Reserve Bank Governor, Alan Bollard this morning made his last cash rate announcement for 2011, confirming no change to the cash rate which will remain at 2.5%.
In providing his policy assessment he made specific comment regarding the worsening world economy and the difficulties being encountered by a growing number of European economies. He also cited weakening economic activity which has now spread and includes the Asia Pacific region.
While the impact on New Zealand has so far been minimal business confidence has declined somewhat and investment spending is likely to remain weak for some time.
The domestic economy continues to expand, all be it at a modest pace. Inflation is now said to be within the Reserve Bank target range of 1 – 3% and the recent depreciation in the New Zealand dollar value has provided some much needed support for the export sector. Over time it is expected that the repairs and construction taking place in Canterbury will also provide a significant boost to the local economy.
The main threat to interest rates revolves around the cost of borrowing offshore and it now seems inevitable that funding costs for local Banks’ will increase in the coming year. How much and what impact that will have on domestic interest rates remains to be seen. There remains a high degree of uncertainty around the global outlook and there is a risk that conditions will weaken further. In the meantime there seems to be no upward pressure on interest rates.
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