WELLINGTON–New Zealand’s central bank left the official cash rate (OCR) unchanged at a record low of 2.5 percent Thursday, saying the European debt crisis continued to threaten the country’s recovery. The Reserve Bank of New Zealand said that given the global economic situation “it remains prudent to continue to keep the OCR on hold.” The decision, widely expected by the markets, keeps interest rates at the 2.5 percent mark set in March after being at 3.0 percent for eight months before that. “Domestic activity has continued to expand at only a modest pace despite relatively strong commodity prices. More recently, domestic business confidence has fallen back somewhat,” bank governor Alan Bollard said in a statement. “As foreshadowed at the time of the September monetary policy statement, there is a real risk that the European sovereign debt crisis could cause a further slowing in global activity, putting downward pressure on New Zealand’s commodity export prices. “The difficult international market conditions could also result in increased New Zealand bank funding costs over the coming year.”
But Bollard added that if global developments have only a mild impact on the New Zealand economy interest rate increases were likely in future. He said that while inflation remained above the bank’s 1.0-3.0 percent target, this largely reflected the one-off effect of an increase in the goods and services tax (GST) from 12.5 to 15.0 percent last year. The September quarter inflation data suggested that once GST and other one-off influences have been stripped out, underlying inflation is settling near 2.0 percent. In the past month, New Zealand’s sovereign credit rating has been downgraded by Standard & Poor’s and Fitch Ratings due to the size of the country’s external debt.