Interest rate hike now in sight

Reserve Bank has held the official cash rate at a record low 2.5%, but has indicated a rate hike is now in sight in the next couple of months with the economy’s recovery on track.

Thursday, April 29th 2010, 8:59AM

"We continue to expect the New Zealand economy to recover in line with or slightly faster than our March statement projections."

"We expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected."

Bollard has kept the OCR at a record low for 12 months after he slashed interest rates to revive the economy from its worst recession in 18 years. The Reserve Bank forecasts the 90-day bank will rise to 3.3% in the September quarter, and traders have been split over whether Bollard will tighten monetary policy in June or July after first-quarter inflation came in at 0.4%, below market expectations.

"Broadly, the message will be the economy tracked as expected and the RBNZ sees sufficient evidence of a recovery to carry out its plan for normalisation," said Imre Speizer, markets strategist at Westpac Banking Corp. before the announcement. "Any meeting after this one could result in a rate hike."

New Zealand's economy climbed out of recession in the middle of last year as returning expatriates and incoming migrants stoked demand for housing amid a decline in new construction, while dairy prices bounced back from a slump in July and have underpinned confidence in the farming sector.

Still, consumers are continuing to look to the future as a 10-year high unemployment rate of 7.3% continues to sap their appetite to start buying big ticket items, and the ANZ Roy Morgan Consumer Confidence survey last week showed consumers are more optimistic about the future than they are about the present.

The latest National Bank Business Outlook, out yesterday, showed confidence has stayed buoyant after its rebound through the latter half of 2009, and companies are beginning to get more optimistic about their hiring and investment intentions. Though businesses' pricing intentions remained stable at a net 26% of respondents expecting to increase their prices over the coming year, expectations for inflation edged up to 2.67% from 2.64% in March as companies prepare for Bollard to begin tightening monetary policy.

That will bring New Zealand into line with its biggest trading partner across the Tasman which has been on a tightening regime since October last year. The Reserve Bank of Australia has hiked its target cash rate four times, and yesterday's data showing a faster than expected pace of inflation increased the prospect of another rate hike by the RBA next month. At 4.25%, the Australian benchmark rate is currently 175 basis points over New Zealand's OCR, a record spread in Australia's favour.

Full statement
OCR unchanged at 2.5 percent

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.50%.

Reserve Bank Governor Alan Bollard said: "The New Zealand economy is recovering broadly as expected and growth is predicted to pick up further through 2010.

"Trading partner activity has recovered more quickly than we expected. Growth in Asia has been particularly strong. Consistent with this, export commodity prices have increased close to their 2008 peak. At the same time, risks to the global outlook remain elevated.

"Notwithstanding the impact of stronger than expected export earnings, New Zealand households remain cautious, with the housing market and household credit growth subdued. Similarly, business spending is weak and firms continue to reduce debt.

"On balance, we continue to expect the New Zealand economy to recover in line with or slightly faster than our March Statement projection. Annual CPI inflation, which has been close to 2 percent for the past year, is expected to track within the target range over the medium term.

"As previously indicated, we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.

"The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve, is expected to make OCR increases more effective than in the past. Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles."

« Bollard to hold OCR amid faltering retail spending and housing market

Bollard gives himself "wiggle room" on first rate hike »

Special Offers