KEY POINTS:
Reserve Bank Governor Alan Bollard had nothing for the Christmas stocking of homeowners today.
The Reserve Bank has kept the official cash rate at a record 8.25 per cent on expectations high commodity prices and income tax cuts will spur inflation.
It means homeowners fearing a further hike in their mortgage rate can rest easy in the meantime.
However, people who are struggling and hoping for mortgage relief by way of a cut in interest rates anytime soon are out of luck.
He accepted "the housing market has clearly slowed", but said other factors were impacting inflation statistics.
Inflation is expected to be above the central bank's targeted 1 per cent and 3 per cent range because of high oil prices, the dairy boom, tight labour market and consumers spending generated by the government's plans to lower personal income taxes, Reserve Bank governor Alan Bollard said in a statement.
"Overall, inflationary pressures have increased, and interest rates are now likely to remain around current levels for longer than previously thought," Bollard said.
"We believe that the current level of the OCR remains consistent with future inflation outcomes of 1 per cent to 3 per cent on average over the medium term."
The RBNZ, which last increased the official cash rate in June, has lifted the benchmark a total 1 percentage point this year in an effort to tame inflation. New Zealand's employment rate dropped to 3.5 per cent in the three months ended September, Statistics New Zealand reported. The government plans to announce plans for cuts in income tax next year.
BNZ chief economist Tony Alexander said rates will remain high for the next year.
"The main message is that borrowers shouldn't get optimistic about rates going down," said Mr Alexander, who thinks there's a slight chance rates will be cut late next year.
The New Zealand dollar rose above 76.70 US cents after the 9 am announcement from about 76.45 US cents. New Zealand's interest rate advantage over the US Federal Reserve's benchmark this year bolstered the kiwi dollar to a record 81 US cents in July.
Mr Alexander said the currency could reach 80 US cents in coming months.
"The interest rate differential is strongly in favour of the New Zealand dollar."
Westpac economist Doug Steel described the Reserve Bank's statement as "pretty hawkish".
"They're pretty sanguine on the world situation and talking up the domestic in inflation pressures, which are pretty intense.
"It looks like interest rates aren't coming down anytime soon, and could well rise next year if the world was to pan out okay."
ANZ Bank chief economist Cameron Bagrie said that reading between the lines "we now have a real inflation problem. That means there is going to be a sacrifice to get the inflation genie back in the bottle."
Independent economist Donal Curtin said: "Everything's horrible."
He cited oil prices, the inflationary effects of tax cuts and the Government's carbon emissions policy, the tight labour market, a continuing strong housing market and the effects of increased dairy farmer spending.
BNZ economist Craig Ebert said most of the risks seemed to be over inflation surprising on the upside and not the downside.
"They've pushed out any hope of easing even further, so they'll sit where they are as long as it takes to take inflation pressure out."
Goldman Sachs JB Were economist Shamubeel Eaqub believes the bank is too optimistic in forecasting economic growth will only slow to 2.6 per cent next year from the current rate of 3 per cent.
He said the slowing outlook for the US economy and weakening house prices domestically would dampen the economy more.
"We think the Reserve Bank is far too optimistic about the economy and will be surprised on the downside on economic growth.
"The economic evidence early next year will dispel a lot of the fears they are talking about."
Elsewhere, Australia's central bank held its key interest rate at 6.75 per cent yesterday amid uncertainty about the global economic outlook.
In the US, analysts predict the Federal Reserve will lower the discount rate by half a point to 4.5 per cent when it meets in Washington next week, as the global credit crunch continues to bite.
KEY POINTS
Key points from the Reserve Bank's December quarter Monetary Policy Statement released today:
* Official Cash Rate left unchanged at 8.25 per cent in line with expectations;
* Inflation projected to be above 3 per cent all next year and 3.4 per cent in the second half;
* RB Governor Alan Bollard says official interest rates likely to remain at current levels for longer than previously thought;
* RB assumes across-the-board personal tax cuts of $1.5 billion in early 2009;
* 90-day bank bills assumed to remain around current 8.7 per cent until second half of 2009;
* Economic growth forecast to be 3.1 per cent in year to March 2008 falling to 2.6 per cent in 2009;
* NZ dollar trade weighted index assumed to be above 70 until 2009;
* NZ real domestic income expected to increase 6.5 per cent in coming year, boosted by dairy exports;
* Lending rates projected to rise another 0.7-1.5 percentage points.
- additional reporting by NZPA
