New Zealand Central Bank Issues Dovish Statement

December 9, 2009

New Zealand monetary policymakers agreed not to lift their 2.5% cash rate.  It has been at that level since April 30, 575 basis points below the prior cyclical peak.  That was my expectation and that of many other analysts, but not all of them.  So the statement released today by the central bank seems to have had an added agenda to dissuade anticipation of a rate increase in the near term.  Officials note that credit growth remains subdued and that a housing market revival has not spilled over into consumer spending or business investment.  Exports are meanwhile constrained by a pricey New Zealand dollar.  Indeed financial conditions have tightened as a result of the elevated exchange rate, rising long-term rates and widening gap between the cash rate and bank funding costs.  The statement predicts that sub-2% inflation will continue until early 2011 and not rise above target after that.  Officials explicitly reject the need for a “more immediate” rate hike and indicate that such can be put off until around mid-2010 or later if the economic recover were to flounder.

All this complacency contrasts with the hawkish Reserve Bank of Australia across the Tasman Sea, setting the stage for further erosion of the kiwi’s value against the Australian dollar.

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


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