2.5% New Zealand Official Cash Rate Held Steady for Fifth Time in a Row

October 26, 2011

As with decision-makers at other central banks, the uncertainty of the euro debt crisis remains the 500-pound gorilla in the room where New Zealand monetary authorities deliberate.  It has dampened world demand, lifted bank financing costs, and harmed business and consumer confidence.  Prudence at this juncture argued again for waiting and watching for better guidance.

The Official Cash Rate (OCR) is at a multi-decade low.  In the Great Recession, the OCR was slashed seven times from 8.25% prior to July 2008 to 2.5% after end-April 2009, and there it sat until back-to-back hikes of 25 basis points in June and July of 2010.  But New Zealand’s recovery was hammered by two earthquakes on the South Island, the first in the autumn of 2010 and even more devastatingly a second time on February 22, 2011.  In response, Reserve Bank of New Zealand policymakers returned the rate to 2.5% via a cut of 50 basis points on March 10.  Subsequent meetings on April 28, June 6, July 28, September 15, and today made no further change in the OCR level.

A statement released today lays out two rate biases.  One observes that domestic activity is expanding just “modestly,” corporate confidence is lower, bank funding costs could climb further if the euro crisis is not resolved, and  CPI inflation of 4.6% largely reflects a hike in the goods and services tax.  Once that drops out of on-year inflation comparisons, the rate should settle back near the center of the 1-3% target range.  The other view awaits a boost to growth from reconstruction investment in quake-stricken areas, firm prices for commodity exports, and calmer fallout from Europe if leaders there just do the right thing.

One is left to conclude that no tightening will be undertaken soon — certainly not in the next policy announcement on December 8.  Economic activity will have to exhibit more staying power before a rate increase is implemented.  A new significant recession would have to set in before officials chance cutting the OCR below its Great Recession low.  The rate bias is upward, but one cannot say with complete certainty that the next move will not be in the other direction.

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



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