Bollard highlights Euro risk in OCR statement

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

The New Zealand dollar rallied slightly after the Reserve Bank's decision to leave its official cash rate unchanged, reflecting the fact that Governor Alan Bollard made no reference to any possible future rate cuts.

In the minutes following the 9 a.m. release, the NZ dollar rallied to US77.53c from US77.29, reflecting the market's view that Bollard had been slightly more "hawkish" than expected.

After 30 minutes, the currency settled back to around US77.47c.

While economists did not expect the bank to cut rates before the end of this year, the financial markets had priced in at least one rate cut.

"The market had priced in a 25 basis point rate cut by the end of the year and that has not been signalled in any way, shape, or form by the Reserve Bank," Westpac senior market strategist Imre Speizer said.

View the Monetary Policy Statement here.

Bollard's one page press statement highlighted the risks associated with increased uncertainty in Europe, but also played up New Zealand's growth prospects.

He said New Zealand's economic outlook had weakened a little since the bank's last monetary policy statement (MPS) in March.

"Political and economic stresses in Europe, along with a run of weaker than expected data, have seen New Zealand's trading partner outlook worsen," he said.

Furthermore, there was a "small but growing" risk that conditions in the euro area could deteriorate more markedly than was projected in today's MPS.

He said the bank was monitoring euro-area developments carefully and said there was potential for rapid change.

Increased agricultural production and the weakened global outlook have driven New Zealand's export commodity prices lower, he said.

The resulting moderation in export incomes, although partially offset by depreciation in the exchange rate, would weigh on economic activity in New Zealand, he said.

Fiscal consolidation was also likely to constrain demand growth, he said.

Offsetting these negative influences was increased housing market activity, supported by recent reductions in mortgage interest rates.

"In addition, repairs and reconstruction in Canterbury are expected to substantially boost construction sector activity in coming quarters," he said.

Aggregate GDP growth is projected to pick up slightly to just over 3 per cent next year, Bollard said.

Given this economic outlook, inflation is expected to settle near the mid-point of the 1 to 3 per cent target range, he said.

Bollard said that it "remained appropriate" for monetary policy to remain stimulatory - with the official rate staying at 2.5 per cent.

The OCR has not changed since March 2011, when it was cut by 50 basis points in an attempt to lessen the economic impact of the Christchurch earthquakes a month earlier.

See recent changes to the OCR here.