The Official Cash Rate (OCR) will remain at 7.25 percent.
Reserve Bank Governor Alan Bollard said: “Data since our March Monetary Policy Statement (MPS) indicate that, while the economy has weakened faster than expected, short-term inflation pressures have intensified.
“The anticipated slowdown in domestic demand commenced in the latter part of 2005 and is projected to continue through this year. This will be partly offset by growth in exports and import substitution, reinforced by the recent decline in the exchange rate. Recent economic indicators suggest the economy will continue to grow modestly through 2006.
“Despite the easing in resource pressures, the short-term inflation outlook has worsened. The exchange rate drop will boost import prices. We also expect significant further price rises over coming quarters as a result of the ongoing world oil shock. These effects are expected to keep annual CPI inflation above 3 percent for longer than previously projected and risk putting upward pressure on inflation expectations.
“Monetary policy remains focussed on ensuring that inflation settles back within the 1-3 percent target band over the medium term. As we have stated previously, policy will not try to counteract the one-off boost to prices from the exchange rate and oil price shocks. In this regard, we still do not expect to raise interest rates again in this cycle. However, monetary policy must remain vigilant against these price shocks spilling over into inflation expectations, and price and wage-setting behaviour. Given the current outlook, we maintain our March MPS view and continue to see no scope for a cut in the OCR this year.”
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