Wednesday, July 24, 2013

New Zealand holds rate steady but adopts tightening bias

    New Zealand's central bank maintained its official cash rate at 2.5 percent and repeated that it would hold the rate steady through the year, but warned that it would probably have to tighten policy in the future, depending on how much the housing market and construction sector fuels inflation pressures.
    The introduction of a tightening bias by The Reserve Bank of New Zealand (RBNZ) was not expected by economists, though the central bank has often voiced its concern over the strength of the housing market and the effect this may have on inflation.
    The RBNZ, which has held its its policy rate steady since March 2011, said inflation had been very low over the past year, helped by the strong New Zealand dollar and international and domestic competition, but it was now expected to trend upwards towards the midpoint of the bank's 1-3 percent target band as growth accelerates over the coming year.
    "The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures," the bank's governor, Graeme Wheeler, said in a statement.
    "Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year," he added.
    Since March the RBNZ has said it would keep its policy rate steady this year but this is the first time that it warned financial markets that it would have to tighten policy in the future.
   New Zealand's inflation rate eased to 0.7 percent in the second quarter from 0.9 percent in the first quarter, but Wheeler described the house price inflation in Auckland and Canterbury as "rapid," and repeated that the central bank did not want to see financial or price stability compromised by housing demand getting too far ahead of supply.
    Though New Zealand's economy slowed in the first quarter, due to the impact of drought on agriculture, the central bank said that growth was picking up, consumption was rising and reconstruction in Canterbury - following the 2011 Christchurch earthquake - would be reinforced by a broader national recovery in construction, particularly in Auckland.
    "This will support aggregate activity and eventually help to ease the housing shortage," Wheeler said.
    New Zealand's first quarter Gross Domestic Product rose by a quarterly 0.3 percent, down from 1.5 percent in the fourth quarter. Year-on-year, first quarter growth was 2.4 percent, down from 3.2 percent.
    The central bank repeated that the New Zealand dollar remained high, despite a decline on a trade-weighted basis since May, and continued to be a headwind for the tradables sector, restricting export earnings and encouraging demand for imports, while fiscal consolidation would also weigh on demand.


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