Wednesday, April 23, 2014

New Zealand raises rate another 25 bps to 3.0%

    New Zealand's central bank raised its benchmark Official Cash Rate by another 25 basis points to 3.0  percent, as widely expected, saying it is important to contain rising inflationary pressures.
    But the Reserve Bank of New Zealand (RBNZ), which last month became the first central bank in the world's advanced economies to raise its rate since July 2011, tweaked its guidance from March to specifically take account of the impact of the high exchange rate of the New Zealand dollar on inflation.
    "The speed and extent to which the OCR will be raised will depend on economic data and our ongoing assessment of emerging inflationary pressure, including the extent to which the high exchange rate leads to lower inflationary pressure," RBNZ Governor Graeme Wheeler said in a statement.
     On March 13, when the central bank raised its rate by 25 basis points, the first change in rates since a cut in March 2011, the RBNZ only said the pace of future rate increases would depend on inflationary pressures, omitting any reference to the exchange rate.
     New Zealand's headline inflation rate eased to 1.5 percent in the first quarter of 2014 from 1.6 percent in the fourth quarter of last year, but Wheeler said that "headline inflation is moderate, but inflationary pressures are increasing and are expected to continue doing so over the next two years."
    Wheeler said spare capacity is being absorbed and inflationary pressures are apparent, especially in the construction and other non-tradeable sectors.
    "The high exchange rate remains a headwind to the tradables inflation, and along with low import price inflation has been holding down tradables inflation," Wheeler said, repeating his view that the central bank "does not believe the current level of the exchange rate is sustainable."
    New Zealand's dollar rose rapidly in March 2009 as investors sought safe haven from the global financial crises, rising from almost 2 to the U.S. dollar to 1.14 by July 2011. Since then it has eased slightly, trading at 1.16 to the dollar today, but against the yen it has remained under upward pressure.
    New Zealand's economy is continuing to expand and Wheeler estimated first quarter growth of Gross Domestic Product of 3.5 percent, adding that growth is gradually increasing in the country's trading partners and global financial conditions remain very accommodating.
    Prices for New Zealand's export commodities, such as milk, remain very high, he said, and the extended period of low interest rates and strong growth in construction are supporting recovery. Immigration to the country is also continuing to rise, boosting housing and consumer demand.
    But Wheeler also acknowledged that prices for dairy products have fallen by 20 percent in recent months, a factor that economists have said could lead the RBNZ to change its projections for future interest rate rises in its next monetary policy statement in June.
     New Zealand's GDP expanded by 0.9 percent in the fourth quarter of 2013 for annual growth of 3.1 percent, down from 3.3 percent in the third quarter.
    In March the RBNZ forecast in its monetary policy statement that the cash rate would have to rise by about 2 percentage points over the next two years for inflation to settle around the bank's 2.0 percent target.
    The RBNZ's forecast for the 90-day bank bill, which mirrors the OCR rate, was projected to rise to 3.3 percent in June, 3.7 percent in September and 4.0 percent in December.


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