WELLINGTON -- New Zealand's central bank held interest rates steady and scaled back its rate and growth outlook on Thursday, backing views that it will keep rates unchanged until mid-2011 at the earliest as it tries to revive a tepid economy.
The Reserve Bank of New Zealand kept the official cash rate (OCR) at 3%, as financial markets had expected, saying the pace of economic growth has slowed as household and businesses remained cautious about spending, and as the global outlook faced downside risks.
"While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing," Governor Alan Bollard said in a statement.
He said rates are likely to rise less over the next two years than signalled in the September statement, when its bank bill interest rates had implied the cash rate hitting around 5% by 2012-13.
The bank cut its forecast for 90-day bank bill futures, a barometer for the official cash rate, by about 25 basis points across the curve.
The RBNZ held its cash rate steady at the September and October reviews after 25 basis point rises in June and July.
The New Zealand dollar fell around half a cent to $0.7448 before bouncing back to $0.7485/90 while interest rate futures prices rose by up to 10 points as investors trimmed expectations of future tightening and abandoned expectations of a hike in March.
The swap yield curve also steepened, with two-year swaps falling 5.5 basis points to 3.81% and the five-year swaps down one basis point to 4.715%.
The restrained RBNZ outlook contrasted with the Reserve Bank of Australia (RBA), which still has a gradual tightening bias after holding rates at 4.75 percent this week. That sent the kiwi to a low of NZ$1.3132 before steadying around NZ$1.3101.
"It appears that it will take a decent pick-up in the New Zealand data flow to bring rate hikes back onto the policy table," said Deutsche Bank chief economist Darren Gibbs.
"An upward move in the OCR before the middle of 2011 is very unlikely and there must be a reasonable chance it is even later than mid-year," he added.
