New Zealand Reserve Bank governor Alan Bollard took a relaxed tone yesterday when announcing that the official cash rate would stay unchanged at 2.5%.
BNZ senior economist Craig Ebert said the tone should not have come as a surprise as Dr Bollard was very much in a wait-and-see mode.
"While there has been evidence of economic resilience in the face of adversity and upward pressure on prices, governor Bollard emphasised the ongoing economic uncertainty, while tending to downplay inflation," Mr Ebert said. "But at least he did mention inflation this time around in his summary."
In his statement, Dr Bollard said headline inflation was currently being boosted by recent increases in indirect taxes.
Annual inflation was expected to settle comfortably within the 1% to 3% target band once the tax increases dropped out of the annual rate.
"Given the outlook for core inflation and continued economic disruption stemming from the earthquakes, the current level of the OCR was likely to remain appropriate for some time," he said.
Westpac chief economist Dominick Stephens took that to mean the Reserve Bank would leave the OCR unchanged this year before lifting it in January.
"Yes, the economy is holding up surprisingly well. But the economy is currently operating well below its productive capacity. There is ample room to grow before encountering inflationary speed limits."
The strong exchange rate would continue to dampen inflation for some time, he said.
The main threat to inflation - bottlenecks associated with the reconstruction of Christchurch - was unlikely to arise before 2012.
Once the lifting cycle was under way, Westpac expected it could be steeper and more prolonged than markets were anticipating, Mr Stephens said.
Mr Ebert was less relaxed about inflation than the Reserve Bank obviously was. He said at least the bank maintained a threat of consistency from its super-conservative tack taken in March.
"Even if our central bankers quietly confessed the economy has held up better than they thought it would post the quake, and that inflation needs some watching, they were hardly going to say so publicly at this stage of proceedings.
"Indeed, in their own minds they probably think the 0.5% OCR cut back in March was working some magic. So let's not spoil it," Mr Ebert said.
The New Zealand dollar fell nearly $US 0.5c after the announcement when Dr Bollard said higher oil prices and the elevated level of the New Zealand dollar were both unwelcome. They would have some dampening effect on economic activity.
The Australian dollar passed through the US$1.09 mark as market confidence in the global economy remained buoyant.
