What the Reserve Bank said about interest rates

The Reserve Bank today increased the OCR by 25 basis points to 3%.

New Zealand’s economic expansion has considerable momentum, with GDP estimated to have grown by 3.5% in the year to March. Growth is gradually increasing in New Zealand’s trading partners, but inflation in those economies remains low. Global financial conditions continue to be very accommodating.

Prices for New Zealand’s export commodities remain very high, though auction prices for dairy products have fallen by 20% in recent months. Domestically, the extended period of low interest rates and strong growth in construction sector activity are supporting the recovery. Net immigration continues to increase, boosting housing and consumer demand. Confidence remains very high among households and businesses, and measures of investment and employment intentions are positive.

Spare capacity is being absorbed, and inflationary pressures are becoming apparent, especially in construction and other non-tradable sectors. The high exchange rate remains a headwind to the tradables sector, and along with low import price inflation has been holding down tradables inflation. The Bank does not believe the current level of the exchange rate is sustainable.