OCR on hold: RBNZ

The Reserve Bank has left the official cash rate unchanged at 2.5% and expects it to stay that way at least until the end of the year.

Thursday, March 14th 2013, 12:00AM

by The Landlord

Governor Graeme Wheeler said global economic risks had receded over recent months and financial market sentiment has improved.

But his statement was a bit more dovish than the markets had expected, with a focus on the risks to the economy, such as the patchy nature of the domestic recovery.

He indicated the bank would be keeping a close eye on house prices.

“While demand and output are expanding, the labour market remains weak. Economic growth and inflation are being shaped by a range of forces. The Canterbury rebuild is gaining momentum and residential investment and business and consumer confidence are increasing. House price inflation is increasing and the bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.”

He said the high Kiwi dollar was hurting exporters and drought was causing difficulty in many parts of the country.

“Ongoing fiscal consolidation will also act to slow overall demand. We project the economy to grow at an annual rate of between 2% and 3% over the forecast period. Inflation is expected to rise gradually towards the 2% midpoint of the target range.”

Wheeler said that with the economy starting from a position of excess capacity and the New Zealand dollar remaining elevated, 90-day interest rates would likely remain flat through 2013.

As GDP and the labour market recovered, he said, households could revert to spending behaviour seen during the previous cycle, resulting in stronger-than-expected pressures on aggregate demand.

“House prices are estimated to have increased in real terms at an annual rate of 6% over 2012 and are forecast to increase by 6.2% and 3.6% in 2013 and 2014 respectively before levelling off. There is considerable uncertainty around these projections given the nature of supply and demand imbalances in regional housing markets. We will closely monitor house prices for any signs of feed-through into consumer price inflation.”

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