RBNZ hikes again, but signals pause

ScreenHunter_3456 Jul. 24 09.56

By Leith van Onselen

The Reserve Bank of New Zealand (RBNZ) has once again hiked the official cash rate (OCR) by 0.25% to 3.50% – the fourth rise in five months – but also signaled a pause while it assesses the impact on the New Zealand economy. The RBNZ has also warned on the New Zealand dollar, claiming that it is overvalued and risks a potential “significant fall”. From the Statement:

New Zealand’s economy is expected to grow at an annual pace of 3.7 percent over 2014…

Construction, particularly in Canterbury, is growing strongly. At the same time, strong net immigration is adding to housing and household demand, although house price inflation has moderated further since the June Statement.

Over recent months, export prices for dairy and timber have fallen, and these will reduce primary sector incomes over the coming year. With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.

Inflation remains moderate, but strong growth in output has been absorbing spare capacity. This is expected to add to non-tradables inflation. Wage inflation is subdued, reflecting recent low inflation outcomes, increased labour force participation, and strong net immigration.

It is important that inflation expectations remain contained. Today’s move will help keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained. Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year. It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.

The speed and extent to which the OCR will need to rise will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.

According to Interest.co.nz, the RBNZ “has previously forecast another 1.25% of hikes through late 2014 and the 2015 year as it drags the OCR up to around its view of a ‘neutral’ level of 4.5%. This would imply floating mortgage rates well over 7% and headed for 8%”.

It will be interesting observing the New Zealand housing market from here, which is now facing dual headwinds from the LVR caps and higher mortgage rates, offset by rising immigration.

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Unconventional Economist


  1. As I posted on an earlier link, the Banks appear to be out in force after this announcement hawking more household debt. I’ve had one call from my main bankers, and unusually two ( unanswered, admittedly) from other ‘name withheld’ sources within an hour of Graeme’s talk. Until the RBNZ does get to it’s substantially higher interest rate target, expect more ‘get in now before it’s too late’ calls from the banking/property sectors…..

  2. I don’t think reserve banks and official interest rates lost almost all control over economies. And that’s why people are not much interested what reserve banks have to say.

  3. Hugh PavletichMEMBER

    Sound decision by the RBNZ.

    But the RBNZ cannot release affordable land Housing Minister Dr Nick Smith. That’s your job !

  4. What the RBNZ doesn’t seem to understand is that in a world awash in cheap money, no one cares about falling commodities. They want yield that is difficult to find anywhere else, and NZ is providing that opportunity.

    Only when (or if) the US changes monetary direction will capital flows change significantly enough to make a difference to our expensive currency.

    Complaining about the current value or threatening intervention is futile.