The Reserve Bank left its official cash rate unchanged at 2.5 percent today, reflecting the high level of uncertainty surrounding the global economic outlook and the risk that conditions could get worse.
Market expectations were for the bank to keep its rate unchanged.
Continuing difficulties related to sovereign and bank debt in a growing number of European economies resulted in high levels of volatility in financial markets, Reserve Bank governor Alan Bollard said.
"There has also been a softening in international economic activity, including in the Asia-Pacific region,'' he said in a statement.
Global developments were having some negative impact on New Zealand, though to date it had been limited.
Business confidence has declined and investment spending is likely to remain weak for some time.
Tightness in international markets meant funding costs for New Zealand banks would increase to some degree over the coming year, he said.
There remained a high degree of uncertainty around the global outlook and there is a risk that conditions could weaken further. Domestically, economic activity continued to expand, though at a modest pace.
"Although off their peaks, export commodity prices remain elevated,'' Bollard said.
"In addition, the depreciation of the New Zealand dollar provides some support for the tradeable sector of the economy. Over time, repairs and reconstruction in Canterbury will also provide a significant boost to demand for an extended period,'' Bollard said.
Bollard said annual headline inflation is estimated to have returned within the Bank's 1 to 3 percent target band in the December quarter.
"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 official cash rate hold at 2.5 percent,'' Bollard said.
The rate has been at 2.5 percent since March, when it was cut by 50 basis points.
