New Zealand Gets First Rate Increase

June 9, 2010

The Reserve Bank of New Zealand (RBNZ) raised its Official Cash Rate (OCR) to 2.75% from 2.5%, which had been the OCR level since a 50-basis point cut in April 2009.  Most but not all analysts anticipated the move.  Central bank officials project a more broadly-based recovery with 3.5% GDP growth in both 2010 and 2011, led by the strength of the terms of trade (export/import price ratio), foreign demand, and an improving labor market.  While in-target core inflation is expected, total CPI inflation is likely to get pushed above 5% by an increase of the goods and services tax.  Accordingly, officials felt in appropriate to begin removing some monetary policy stimulus but noted that the OCR will not need to climb to the level of previous cyclical peaks like 8.25% during the year to July 2008.  An upward sloping yield curve and greater usage of floating rate mortgages are two reasons for believing this.

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

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