The Reserve Bank left the interest-driving official cash rate at 3% yesterday and indicated the pace of further increases was likely to be moderate, compared to expectations given in June.
In June and July the official cash rate was lifted 25 basis points as the world economy showed signs of continuing recovery, but Reserve Bank Governor Alan Bollard said while global and domestic economies continued to recover, the outlook had weakened since June.
"While the global and domestic economies continue to recover, the outlook has weakened since our June Statement. We consider it appropriate at this point to keep the OCR on hold," Dr Bollard said.
He said the decision to hold on the cash rate was made before the Christchurch earthquake, and recovery from that was likely to disrupt economic activity for some time yet.
ASB senior economist Jane Turner said the Reserve Bank was "very explicit" in that the "unequivocally dovish" statement implied several on-hold decisions.
"Behind the stark change in view, are substantially weaker growth forecasts and more emphasis placed on higher bank funding costs and the expectation that this dynamic is likely to persist for much longer than previously expected," she said.
Dr Bollard said in the domestic economy, the household sector remained cautious, with consumer spending soft, house sales falling and house prices remaining flat. With continued soft demand for credit, this suggests household spending will not increase to the extent previously projected, Dr Bollard said.
"Over time, it is likely that further removal of monetary policy support will be required. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement," he said.
Ms Turner said "the Reserve Bank is very comfortable with the inflation outlook and is in no hurry to lift interest rates in the here and now".
She predicted the official cash rate would remain unchanged for the rest of the year.
