New Zealand’s Second Central Bank Interest Rate Hike

April 23, 2014


Officials at the Reserve Bank of New Zealand as expected engineered a follow-up 25-basis point increase of their Official Cash Rate to 3.0% and released an extremely close facsimile to the March 13th statement that launched this tightening cycle.  The OCR had been at 2.5%, a record low,  for three years between March 2011 and March 2014 and also at the same level between April 2009 and June 2010.  Monetary officials believe that real GDP expanded about 3.5% between 1Q13 and 1Q14 and cite several continuing growth-promoting factors such as elevated commodity export prices, very low interest rates, and reconstruction in the wake of the 2011 earthquake on the South Island.

Although inflation remains low, “spare capacity is being absorbed, and inflation pressures are becoming apparent, especially in construction and other non-tradable sectors.”  This observation then segues into forward guidance that puts the two OCR increases into the context of a more extensive normalization of policy to a point where monetary policy neither stimulates nor depresses growth.

 it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure.  By increasing the OCR as needed to keep future average inflation near the 2% target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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