Wednesday, December 11, 2013

New Zealand holds rate, will raise rate to contain inflation

    New Zealand's central bank held its official cash rate (OCR) unchanged at 2.5 percent, as widely expected, but warned that it "will increase the OCR as needed in order to keep future average inflation near the 2 percent target," making a rate rise early next year practically a foregone conclusion.
    Today's guidance by the Reserve Bank of New Zealand (RBNZ) is much more hawkish than its statement in October and September when it said an "OCR increases will likely be required next year."
    The RBNZ, which has held rates steady since March 2011, also said the economic expansion "has considerable momentum" and "inflation pressures are projected to increase."
    In its December monetary policy statement, the bank forecast annual non-tradeables inflation rising towards 4 percent as pressure on capacity grows and wage inflation picks up. Higher taxes on tobacco and petrol are also expected to boost inflation by up to 0.3 percentage points each year until 2016.
    "The Bank's assessment is that, consistent with CPI inflation settling near the 2 percent midpoint of the target range over the medium term, growing demand and inflation pressure should warrant a withdrawal of stimulus beginning in 2014," the bank said in its quarterly policy statement.
    If the RBNZ were to raise rates early next year, it will become the first central bank in the advanced economies to tighten its policy stance since early 2011 after the Bank of Canada last month dropped its tightening bias, Norway last week delayed any rate rise by a year to the summer of 2015 and Sweden's central bank first expects to raise rates by end of 2014, at the earliest.
     New Zealand's inflation rate rose to 1.4 percent in the third quarter from 0.7 percent in the second quarter and the bank's governor, Graeme Wheeler, said inflation pressures are expected to rise with the extent and timing depending on the exchange rate, changes in commodity prices and the degree to which momentum in the housing market and construction spills into broader cost and price pressures.
    The RBNZ estimated that economic growth exceeded 3 percent in the year to the September quarter. The country's Gross Domestic Product rose by an annual rate of 2.5 percent in the second quarter, down from 2.7 percent in the first quarter.
    "New Zealand's terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by the Canterbury rebuild and the response to the housing shortage in Auckland," Wheeler said.
    Despite moderate growth among New Zealand's trading partners, Wheeler said export prices for the country's main commodities, and especially diary produce, have continued to rise.
    Fiscal consolidation and the high exchange rate of the New Zealand dollar is offsetting strong domestic demand but Wheeler said he did not believe that was sustainable in the long run.
    "Given this outlook, it is becoming unnecessary to maintain the current degree of monetary stimulus," the RBNZ said in its policy statement.
    Economic growth is forecast to average 3 percent through 2014 before moderating from early 2015.
    Early this year the RBNZ committed itself to keeping its policy rate steady through this year but then in July it warned that "a removal of monetary stimulus will likely be needed in the future." In September it said that increases would likely be required in 2014 and now it has committed itself to a rate rises next year, with markets looking for an rate hike in March.
   The RBNZ became the world's first central bank in June 1997 to publish interest rate projections to manage expectations about future policy. In its quarterly monetary policy statements, the RBNZ sets out the future path of the 90-day interest rate, which has closely tracked the OCR rate ever since it was introduced in March 1999.
    In its latest statement, the central bank raised the track for the 90-day rate by about 50 basis points from its September statement, Wheeler said. It is now projected to rise to 3.8 percent by December 2014, then to 4.6 percent by December 2015 and to 4.8 percent by March 2016.


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