Reserve Bank of New Zealand Closer to a Rate Hike

January 29, 2014

In 2013, New Zealand monetary authorities repeatedly reiterated the expectation that the official cash rate would stay unchanged at 2.5%, and they kept that implicit promise.  Late in the year, the message was modified to inform people that increases would become necessary in 2014.  The released statement from Governor Wheeler following this year’s first policy meeting narrows the timing of a first move considerably, strongly suggesting action at the next scheduled policy statement on March 13.  A move then would nicely frame the current period of an uninterrupted 2.5% OCR level to exactly three years.  The size of the first increase almost surely will be 25 basis points, that is by a quarter percentage point to 2.75%.

While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years. In this environment, there is a need to return interest rates to more-normal levels. The Bank expects to start this adjustment soon.

New Zealand economic growth is projected to continue at around a 3.5% pace, sufficient to close the output gap and to underpin a gradual rise of inflation, which at 1.6% presently lies below the medium-term inflation target mid-point but not far below.  A disinflationary factor in the past has been the buoyant New Zealand dollar, about which the statement protests indirectly by calling the currency’s levels unsustainable.

The high exchange rate continues to dampen inflation in the traded goods sector, but the Bank does not believe the current level of the exchange rate is sustainable in the long run.

New Zealand’s exchange rate lost value today, choosing to follow the forward guidance directed at it rather than indications about the future path of the official cash rate.  The next three policy statement are scheduled for March 13, April 24, and June 12. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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