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.