New Zealand Central Bank Rate Raised But Statement Signals Greater Caution

July 28, 2010

The Reserve Bank of New Zealand has implemented a second 25-basis point rate increase.  The first was announced June 10, and today’s lifts the rate to 3.0%.

The central bank’s statement was less hawkish than June’s communique.  Growth had been called broad-based seven weeks ago, but in contrast considerable discussion this time is spend on “subdued domestic demand.”  Officials note modest retail sales, declining housing sales, weak credit growth, very low business investment, and subdued corporate lending.  Officials complain that the New Zealand dollar has risen, whereas fundamentals warranted a softer tone.  Nonetheless, overall GDP growth ought to be “respectable in the near term, enough so that CPI inflation, which has hovered near 2% for over a year, should tend to pick up.  So although growth prospects are somewhat less bright than when the first rate hike was made, a need to cautiously remove monetary stimulus should proceed forward.  That said, officials indicated rates would rise more slowly than assumed initially:

Even after today’s move, the level of the official cash rate (OCR) is still very supportive of economic activity.  The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement.

Reports released at the time of the first rate increase suggested that the OCR might climb 175 basis points in the year to the second quarter of 2011 and by 125 bps additionally in the following twelve months to around 6.0% by the middle of 2012.  That indication now appears too steep.  The last cycle of monetary policy restraint crested with the OCR holding at 8.25% between July 2007 and July 2008.  It was cut  in 2008 by 25 bps in July, 50 bps in September, 100 bps in October and 150 bps in December.  Reductions early in 2009 amounted to 150 bps in January and 50 bps each in March and April, the last taking the OCR to a low of 2.5%.  That was only half as high as the prior cyclical low of 5.0% from July 2003 to January 2004.

The next policy statement is scheduled for early September.

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



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