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

 


NZ central bank raises OCR a third time to 3.25%; kiwi jumps

NZ central bank raises OCR a third time to 3.25%, keeps track broadly intact; kiwi jumps

By Jonathan Underhill

June 12 (BusinessDesk) - The Reserve Bank of New Zealand raised the official cash rate for a third time while keeping its track for interest rates broadly in line with its March projections, suggesting the bank sees no need to pause in removing stimulus in an accelerating economy. The New Zealand dollar jumped three quarters of a cent against the US dollar following the announcement.

Governor Graeme Wheeler raised the OCR to 3.25 percent, as expected, saying as inflationary pressures are expected to increase, “it is important that inflation expectations remain contained and that interest rates return to a more neutral level.”

Gross domestic product grew an estimated 4 percent in the year to June, and has “considerable momentum,” he said. While low interest rates had played an important part in supporting growth in the past few years, “more recently, growth has become more self-sustaining and very low interest rates are no longer appropriate given the rise in inflationary pressures.”

The New Zealand dollar touched a three-week high of 86.27 US cents following the announcement, and was recently trading at 86.22 cents, from 85.50 cents immediately before the 9am announcement.

Wheeler is signalling no pause in the tightening cycle to a market that has moderated its expectations for hikes in the OCR this year by about 15 basis points since March. Based on the Overnight Interest Swap market at the end of May, the market had priced in the OCR reaching 3.7 percent by March 2015 compared to the 3.85 percent being priced in at the time of the March MPS.

The Reserve Bank attributed this change to overseas investors being the dominant market participants driving rates lower, “more than offsetting the flows from domestic banks wanting to fund fixed rate mortgages that put upward pressure on rates.”

The impact since March has been less than the bank wants because lenders have benefited from lower global wholesale rates and have less need to seek funding because of the inflow of deposits. Added to that, rivalry in the home loan market means lenders have been keep mortgage rates lower than expected.

The Reserve Bank signalled in March it may hike the OCR by 200 basis points over two years and the monetary policy statement does nothing to moderate that view. The 90-day bank bill rate, seen as a proxy for the OCR, is projected to be 4 percent by year-end, unchanged from the March MPS. Since then the bank bills have gained to 3.46 percent from around 3.07 percent.

By the end of 2015, the central bank sees the 90-day bank bills at 4.7 percent, little changed from the 4.9 percent rate it saw in March.

Annual inflation breaks through the mid-point of the bank’s 1 percent-to-3 percent target range in the June quarter of 2015, at 2.1 percent, three months earlier than was projected in the March MPS, before slipping back to 1.9 percent.

Part of that is driven by the central bank’s assumption that current price pressures moderate. It notes that “strong increases in construction spending will support robust domestic demand over coming years” and expects the sector will grow to about 10.5 percent of potential GDP in the next two years.
Strong net immigration and income growth will boost housing demand, but house price inflation is expected to moderate as more supply becomes available, the bank said.

New Zealand property values increased at an 8.2 percent annual pace in May, the slowest in nine months, according to QV data, suggesting the Reserve Bank’s loan to value restrictions have cool demand.

The bank’s projections assume that annual net immigration peaks in mid-2014 at 37,000 working-age people, with some 70,000 people added to the population over its forecast horizon to June 2017.

Yet the composition of migration means it is likely to stoke demand less than in the peaks of the early 2000s, mainly because much of the increase reflects a drop in New Zealanders moving overseas and more kiwis returning home, “encouraged by New Zealand’s relatively favourable economic performance.”

“We think that market expectations for a significant downgrade in the RBNZ’s interest rate forecasts will be disappointed,” Imre Speizer, director, NZ rates strategy, at Westpac Banking Corp, said before the MPS was released. “The data flow since the last MPS has been mixed. Soft inflation and wage costs, lower dairy prices and a high NZD have been offset by stronger migration, lower mortgage rates, and a fiscal impulse.”

The biggest revisions to the bank’s provisions are for the track of the trade-weighted index, which was recently at 79.83 from 79.97 at the time of the last MPS on March 13. The central bank expects the TWI to average 80 in the June quarter, up from its March projection of 78.4, and hold above 79 through 2014, before declining in 2015.

“Our projection assumes that the TWI falls gradually, by about 7 percent over the next three years,” Wheeler says in the monetary policy statement released today. “To date, the fall in the currency has been smaller than the drop in commodity prices would suggest. If the exchange rate remains strong, it is likely to be reflected on continued low or negative tradables inflation.”


(BusinessDesk)

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Balance Of Trade: NZ Posts Trade Deficit In October On Falling Dairy Exports

New Zealand’s posted its largest monthly trade deficit for October in six years, while narrowing the shortfall from September, led by a fall in dairy exports to China while all main imports into the country rose. More>>

ALSO:

Gigatown Winner: Plenty Of Positives For Dunedin

Although the city has taken the Gigatown title, along with new ultrafast 1Gbps broadband and funding for $700,000 worth of UFB-related initiatives across the community, Mr Cull says Dunedin has gained so much more through its involvement. More>>

ALSO:

R18: The Warehouse Group Praised For Removing Games

The decision by New Zealand’s largest retailer The Warehouse Group (TW Group), to withdraw stocks of the latest version of Grand Theft Auto V (GTA V) and other R18 games, has been praised by advocacy group Stop Demand Foundation. More>>

ALSO:

Air NZ Wine Awards: Victory For Villa Maria As Pinot Noir Thrills

It was a night to remember as Villa Maria Estate picked up one of the highest accolades of the evening, the O-I New Zealand Reserve Wine of the Show Trophy, at the 28th Air New Zealand Wine Awards. The Villa Maria Single Vineyard Southern Clays Marlborough ... More>>

ALSO:

Future Brighter Money: RBNZ Releases New Bank Note Designs

New Zealand’s banknotes are getting brighter and better, with the Reserve Bank today unveiling more vibrant and secure banknote designs which will progressively enter circulation later next year. More>>

ALSO:

Get More From Scoop

 
 
Standards New Zealand

Standards New Zealand
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news