Reserve Bank of New Zealand Meeting Review: No surprises

March 10, 2010

The Official Cash Rate of New Zealand was left at 2.5%, where it has been since April 2009.  After New Zealand entered a five-quarter recession in the first quarter of 2008, 575 basis points of rate cuts were implemented between July 2008 and April 2009.  As they did after the prior two meetings and as I expected, a statement today from RBNZ officials affirmed that an initial rate hike can be expected around the middle of this year.  The first meeting after midyear is scheduled for July 29 following meetings on April 29 and June 10.

Today’s statement observes that growth will be stronger in 4Q09 and 1Q10 than in 2Q09 or 3Q09, and officials reaffirm their belief that CPI inflation, now at 2%, will track within its target boundaries over the medium term but may climb near to the target ceiling in the nearer term.  Today’s statement adds language to dampen concerns about how rapidly or high rates might climb after mid-2010, noting

  • that the level of stimulus from any given Official Cash Rate level is lower now than before the financial crisis because of higher bank funding costs,
  • higher bank funding costs will linger for some time,
  • and fiscal consolidation could mitigate how much rates will need to be raised.

Because of subdued credit growth and weak business investment, officials in New Zealand are approaching the task of normalizing interest rates with more caution than their counterparts in Australia and many other regional central banks.  See my preview earlier this week for deeper discussion of latest economic trends in New Zealand.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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