New Zealand Monetary Tightening Paused

September 15, 2010

New Zealand’s Official Cash Rate was left unchanged at 3.0%, having been hiked by 25 basis points each at the prior two meetings on July 29 and June 10.  Opinions had been split over whether a third increase would be sanctioned.  The July statement conceded that the “pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement.”  A new statement just released reiterated that thought, although also asserting, “over time, it is likely that further removal of monetary policy support will be required.”  In pausing policy, officials cited the disruptive impact of the September 4th earthquake, the continuing caution of households (e.g., soft consumption, falling home sales and flat real estate values), and slower global growth prospects.  Headline inflation is likely to rise for special factors over the coming year, but officials do not expect the increase to impact expected inflation or to endure.

Real GDP expanded by a slower 0.6% in 1Q10 than the 0.9% pace in the final 2009 quarter.  GDP was 1.9% higher than in 1Q09.  CPI inflation at midyear was at 1.8%.  Today’s statement, unlike the one in July, did not mention the kiwi.  July’s warned that exchange rate appreciation was “inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices.”

Between July 2007 and July 2008, the OCR was slashed to 2.5% from 8.25%.  The June Statement had projected it would rise 175 bps over the year to 2Q11 and another 125 bps in the subsequent statement year.  Officials no longer expect increases of such a large magnitude.

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



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