By Alex Tarrant
A December briefing from the Reserve Bank to the Finance Minister released today, coupled with more recent comments from the Bank’s governor, suggest it has toned down its forecast increase in interest rates over the next year and a half.
The Official Cash Rate (OCR) would need to increase gradually over the next 18 months if global economic developments have only a mild impact on New Zealand, the Reserve Bank of New Zealand said in its December-dated briefing to the Finance Minister, which was released today.
The briefing, which was written before the Bank's December 8 Monetary Policy Statement, notes the Bank's "current published projections imply a gradual increase in the OCR over the next 18 months with the 90 day interest rate projected to rise by around 150 basis points".
In the December 8 Monetary Policy Statement, the 90-day bank bill rate is projected to rise from 2.7% in the December 2011 quarter to 3.9% in the June 2013 quarter, and 4% in the September 2013 quarter - a rise of 120-130 basis points.
Headline inflation had remained elevated over the past year and peaked at 5%, partly reflecting last year’s GST increase. However, the central bank's latest assessment was that core inflation remained relatively well contained, the RBNZ said in the briefing paper.
"Provided global developments have only a mild impact on New Zealand, it is expected that the Official Cash Rate (OCR) will need to gradually increase over the next 18 months in order to ensure that inflation settles back within the 1-3 percent target band by early 2012. We will continue to update the outlook for inflation and monetary policy in our regular Monetary Policy Statements," it says.
Since the December briefing and Monetary Policy Statement, Reserve Bank Governor Alan Bollard kept the OCR on hold at 2.5% on January 26., saying it "remained prudent" to do so. Markets jumped on the ommission of the words "for now" from Bollard's January 26 OCR statement which had previously been used to describe the Bank's thoughts on keeping the OCR on hold.
Bollard told an audience in Christchurch on January 27 that the New Zealand economy may grow slower than the 3% it had forecast in the December 8 Monetary Policy Statement because of a delayed rebuild in the quake-hit city, and the fall-out from the European sovereign debt crisis.
“The market thinks rates are going to be unchanged right through this year,” Bollard said in Christchurch. “We’re not uncomfortable with that. As we see the numbers at the minute, it seems to be a reasonable deduction to take from that.”
High NZ$ hurting
Meanwhile, the Reserve Bank noted the New Zealand dollar was being boosted partly due to demand from sovereign wealth funds and central banks which were looking to diversify away from US and Euro assets.
"The New Zealand dollar has appreciated over the past year hitting a new post-float high against the US dollar. Drivers of this trend include more positive domestic economic data combined with a weakening growth outlook offshore, a strong terms of trade owing largely to continued robust Asian growth," the Reserve Bank said in the December 2011 briefing.
"Portfolio diversification away from United States dollar and euro assets by sovereign wealth funds and central banks has also boosted the New Zealand dollar," it said.
"Whilst a sign of the relative strength of New Zealand‟s economy, the high exchange rate in trade weighted terms continues to hinder rebalancing of the economy in favour of stronger tradables sector activity. It appears to be part of the reason why the overall improvement in New Zealand‟s trade balance has been modest despite a 37 year high in the terms of trade. In recent months, the New Zealand dollar has eased from its highs as concerns about financial risks have led investors back toward safe-haven currencies."
The Trade Weighted Index - the basket of currencies the Reserve Bank keeps watch of - sat around 68 in the first week of December 2011, having fallen from 75 at the start of August 2011. Since December, the TWI had risen back to 73 by this morning.
(Updates with comments on currency)
2 Comments
It is perhaps time that Bernard et al published a detailed article on exactly what the ocr is..and more to the point, what manipulating it can lead to...
http://www.rbnz.govt.nz/monpol/about/0072140.html
"When people save more or spend less, there is less pressure on prices to rise, and therefore inflation pressures tend to reduce. Although the OCR influences New Zealand’s market interest rates, it is not the only factor doing so. Market interest rates – particularly for longer terms –are also affected by the interest rates prevailing offshore since New Zealand financial institutions are net borrowers in overseas financial markets. Movements in overseas rates can lead to changes in interest rates even if the OCR has not changed."
If you are as thick as a plank you will believe the BS about there being no risk of a credit crisis leading to much higher rates....you will think you are being told the truth...you will not question your RBNZ or Treasury and certainly not the govt.
When the shite hits the credit fan, as it will, mortgage holders will have to pass far more of their income to the bank to finance their debt...and that will mean a deeper recession...and no matter how low the ocr, the recession will remain firmly entrenched.
Such is the consequence of shoddy govt and poor RBNZ policy for decades, whereby the entire nation pretty well operates on a flow of credit...that flow will not remain easy and cheap.
Wolly - you've been beating on that drum for 3 years or more - "big rate rises coming from offshore" .... hasn't happened yet ..... unlikely to happen for a few years yet.
Maybe you should do a full 3 year data mining analysis on all your ravings - they've all been so wrong (so far).
Our rates are still sky-high compared to USA, UK, Taiwan, Japan, Germany etc etc ....
We're all used to 7-8% rates normally anyway, so a 2.0 full rate rise is no big deal - only back to the old normal.
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