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RBNZ OCR Review - OCR raised 25bps

Data Flash (New Zealand) RBNZ OCR Review - OCR raised 25bps

Key points

As expected, the RBNZ raised the official cash rate (OCR) by 25bps to 6%, in line with average market expectations.

The rise was accompanied by a statement (reproduced in full below) which made the following key points:

The risks of rising inflation are gradually increasing.

Q4 GDP figures pointed to strong broad-based growth.

Recent indications here and abroad are that growth prospects in NZ and abroad are at least as strong as the Bank expected in March, while surplus capacity has been more or less exhausted.

Today's move is consistent with the Bank's previous projections showing that a firming in monetary conditions is necessary to maintain price stability.

Despite equity market volatility, financial markets appear to have taken the view that global growth and inflation prospects have not been materially adversely affected. The Bank will continue to monitor developments in international markets.

Even after today's rise, on most estimates interest rates remain, if anything, on the easy side of neutral. Given the weak NZD, broader monetary conditions remain very easy (see chart below).

Given evidence of strong pipeline pressures on inflation from commodity prices and the weak NZD, combined with growing pressures on inflation from excess demand in the non-tradeables sector of the economy, further tightening of monetary conditions is inevitable over the remainder of this year. We expect the Bank to raise the OCR by a further 50bps when it releases its next Monetary Policy Statement (MPS) on 17 May. We expect the OCR to rise to 7.50% by the time of the March 2001 MPS.

The May MPS is likely to show a slightly higher track for inflation and interest rates than the Bank projected in March.

Market Reaction

90 day bank bills rose 5bps on Tuesday's close to 6.52%. June and September futures rose around 10-13bps to 6.78% and 7.04% respectively. The market is currently pricing in a 38bp increase in the OCR in May.

The bond curve flattened slightly, with short bond yields rising 4bps and longer bonds rising 2bps.

The response of NZD was fairly muted: the NZD is sitting at .4957 while the TWI is at 54.77.

Darren Gibbs, Senior Economist, New Zealand, (64) 9 351 1376

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