In its latest Monetary Policy Statement (MPS), the Reserve Bank left the Official Cash Rate (OCR) at 2.50%. Subject to trading banks crying “funding pressure”, mortgage holders’ should expect floating rates to remain at current levels.

In a shorter MPS than usual, and much shorter than the last, the Reserve Bank Governor made no mention of signs of economic recovery. He noted that New Zealand has largely missed out on the improvement in global economic conditions coincident with increasing hard commodity prices as soft commodity prices (dairy and food) have remained soft.

The Reserve Bank Governor cautioned that economic recovery is dependent upon further easing in financial conditions. The high New Zealand dollar and higher wholesale interest rates mean that economic recovery remains at risk.

In a sign of the times, inflation is now only mentioned in the shortest paragraph, CPI inflation is now well within the target band and is expected to remain so for the medium term.

Overall, the tone of this MPS was decidedly pessimistic and evidenced the Reserve Bank’s clear intentions to remain accommodating. The Bank reiterated comments in earlier Monetary Policy Statements that it expects to leave interest rates at or below current levels until late 2010. It also left the door ajar for further modest rate cuts if required.

Below is the full statement from the Reserve Bank Governor, Alan Bollard:

“The outlook remains highly uncertain. New Zealand’s merchandise exports are heavily weighted to soft commodities. As a result, New Zealand has not benefited to any significant extent from the rebound that has occurred recently in global hard commodity prices.

Overall economic growth is evolving broadly in line with our forecasts in the JuneMonetary Policy Statementas the low OCR and stimulatory fiscal policy take effect. However, looking forward the level of the New Zealand dollar and wholesale interest rates are higher than assumed in our forecasts. The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks.

The forecast recovery is based on a further easing in financial conditions. If this easing does not occur, the forecast recovery could be put at risk. In these circumstances we would reassess policy settings.

Annual CPI inflation is currently well within the target band and it is expected to track comfortably within it over the medium-term.

We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010.”