RBNZ keeps OCR unchanged; strong kiwi provides flexibility though rates will rise

Thursday 31st October 2013

Reserve Bank governor Graeme Wheeler kept the official cash rate at a record-low 2.5 percent, while rates are set to rise next yeah though persistent strength in the New Zealand dollar would give him "greater flexibility" as to the timing and size of any hikes.

"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," Wheeler said in a statement.

Wheeler has to juggle the competing tensions between a strong currency holding down imported inflation and a resurgent property market and increasing construction activity threatening to fuel consumer spending.

The Reserve Bank said in September that it projected the trade-weighted index, its favoured measure of the currency, to average 74.7 in the final quarter of this year. The New Zealand dollar rose to 82.67 US cents from 82.23 cents immediately before the 9am announcement. The trade-weighted index rose to 76.51 from 76.11.

"We have been forecasting a March 2014 hike, and until a week ago, markets were pricing about the same," Westpac Banking Corp market strategist Imre Speizer said in a note published before the release. "However, that pricing started to be pared as market thoughts turned to next week's OCR Review and it was clear the exchange rate was higher than the RBNZ forecast in September."

Traders were pricing in 76 basis points of increases over the coming year ahead of today's review, down from as much as 97 basis points in early September, according to the Overnight Index Swap curve.

The strength in the kiwi has undermined the export sector and held back parts of the economic recovery, and delays to the US Federal Reserve's planned tapering of its quantitative easing programme have kept the local currency high relative to the US dollar.

The kiwi's persistent strength prompted New Zealand's Reserve Bank to intervene in currency markets earlier this year in a bid to shear the top off a peak, and figures yesterday showed it was a net seller of $7 million in September during the course of its regular operations.

Wheeler today reiterated his expectation that the key rate will stay unchanged this year and rise in 2014, saying "the extent and timing of the rise in the policy will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures."

Signs of life in the property market and increasing construction prompted the central bank to flag steeper interest rate hikes in its September forecasts, and it sees the 90-day bank bill rate, often used as a proxy for the OCR, rising to 3 percent in the June quarter and 3.6 percent by the end of 2014. That's about half a percentage point higher than in its June forecast.

"Household spending is rising, and reconstruction in Canterbury is being reinforced by a broader rise in construction in Auckland and across the country more generally," Wheeler said. "This will support economic activity and start to ease the housing shortage."

Wheeler may also delay rate hikes after the central bank this month imposed restrictions on the level of residential property lending banks can write with small deposits as a means to stifle a bubbling housing market in Auckland and Christchurch without having to resort to lifting interest rates, which would encourage foreign investors seeking higher yields to buy the New Zealand dollar.

"Recently introduced restrictions on high loan-to-value mortgage lending are expected to help slow house price inflation and the bank will continue to monitor the situation closely," Wheeler said.

The bank estimates the restrictions will lower annual house price inflation by between 1 and 4 percentage points, and trim household credit growth by between 1 and 3 percentage points.

BusinessDesk.co.nz

Comments from our readers

No comments yet