New Zealand Interest Rate Unchanged But More Hawkish Statement Released

June 8, 2011

The Reserve Bank of New Zealand’s Official Cash Rate (OCR) will remain at 2.5% at least until the next meeting in late July.  However, a statement on the central bank web site serves notice that rate rises lie ahead.

First a little history.  New Zealand’s economy was recovering from policy-induced recession when the Great Recession struck.  The OCR had been raised to 8.25% to cut inflation and held at that level for a year between July 2007 and July 2008.  In seven steps, such was slashed to 2.5% by April 2009 as the world slowdown hit New Zealand at a time when it was already fragile.  Two 25-basis point rate hikes to 3.0% were engineered in June and July of last year, but an earthquake near Christchurch on the South Island last autumn put policy on pause.  Then after a second quake early this year, officials responded with a 50-bp rate cut in early March, returning the OCR to the cyclical low of 2.5% and left that level after a subsequent meeting on April 28.

The April 28 statement had a dovish tone, concluding that “given the outlook for core inflation and continued economic disruption stemming from the earthquakes, the current level of the OCR is likely to remain appropriate for some time.”

Today’s statement points out that the earthquakes had a more limited impact on confidence from a geographical standpoint than feared, observes an improved overall economic outlook, predicts that the rebuilding of damaged infrastructure will enhance 2012 GDP growth by two percentage points, blames current elevated inflation on special factors and global factors, but also observes that expected inflation has been creeping higher.  Although core inflation remains confined, the statement concludes much more hawkishly than the April statement.  Governor Bollard asserts, “as GDP growth picks up, underlying inflation is expected to rise. A gradual increase in the OCR over the next two years will be required to offset this, such that CPI inflation tracks close to the midpoint of the target band over the latter part of the projection. The pace and timing of increases will be guided by the speed of recovery, but for now the OCR remains on hold.”  The phrase “for now” implies a much shorter duration than “for some time.”

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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