New Zealand Interest Rate Policy on Hold

September 14, 2011

Although New Zealand’s economy has been performing better than many other economies lately, policymakers at the Reserve Bank of New Zealand decided as widely anticipated to leave the Official Cash Rate (OCR) at its cyclical low of 2.5%.  A statement indicates that the directional rate bias is tilted to the upside but that timing hinges on the evolution of the impact of global economic and financial risks on New Zealand.  Officials are keenly watching a “markedly deteriorating” outlook in many of New Zealand’s trading partners and the tightening of bank funding markets around the world.  The OCR was slashed during the Great Recession, which started early in New Zealand, from a peak of 8.25% to 2.5%, and rate hikes to 2.75% in June 2010 and 3.0% in July of 2010 were reversed in March of this year after the severe earthquake on the South Island. 

To the kiwi’s advantage, growth proved more resilient than assumed after the quake.  Nonetheless, New Zealand’s business purchasing managers index has slid from 56.2 in June to 52.9 last month.  It remains to be seen whether this slowdown is reversed again as reconstruction of damaged property and infrastructure kicks in.  The key sentence in the latest RBNZ statement reads

“If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase. For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 percent.”

Higher New Zealand inflation since the June assessment is expected to prove temporary.  Such reflects the government’s increase of its goods and services tax.  Core inflation continues to run near the middle of the 1-3% target range. 

The scheduled date of the next OCR announcement is October 27.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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