Wednesday, March 12, 2014

New Zealand raises rate 25 bps to 2.75%

   New Zealand's central bank raised its benchmark Official Cash Rate (OCR) by 25 basis points to 2.75 percent following months of warnings that it would have to tighten monetary policy to keep inflation from rising above the bank's 2.0 percent midpoint target.
    The Reserve Bank of New Zealand (RBNZ) said the country's economic expansion had considerable momentum and inflationary pressures were increasing and expected to continue over the next two years, making it important for the central bank to contain expectations.
    "To achieve that it is necessary to raise interest rates towards a level at which they are no longer adding to demand," Graeme Wheeler, governor of the RBNZ, said in a statement.
    "The Bank is commencing this adjustment today," Wheeler added, signaling that rates will be raised further in coming months.  "The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures."
    In its monetary policy statement, the central bank said the cash rate will have to rise by about 2 percentage points over the next two years for inflation to settle around the bank's target.
    The RBNZ forecast that the 90-day bank bill rate, which mirrors its benchmark OCR rate, would rise to 3.3 percent in June this year, 3.7 percent in September and 4.0 percent in December. In its previous policy statement, the central bank projected the bill rate at 3.8 percent in December 2014.
    In 2015 the bill rate is projected to continue to rise, hitting 4.8 percent by December and then rise further in 2016 to 5.2 percent in December 2016.
     The RBNZ started warning investors and financial markets in July 2013 that it would have to start to remove its stimulus and in January it said interest rates had to return to normal levels and this adjustment was expected to start "soon." The last time the central bank cut its rate was in March 2011.
    Financial markets and economists had expected the RBNZ to raise rates today as it becomes the first central bank in an advanced economy to tighten policy since July 2011.
    New Zealand's Gross Domestic Product rose by 1.4 percent in the third quarter of 2013 for annual growth of 3.5 percent, up from 2.3 percent in the second quarter.
    Wheeler said economic growth was becoming more broad-based and GDP was estimated to have growth by 3.3 percent in the first quarter of this year.
    Growth among New Zealand's trading partners is gradually rising and prices for the country's exports, especially diary, remain very high. Strong construction activity along with a "rapid increase" in immigration over the past 18 months has boosted housing and demand, while confidence is very high among consumers and business, with hiring and investment intentions continuing to rise, he said.
    "Growth in demand has been absorbing spare capacity, and inflationary pressures are becoming apparent, especially in the non-tradeables sector," Wheeler said, adding that weak import inflation and the high exchange rate of the New Zealand dollar - known as the kiwi - has held down inflation.
    While the strong kiwi remains a headwind to the industries that are competing with other countries, Wheeler said the central bank did not believe the current exchange rate was sustainable in the long run.
    In addition to pressure on inflation from a strengthening economy and a booming construction sector, home prices have also been rising. The central bank has enacted restrictions on high loan-to-value mortgages and while this help dampen prices, Wheeler said continued immigration would offset that influence.
    New Zealand's headline inflation rate rose slightly to 1.6 percent in the fourth quarter from 1.4 percent in the third quarter.


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