OCR unchanged at 2.50%

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

Thursday, October 31st 2013, 9:02AM

Reserve Bank Governor Graeme Wheeler said: “The recovery in the United States and other major advanced economies remains patchy. Nevertheless, world prices for New Zealand’s export commodities are very high.“Global long-term interest rates are still very low, but have been volatile recently. This volatility has largely been due to uncertainty as to when the Federal Reserve will exit from quantitative easing.

“The New Zealand economy is estimated to have grown by more than 3 percent in the year to September. Household spending is rising, and reconstruction in Canterbury is being reinforced by a broader rise in construction in Auckland and across the country more generally. This will support economic activity and start to ease the housing shortage.

“In the meantime high house price inflation persists, especially in Auckland. As has been noted for some time, the Reserve Bank does not want continued high house price inflation to compromise financial or price stability. Recently introduced restrictions on high loan-to-value mortgage lending are expected to help slow house price inflation and the Bank will continue to monitor the situation closely.

“The exchange rate remains high and is a headwind to the traded goods sector. Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the Bank with greater flexibility as to the timing and magnitude of future increases in the OCR. Fiscal consolidation is also expected to continue weighing on demand over the next few years.

“Annual CPI inflation increased to 1.4 percent in the September quarter. As domestic demand pressure picks up, headline inflation is likely to rise towards the 2 percent target midpoint. The Bank is aiming to keep inflation and inflation expectations close to 2 percent over the medium term.

“Although we expect to keep the OCR unchanged in 2013, OCR increases will likely be required next year. The extent and timing of the rise in the policy rate will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures.”

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