Wednesday, October 30, 2013

New Zealand holds rate and still sees rate rises in 2014

    New Zealand's central bank maintained its official cash rate (OCR) at 2.5 percent, as widely expected, repeating that it expects to keep the rate steady for the rest of the year and "OCR increases  will likely be required next year.
    The Reserve Bank of New Zealand (RBNZ), which has held its rate steady since March 2011, also repeated last month's statement, saying "the extent and timing of the rise in the policy rate will depend largely on the degree to which momentum in the housing market and construction sector spills over into broader demand and inflation pressures."
    New Zealand's inflation rate - up to 1.4 percent in September from 0.7 percent in August - is expected to rise toward the bank's 2.0 percent target midpoint as domestic demand picks up.
    The New Zealand dollar, known as the kiwi, remains high and a headwind to the country's exports, the bank said, adding that "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."
    Another factor weighing on demand is fiscal consolidation.
    The New Zealand dollar rose steadily against the U.S. dollar since early 2009 but dropped in early May and hit US$ 0.77 on Sept. 1 after a high of US$ 0.86 in mid-April But since then it has bounced back, trading at $0.82 today, unchanged on the year.
    New Zealand's economy expanded by an annual 2.5 percent in the second quarter, down from 2.7 percent in the first, and the RBNZ said the economy was estimated to have grown by more than 3 percent in the year to September and household spending was rising and reconstruction is strong, which will support the economy and at some point ease the housing shortage.
    "In the meantime high house price inflation persists, especially in Auckland," the bank said, referring to its oft-repeated concern that high house price inflation could compromise financial or price stability. It added, however, that recent restrictions on loan-to-value mortgages were expected to help slow down the rise in prices.
    Economists expect the RBNZ to raise rates in March 2014.


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