A weakening economy and outlook prompted New Zealand's central bank Thursday to announce it would leave its interest rate unchanged at the historic low of 2.5 percent.
The Reserve Bank of New Zealand (RBNZ) has maintained the 2.5- percent Official Cash Rate (OCR) since March last year, and the lack of movement announced in the latest Monetary Policy Statement was widely expected.
"New Zealand's economic outlook has weakened a little since the March Monetary Policy Statement," said RBNZ Governor Alan Bollard in the June statement's policy assessment.
Bollard said the RBNZ was also monitoring the developments in the euro zone carefully given the potential for rapid change there.
"Political and economic stresses in Europe, along with a run of weaker-than-expected data, have seen New Zealand's trading partner outlook worsen. Furthermore, there is a small but growing risk that conditions in the euro area deteriorate more markedly than is projected in the June statement," he said.
Increased production and weakened global outlook had driven down prices for New Zealand's export commodities.
"The resulting moderation in export incomes, although partially offset by depreciation in the exchange rate, will weigh on economic activity in New Zealand," he said.
"Fiscal consolidation" was also likely to constrain demand growth in future, he said.
The statement said both households and corporations were reining in debt, which along with the persistent strength of the New Zealand dollar and the weak global environment, had restrained economic growth in recent years.
"This reduced capital investment, while having an immediate negative impact on GDP, has also negatively affected the economy's future capacity to grow. In addition, economic uncertainty and cautiousness in the willingness to borrow and lend has limited innovation and risk-taking, further inhibiting potential growth," said the Monetary Policy statement.
It added that the government's tight fiscal policy with the aim of returning to budget surplus by 2015-2015 would also restrain economic growth.
"Such tightening will have a negative influence on demand growth over the projection horizon," said the statement.
Offsetting the negative influences, housing market activity continued to increase, and repairs and reconstruction in the earthquake-battered Canterbury region were expected to substantially boost construction activity in coming quarters, said Bollard.
"Aggregate GDP growth is projected to pick up slightly to just over 3 percent next year. Given this economic outlook, inflation is expected to settle near the mid-point of the (1-percent to 3- percent) target range," he said.
"It remains appropriate for monetary policy to remain stimulatory, with the OCR being held at 2.5 percent."