy, with the country's terms of trade fell to a three-year low as the strong currency ate into dairy returns, while Canterbury's rebuild and Auckland's housing market underpinned the fastest quarterly growth in building activity in the September quarter.

The central bank largely held its previous view on the 90-day bank bill, often seen as a proxy for the OCR, which is seen as on hold until December next year, rising to 3.3 per cent in March 2015.

"Because of lower bank funding costs and increased competition among banks, this projection implies a lower forecast for retail interest rates than was the case in the September statement," the bank said.

Before the meeting, trading were giving a 17 per cent chance of a rate cut, and had priced in 21 basis points of reductions in the coming year, according to the Overnight Index Swap curve.

"We expect the meaning of the prefix 'for now' in the critical policy sentence 'For now it remains appropriate for the OCR to be held at 2.5 per cent" to be clarified and imply the next move is seen as up, not down," said Imre Speizer, market strategist at Westpac Banking in a note before the release.

Wheeler dropped the 'for now' reference in today's statement, saying "on balance, it remains appropriate for the OCR to be held at 2.5 per cent."

Today's full monetary policy statement is Wheeler's first after a bumpy first few months in the job where he was shown the door in his first appearance before select committee when politicians started bickering over process, and this week engaged in politicking when accused of misleading Parliament by Green Party co-leader Russel Norman.

New Zealand's OCR has been on hold for a record 14 meetings since Wheeler's predecessor, Alan Bollard, sliced half a percentage point in March last year as insurance against the impacts of the Canterbury earthquake that levelled the country's second-biggest city.

See a recent history of New Zealand's Official Cash rate here.

- BusinessDesk

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