Reserve Bank cash rate decision leaves no respite for borrowers

Home owners could be waiting until next year for any sign of interest rate relief after Reserve Bank (RB) Governor Alan Bollard again left the official cash rate unchanged at 6.75 per cent yesterday.

And once again, it was stubbornly robust growth in property prices staying the central bank's hand.

"The housing market is still their main bugbear," Westpac chief economist Brendan O'Donovan said.

In a toughly worded statement, Dr Bollard said that with inflation predicted to exceed the RB's 1-3 per cent target band in the coming quarters there was "no prospect of policy easing in the foreseeable future".

"In the current environment, monetary policy must remain vigilant," Dr Bollard said.

While the economy was showing signs of softening, inflation pressures still posed too great a risk to begin easing rates.

"Several years of strong growth have led to productive resources becoming stretched and the resulting inflation pressures will take some time to unwind," Dr Bollard said.

That was on top of the continuing firm tone of residential housing market indicators, representing an "upside risk" for future household spending and inflation, Dr Bollard said.

Westpac's Mr O'Donovan said the RB had indicated it would keep interest rates on hold for some time, preferring to wait for an easing in conditions via the exchange rate rather than interest rates, "until they see the wind completely knocked out of the housing market".

"We're still looking for the first cuts to be the first quarter of next year."

In his hawkish accompanying commentary to the decision, Dr Bollard also cited "additional short-term inflation pressures" that had recently emerged as a result of surging oil prices and "the waning impact of the strength of the exchange rate".

However he also noted signs of a softening economy, with easing GDP growth particularly in the manufacturing sector and slackening business activity and household consumption growth.

Any inkling Dr Bollard has of hiking interest rates any time soon should have been erased after reading this week's horror trade figures.

Soaring oil prices, a continued spend-up on imported consumer goods and deteriorating exports as a result of an over-valued currency sent the trade deficit to a massive $522 million in June, according to Statistics New Zealand figures.

On the currency market, "the kiwi had a small but aggressive short-lived knee-jerk reaction", ANZ Investment Bank senior dealer Mark Elliot said.

Trading around US67.90c before the announcement, it spiked to US68.23c before retreating to close at US67.96c last night.

- NZPA