Alan Bollard, the Reserve Bank Governor, may well have preferred to postpone yesterday's official cash rate statement for a week. By then, at least one aspect of a vexed international economic outlook should be clearer.

The game of political brinkmanship now being played in Washington should have ended, enabling the United States to meet an August 2 deadline to lift its US$14.3 trillion ($16.3 trillion) federal government borrowing cap and avoid default and a credit rating downgrade. As the proceedings have played out, policymakers around the world have fretted over how a crisis of confidence in US solvency could spill into the international economy. A small, open economy such as this would hardly be immune.

As expected, Dr Bollard has opted to hold the official cash rate at a record low 2.5 per cent. But that may be lifted by as many as 50 basis points in September, thereby unwinding the emergency stimulus imposed after the Christchurch earthquakes. The governor said, however, that this was conditional on global risks receding and the economy continuing to recover. The first risk is, of course, the US.

Concern about this has seen the New Zealand dollar surge. It is not alone. Two traditional havens, the Swiss franc and gold, are also at record highs in dollar terms. Good sense, however, will surely prevail and the Washington imbroglio will pass, albeit with permanent damage for the greenback's status.


Yet even then Dr Bollard's brow will remain somewhat furrowed. Global financial stability is also threatened by the potential for another debt-default crisis among the ailing economies of Europe. This could ripple through other seriously indebted countries in the eurozone, creating trepidation around the globe. Many of our trading partners are recovering only sluggishly.

A crisis of confidence would hit hard. The damage would, inevitably, be severe, even in an economy that has proved remarkably resilient.

If these global risks recede and the economy continues to prosper, Dr Bollard indicated that increases to the official cash rate beyond 3 per cent would depend on the strength of the dollar. Its surge has held back the export-led recovery, even if the rise against the currency of Australia, our largest trading partner, has been relatively minor. Discomfort about this may have persuaded the Reserve Bank Governor to be deliberately vague about further official cash rate raises in an attempt to dampen the enthusiasm of speculators. The usual blue-sky scenario would be a gradual series of increases over the next couple of years.

Dr Bollard's concern about inflation, the Reserve Bank's core responsibility, was also apparent. This accelerated at an annual rate of 5.3 per cent in the second quarter, well above the Reserve Bank's target range. The governor suggested people should look at the underlying rate of below 2.5 per cent, rather than the spike driven by the increase in GST. This was a shot across the bows of those anticipating strong growth in wages and prices based on fuel prices and the like. Given the headline rate, allied with a likely mortgage rise in September, it was not a message that will be greeted with equanimity by trade unions, especially those representing low-income workers.

New Zealand's economy grew at twice the pace of market expectations in the first three months of the year. Business confidence remains strong. This has led the Reserve Bank to bring forward the start of increases to the official cash rate. Just over a year ago, it also began this process. Then, the shock of the Christchurch earthquakes caused a rethink. A world of uncertainty means nothing can be taken for granted this time, either.