Thaindian News

Wellington, Dec 8 (IANS) The Reserve Bank of New Zealand (RBNZ) announced Thursday it was leaving the interest rates unchanged on 2.5 percent, citing a deteriorating global financial outlook.

RBNZ Governor Alan Bollard said it was prudent to leave the Official Cash Rate (OCR) at 2.5 percent given the global uncertainty and the “moderate pace” of domestic demand, reported Xinhua.

“Continuing difficulties related to sovereign and bank debt in a growing number of European economies have resulted in high levels of volatility in financial markets. There has also been a softening in international economic activity, including in the Asia-Pacific region,” said Bollard in the policy assessment of the RBNZ December Monetary Policy Statement.

“Global developments are having some negative impact on New Zealand, though to date it has been limited. Business confidence has declined and investment spending is likely to remain weak for some time. In addition, tightness in international markets means funding costs for New Zealand banks will increase to some degree over the coming year.”

He said the risk on further weakening conditions remained as outlined in the previous RBNZ Monetary Policy Statement in September.

“Domestically, economic activity continues to expand, though at a modest pace. Although off their peaks, export commodity prices remain elevated. In addition, the depreciation of the New Zealand dollar provides some support for the tradable sector of the economy,” said Bollard.

Over time, repairs and reconstruction in the earthquake-stricken Canterbury region would also provide a significant boost to demand for an extended period.

“Annual headline inflation is estimated to have returned within the bank’s 1-3 percent target band in the December quarter. Underlying inflation continues to sit close to 2 percent. In addition, wage and price setting pressures have remained contained.

“Given the current unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent for now to keep the OCR on hold at 2.5 percent.”

An economic update from the ASB Bank Thursday said the RBNZ would remain cautious about raising the interest rate given that it expected the Eurozone was already in recession and Asia was heading for a more modest economic downturn.

“We continue to expect the RBNZ will raise the OCR in December 2012, given we see it as unlikely a clear resolution to the European debt crisis will be made over the first half of next year,” said the economic update.

Paul Bloxham, chief economist (Australia and New Zealand) at HSBC Global Research, said in a statement the RBNZ was also aware that New Zealand was “highly exposed internationally” to the impact of a global downturn on commodity prices.

“Like a boxer trying to pick themselves up off the canvas, the RBNZ has been struggling to lift rates from what they were referring to as ‘emergency levels’ put in place after the Canterbury earthquake in February.”

“The RBNZ now has dropped the phrasing of ‘emergency levels’, implying that these low rates may be held for some time yet. Indeed, it may be the case that we have seamlessly moved from one emergency to the next. Where we are may be the ‘new normal’, at least for a while,” said Bloxham.