New Zealand Bank raises prospect of interest rate hike

New Zealand's Reserve Bank Thursday left Official Cash Rate unchanged at the record low 2.5 percent, citing the fragility of the global economy and uncertainty over the U.S. government's debt ceiling, but triggered speculation of a half percentage point rise in September. Reserve Bank governor Alan Bollard said that if the global financial risks receded and the economy continued to recover, the Bank would have "little need for the March 2011 'insurance' cut to remain in place much longer," referring to the emergency stimulus cut after the Feb. 22 earthquake that devastated the country's second largest city of Christchurch. "The economy has grown more strongly than was expected, and it appears that the recovery is getting back on track, supported by a strong terms of trade," said Bollard in his announcement. "At the same time, however, current fragility in global financial markets, including the uncertainty around the U.S. government's debt ceiling, continues to highlight the downside risk to trading partner activity noted in the June Statement." Annual headline Consumer Price Index inflation continued to stay above the Reserve Bank's target band of 1 percent to 3 percent, but that was a temporary effect of the rise in the Goods and Services Tax, a sales tax, said Bollard. "Wage and price setters should focus on underlying inflation, which is currently estimated to be below 2.5 percent," he said. "The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term."