RBNZ keeps OCR unchanged; kiwi initially spikes
RBNZ keeps OCR unchanged; kiwi initially spikes as traders discern less dovish language
Oct. 31 (BusinessDesk) – Reserve Bank governor Graeme Wheeler kept the official cash rate at a record-low 2.5 percent as expected though the kiwi dollar spiked higher as traders initially deemed his language less dovish than they had expected.
The New Zealand dollar jumped as high as 82.80 cents after the statement from 82.23 cents immediately before, and the trade-weighted index gained to as much as 76.58 from 76.11.
Wheeler reiterated that he will raise the OCR in 2014 with the timing dependent “largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures.”
He also said the domestic economy is estimated to have grown “by more than 3 percent” in the year to December, while at his last review on Sept. 12 he used the words “by 3 percent.” He reiterated that prices for New Zealand commodities are “very high.”
Yet he also said persistent strength in the New Zealand dollar would give him “greater flexibility” as to the timing and size of any hikes.
“The last few statements were tending to be a bit more dovish than the market had expected,” said Grant Hassell, head of fixed income at AMP Capital Investors (NZ). “The first read of this statement was that the dovish bent wasn’t there.”
The New Zealand economy still stands out as “one of the first group of countries potentially to raise rates,” he said. “Maybe not in March, maybe it’s April.” Overall, there wasn’t much change from the last monetary policy 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.
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.