Wednesday, October 29, 2014

New Zealand holds rate in pause before next change

    New Zealand's central bank maintained its policy rate at 3.50 percent, as widely expected, but said inflation is expected to rise as economic activity improves and a "period of assessment remains appropriate before considering further policy adjustment." 
    Although the Reserve Bank of New Zealand (RBNZ) still appears to be leaning towards raising rates, its guidance is considerably more dovish than in September when it said it expected "further policy tightening will be necessary to keep future average inflation near the 2 percent mid-point."
    The RBNZ raised its rate by 100 basis points since March to curb inflationary pressures but paused in July to assess the impact of its rate rises on the economy.
    The RBNZ also sharpened its language about the exchange rate of the New Zealand dollar - known as the kiwi - saying it's "current level remains unjustified and unsustainable and continues to contain growth in the tradables sector. We expect a further significant depreciation."
    New Zealand's headline inflation rate rose to 1.6 percent in September from 1.5 percent in August while the exchange rate of the kiwi has eased against the strong U.S. dollar this year, trading at 1.28 to the dollar today from around 1.22 at the start of the year 
    The RBNZ issued the following statement:
"Statement issued by Reserve Bank Governor Graeme Wheeler:
The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.
The global economy is growing at a moderate rate although recent data suggests some softening in the major economies, apart from the United States. Monetary policy is expected to remain supportive for longer in all the major economies.
Growth in the New Zealand economy has been faster than trend over 2014, reducing unemployment and adding to demands on productive capacity. Strong construction sector activity, high net immigration, and interest rates, which remain low by historic standards, continue to support the expansion. Output growth is expected to moderate over coming years, towards a more sustainable rate.
Lower commodity prices and increased global financial market volatility have taken some pressure off the New Zealand dollar. However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation.
CPI inflation remains modest, and was 1 percent in the year to September. Contributing factors are subdued wage inflation, well-anchored inflation expectations, weak global inflation, falls in oil prices, and the high New Zealand dollar. House price inflation has fallen significantly since late-2013, in part due to interest rate increases and the LVR restrictions.
The economy appears to be adjusting to the policy measures undertaken by the Bank over the past year. CPI inflation is currently at a low level despite above-trend growth. However, inflation is expected to increase as the expansion continues. A period of assessment remains appropriate before considering further policy adjustment."


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