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RBNZ holding OCR this year, but warns again about house price inflation and high NZ$
By Bernard Hickey
The Reserve Bank of New Zealand held the Official Cash Rate (OCR) at 2.5% in its March quarter Monetary Policy Statement, as expected, but took the unusual step of saying it expected to hold the OCR there “through the end of the year.”
New Reserve Bank Governor Graeme Wheeler signaled in a speech last week he wanted to be more transparent about the Reserve Bank’s forecasts for interest rates. Previously the Reserve Bank has just forecast the 90 day bill rate, which is closely linked but not pegged to the OCR. Its forecast for the 90 day bill rate was marginally lower for late 2013 and marginally higher for 2015 than in the December quarter statement.
Wheeler said the high New Zealand dollar was containing inflationary pressures, but the Christchurch rebuild was straining spare capacity in construction. The Reserve Bank forecast house price inflation rising to 6.2% in 2013 from 6% in 2012, before slowing to 3.6% in 2014.
“House price inflation is increasing and the Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply, “ Wheeler said in the statement (repeated in full below) He described the monetary policy outlook as ‘finely balanced’.
“Inflation is expected to remain just below the bank’s target band (1-3%) through the early part of 2013,” the bank said in the MPS.
“Monetary policy settings must balance this low near term inflation outlook, and concerns about the exchange rate and weak labour market, against increasing signs that output will accelerate and inflationary pressures will pick up,” it said.
The bank also warned that an unjustified further rise in the New Zealand dollar would result in a lower Official Cash Rate, all other things being equal.
“If the exchange rate rose for reasons not justified by New Zealand’s economic fundamentals, all other things being equal, this would lead to a lower than expected OCR,” the bank said.
The New Zealand dollar dropped sharply immediately after the release of the MPS, falling as low as 81.7 USc from almost 82.7 USc shortly before the 9 am release.
The bank made no comment in the MPS about its search for macro-prudential tools to cool down the housing market, but the hunt for such tools was mentioned in the later news conference.
News conference comments
Meanwhile, Wheeler told a news conference after the release of the MPS that the drought gripping much of the North Island was likely to reduce GDP by 0.2-0.3%, given the current level of rain. If rain was delayed until later in the year similar to the 2007/08 drought, that could reduce GDP by as much as 1%.
He also commented on concerns by other central bankers about 'currency wars', whereby countries deliberately devalued their currencies to boost their export sectors by printing money.
He said he wouldn't describe them as currency wars, rather as exchange rate tensions.
Wheeler also said he was concerned about a surge in high loan to value ratio lending by banks over the last year. See more here.
See full RBNZ statement below.
The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.
Reserve Bank Governor Graeme Wheeler said: “The downside risks around global growth have receded in recent months, and financial market sentiment has improved.
“Domestically, the economic recovery is uneven. While demand and output are expanding, the labour market remains weak. Economic growth and inflation are being shaped by a range of forces. The Canterbury rebuild is gaining momentum and residential investment and business and consumer confidence are increasing. House price inflation is increasing and the Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.
“The overvalued New Zealand dollar is undermining profitability in export and import competing industries, and worsening drought conditions are creating difficulty in much of the country. Ongoing fiscal consolidation will also act to slow overall demand.
“We project the economy to grow at an annual rate of between 2 and 3 percent over the forecast period. Inflation is expected to rise gradually towards the 2 percent midpoint of the target range.
“There are both upside and downside risks to this outlook. At this point we expect to keep the OCR unchanged through the end of the year.”
(Updated with comments from news conference, currency reaction)