New Zealand Cash Rate To Stay Low Through Mid-2010

October 29, 2009

The Reserve Bank of New Zealand implemented seven reductions of its cash rate between July 24, 2008 and April 30, 2009 from a year-long peak of 8.25% to a trough of 2.5%.  After the April 30th meeting, officials indicated that the benchmark rate was unlikely to move above 2.5% before the second half of 2010.  Although no longer hinting that rates might fall further, they retained the position that no tightening will be made before 3Q10 through all four subsequent meetings including one today.  A statement today released by the central bank continued to express concerns about the sustainability and composition of New Zealand’s recovery.  Renewed house price inflation could prevent a desired increase of the savings rate, and New Zealand dollar appreciation of about 25% since April could restrain the improvement of export competitiveness that is needed to avoid additional widening of an already excessive current account deficit.  Business investment is still “weak,” credit growth is too “subdued,” but at least in-target CPI inflation gives the central bank the leeway to maintain a pro-growth monetary policy.  Governor Bollard’s statement reiterates the message that markets have been pricing in an overly aggressive withdrawal of monetary policy stimulus.  One of his hopes no doubt is to encourage a weaker future trajectory in the kiwi, but the currency’s strength has reflected the buoyancy of commodity prices and other commodity-sensitive currencies much more than any speculation that interest rates will rise sooner in New Zealand than in other economies.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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