OCR Unchanged…for now…

Date: 25th October 2012

New Reserve Bank governor Graeme Wheeler is leaving official interest rates unchanged at 2.5 per cent “for now”.
Bank economists expect the central bank to keep rates on hold until late next year.
ASB Bank is expecting the first move up in September 2013, followed by another step up in December. The Reserve Bank would then likely leave rates at 3 per cent for six months to assess the impact, before moving rates up again, ASB said this morning.
But the hurdle to a cut remains high because the $20 billion Canterbury rebuild is just around the corner, and there has been a lift in the housing market, especially in Auckland and Canterbury.
Wheeler backed his decision earlier today by saying that while the global picture was still fragile, the mood was improving.
ASB said that suggested the Reserve Bank was more comfortable that the “calamitous risks are diminishing, albeit slowly”.
Wheeler said the New Zealand economy was improving modestly and the housing market was rising, while the Canterbury rebuild was gaining steam. On the other hand, the high New Zealand dollar was hurting exports, and government belt-tightening was keeping domestic demand in check.
Wheeler said: “For now it remains appropriate for the OCR to be held at 2.5 per cent.”
The New Zealand dollar jumped from about US81.5c before the announcement, to just above US82c by mid-morning. (10am)
“The global economy remains fragile, with further recovery heavily dependent on policy implementation. That said, market sentiment has improved from earlier in the year, suggesting the risks to the global outlook are more balanced.
“Domestically, GDP continues to expand at a modest pace. Housing market activity is increasing as expected, and repairs and reconstruction in Canterbury are boosting the construction sector. Offsetting this, fiscal consolidation is constraining demand growth, and the high New Zealand dollar is undermining export earnings and encouraging substitution toward imported goods and services.
“While annual CPI inflation has fallen to 0.8 per cent, the Bank continues to expect inflation to head back towards the middle of the target range. We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months.”
ASB said the reference to pricing and inflation intentions, which are both subdued, suggested the Reserve Bank may be more concerned about weaker than expected inflation. Inflation has been low mainly because of the high New Zealand dollar keeping a lid on import prices.The wariness about inflation remaining low might indicate that the Reserve Bank could react. ASB bumped up the chances of a rate cut in the next 12 months from 20 per cent to 30 per cent.
It was Wheeler’s first monetary policy announcement since he took over from former governor Alan Bollard last month.
The Official Cash Rate has been held at 2.5 per cent since March last year.
Most bank economists expected interest rates to be held today, though there has been a growing minority encouraging a rate cut as the economic recovery fails to ignite.
Inflation is below the bottom of the Reserve Bank’s target band of 1 per cent to 3 per cent, the growth outlook for the second half of the year looks weak and unemployment remained stubbornly high, at 6.8 per cent.
Also favouring a cut in rates is the overvalued New Zealand dollar, though economists doubt a rate cut would have a lasting impact on pushing the currency down.
ANZ Bank economists said this morning before the announcement: ”When uncertainty is high, central banks are generally reluctant to move policy interest rates, particularly when this is further away from neutral settings.”
Financial markets had been pricing in a rate cut by March next year on the basis of low inflation, weak domestic figures including manufacturing, services and overall job ads, as well as the high currency and uncertain global outlook.
Overnight there were more positive signs internationally, with new home sales in the United States up to their highest levels in two years. The slowdown in China’s factory output is also easing according to survey figures out yesterday.
Published at stuff.co.nz James Weir 25/10/12

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