Dollar concerns RBNZ

New Zealand’s exchange rate is a concern for the Reserve Bank and could mean a change in the official cash rate is further away than had been predicted.

Thursday, October 31st 2013, 11:26AM

by Susan Edmunds

The Reserve Bank today left the OCR unchanged at 2.5%.

Governor Graeme Wheeler said he expected it would need to be increased next year.

But he said if the dollar stayed high, it might not be as early as has been tipped.

“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.”

Westpac chief economist Dominick Stephens said earlier this week that the strong Kiwi dollar had pushed out his prediction for a 25bps lift from March to April.

He said Wheeler’s statement this morning was exactly what he had expected and interest rate markets were also not surprised by the tone. There was barely any movement as a result.

ASB also acknowledged the greater emphasis on the dollar but said the Reserve Bank’s primary concern would still be inflation and the housing market.

“Inflation pressures have now turned a corner, although the lift in inflation over the coming year will be gradual owing to the elevated NZD. Meanwhile, the housing market remains tight but the RBNZ expects that the recently introduced high loan-to-value lending restrictions will slow house price increases. Time will tell as the RBNZ will need three to six months to assess the impact.”

JP Morgan also weighed in on the statement, saying that the language used around the dollar providing “flexibility” was very similar to that which had been used to describe the LVR restrictions’ impact on the housing market.

“Given that the motivation for, and use of, credit rationing tools like LVR restrictions are controversial (justly or otherwise) the Bank might now prefer presenting the uncertainty around the rate path through the more familiar trade-off with currency.”

BNZ's economists said the combined effect of LVR restrictions and the stronger dolalr might mean the first OCR hike would not happen until the middle of the year.

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