Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


UPDATED: Wheeler keeps OCR at 2.5%, hiking to start soon

UPDATED: Wheeler keeps OCR at 2.5%, expects to start hiking rates ‘soon’

(Adds economist comment, updates market reaction)

By Paul McBeth and Tina Morrison

Jan. 30 (BusinessDesk) - Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.5 percent, while saying the rate will have to rise soon as inflationary pressures escalate in an economy with “considerable momentum”.

“The bank remains committed to increasing the OCR as needed to keep future inflation near the 2 percent target mid-point,” Wheeler said in a statement. “In this environment, there is a need to return interest rates to more-normal levels. The bank expects to start this adjustment soon.”

The Reserve Bank last month signalled interest rates would start rising in 2014, and stronger inflation data since then fuelled market expectations Wheeler might have raised the benchmark rate as early as today. Economists were more circumspect with most picking a March hike, saying a later move would let Wheeler explain his decision in the full monetary policy statement, press briefing, select committee hearing and updated forecasts.

“It’s a very strong likelihood that we will see an interest rate increase in March,” said Nick Tuffley, chief economist at ASB Bank. “It is going to keep underpinning the New Zealand dollar.”

While a strong New Zealand dollar was keeping a lid on tradable inflation, “the bank does not believe the current level of the exchange rate is sustainable in the long-run,” Wheeler said today. Following the decision not to change rates, the New Zealand dollar dropped as low as 81.70 US cents, from 82.65 cents immediately before the 9am announcement. It was recently trading at 82.03 cents.

Wheeler said inflationary pressures are likely to increase in the next two years, and figures this month showed consumer prices rose at an annual 1.6 percent pace in the December quarter, slightly ahead of expectations.

In its December forecast track for the 90-day bank bill rate, seen as a proxy for the OCR, the Reserve Bank projected the rate would increase to 2.7 percent in the March quarter of 2014, rising to 3.8 percent by the end of the year, and 4.8 percent by March 2016.

Wheeler said the scale and speed of increases in the OCR would “depend on future economic indicators.”

The country’s “economic expansion has considerable momentum” with annual growth this year expected to continue near a 3.5 percent pace as global demand for New Zealand’s exports fuel high prices, he said.

“While agricultural export prices are expected to come off their peak levels, overall export demand should benefit from improving growth in the global economy,” Wheeler said.

Upbeat consumer and business confidence, rising inward migration, and the Canterbury rebuild and construction in Auckland’s housing market are adding to New Zealand’s growth prospects.

ASB’s Tuffley expects the Reserve Bank to hike rates by 25 basis points in March, June and December of this year and again in March, September and December of 2015, peaking at 4 percent in late 2015.

“We are likely to see the New Zealand dollar remaining pretty firm tracking through those first rate increases,” Tuffley said.

Wheeler was reluctant to lift rates last year to tame booming property markets in Auckland and Christchurch for fear of driving up an already elevated dollar, instead introducing restrictions on low-equity home loans to take riskier demand out of the property market.

Money printing programmes by central banks including the US Federal Reserve, Bank of England, and Bank of Japan has underpinned strength in the kiwi dollar, as the monetary stimulus debased those major currencies.

The Fed today trimmed a further US$10 billion from its monthly asset purchase programme to US$65 billion, while keeping the key rate near zero percent, as the world’s biggest economy continues to recover.


© Scoop Media

Business Headlines | Sci-Tech Headlines


DIY: Kiwi Ingenuity And Masking Tape Saves Chick

Kiwi ingenuity and masking tape has saved a Kiwi chick after its egg was badly damaged endangering the chick's life. The egg was delivered to Kiwi Encounter at Rainbow Springs in Rotorua 14 days ago by a DOC worker with a large hole in its shell and against all odds has just successfully hatched. More>>


Trade: Key To Lead Mission To India; ASEAN FTA Review Announced

Prime Minister John Key will lead a trade delegation to India next week, saying the pursuit of a free trade agreement with the protectionist giant is "the primary reason we're going" but playing down the likelihood of early progress. More>>



MYOB: Digital Signatures Go Live

From today, Inland Revenue will begin accepting “digital signatures”, saving businesses and their accountants a huge amount of administration time and further reducing the need for pen and paper in the workplace. More>>

Oil Searches: Norway's Statoil Quits Reinga Basin

Statoil, the Norwegian state-owned oil company, has given up oil and gas exploration in Northland's Reinga Basin, saying the probably of a find was 'too low'. More>>


Modern Living: Auckland Development Blowouts Reminiscent Of Run Up To GFC

The collapse of property developments in Auckland is "almost groundhog day" to the run-up of the global financial crisis in 2007/2008 as banks refuse to fund projects due to blowouts in construction and labour costs, says John Kensington, the author of KPMG's Financial Institutions Performance Survey. More>>


Health: New Zealand's First ‘No Sugary Drinks’ Logo Unveiled

New Zealand’s first “no sugary drinks logo” has been unveiled at an event in Wellington... It will empower communities around New Zealand to lift their health and wellbeing and send a clear message about the damage caused by too much sugar in our diets. More>>


Get More From Scoop

Search Scoop  
Powered by Vodafone
NZ independent news