Interest rates on hold for some time

Economists’ predictions that the Reserve Bank would hold the official cash rate at 3.50% have proved to be correct.

Thursday, September 11th 2014, 9:01AM

The central bank this morning announced that the OCR would remain unchanged and said it needed more time to monitor earlier monetary policy tightening and the impact of export price reductions before making its next increase.

RBNZ Governor Graeme Wheeler said, in a statement, that more OCR increases are likely.

However he didn’t provide any guidance to when they might come and appears to have toned down the immediacy of any increases.

“We expect some further policy tightening will be necessary to keep future average inflation near the two percent target mid-point to ensure that the economic expansion can be sustained.”

Overall the bank’s plans to keep inflation under control appear to be working, but there continues to be some “uncertainties” it wants to monitor.

“The economy appears to be adjusting to the policy measures taken by the bank over the past year,” Wheeler says.

“There are signs that the OCR increases are starting to have the desired effect of slowing growth in demand to a more sustainable rate, and keep inflation and inflation expectations well anchored.”

The bank says it “typically” takes 18 to 24 months for monetary policy to have its full effects.

The key risks the bank sees at the moment how strong net migration will impact the housing market and how pressures in the construction sector will impact broader inflation.

Wheeler again reiterated that the exchange rate was too high.

“Its current level remains unjustified and unsustainable.”

“We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise.”

The Reserve Bank is forecasting that the economy is expected to grow at an annual pace of 3.7% over this year. This growth will be supported by increasing construction activity and on-going strength in consumption and business investment.

« Not much flavour expected in OCR announcement

What the Reserve Bank said - Sept »

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