The deepening US debt cap crisis is still overshadowing all else in global financial markets, as Democrats and Republicans continue to bicker over the type and extent of budget cuts and tax increases required to save about $US4 trillion ($NZ4.58 trillion) in coming years.
Analysts are factoring in a 60% chance the US problem will be resolved and a 40% chance it will be temporarily deferred.
Markets in the US took a caning yesterday, with the blue chip Dow Jones down 1.59%, the S&P 500 index down 2.03% and tech-heavy Nasdaq down 2.65%.
In the UK and Europe, bourses were down 1% to almost 2% each, while in Asia, the Nikkei and ASX 200 were down 0.5% and 0.8% respectively.
With the New Zealand dollar trading at 30-year highs against the weakening US dollar - it remained above US87c yesterday - Dr Bollard would have earned the ire and condemnation of exporters had the official cash rate shifted.
However, raising it would dampen inflation running at a 21-year high above 5% - well beyond the bank's outer 3% target.
Economists believe that the official cash rate will move by as much as 50 basis points by September, and markets have factored in a 50% chance of a 50-point hike during that month.
Even at the historical low of 2.5%, New Zealand's official cash rate remains one of the highest in the world and is attracting attention from global investors, further fuelling its strength and undermining exporters' profit margins.
Dr Bollard said the New Zealand economy had grown more strongly than expected, and it appeared the recovery was getting back on track, supported by strong terms-of-trade figures released this week - a $230 million increase in export values for the quarter to June.
"At the same time, however, current fragility in global financial markets, including the uncertainty around the US Government's debt ceiling, continues to highlight the downside risk to trading partner activity noted in the June statement," Dr Bollard said.
Provided the current global financial risks receded and the New Zealand economy continued to recover, Dr Bollard saw little need for the March 2011 "insurance" cut following Christchurch's February quake to remain in place much longer.
"The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further official cash rate increases in the short term," Dr Bollard said.
Westpac chief economist Dominick Stephens said it was unclear whether official cash rate hikes would be single or double increments to 50 points, and he was concerned the high kiwi and slowing global growth could reduce the Reserve Bank's "current enthusiasm for near-term hikes".
BNZ senior economist Craig Ebert noted the Reserve Bank "got it horribly wrong" when last time it raised the official cash rate to contain inflation, but the population had no fear of rate increases, and both the official cash rate and exchange rate "ended up higher than needed to be the case".
