What the RBNZ said

New Zealand’s economic expansion has considerable momentum. Prices for New Zealand’s export commodities remain very high, especially for dairy products. Consumer and business confidence are strong and the rapid rise in net inward migration over the past year has added to consumption and housing demand. Construction activity is being lifted by the Canterbury rebuild and by work in Auckland to address the housing shortage. Continued fiscal consolidation will partly offset the strength in demand. GDP grew by 3.5% in the year to September, and growth is expected to continue around this rate over the coming year.

While agricultural export prices are expected to come off their peak levels, overall export demand should benefit from improving growth in the global economy. However, improvements in the major economies have required exceptional monetary accommodation and there remains uncertainty about the timing of withdrawal of this stimulus and its effects, especially on emerging market economies.

Annual CPI inflation was 1.6% in 2013, and forward-looking measures of firms’ pricing intentions have been rising. Construction costs are increasing and risk feeding through to broader costs in the economy. At the same time, there appears to have been some moderation in the housing market in recent months. The high exchange rate continues to dampen inflation in the traded goods sector, but the Bank does not believe the current level of the exchange rate is sustainable in the long run.

While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years. In this environment, there is a need to return interest rates to more-normal levels. The Bank expects to start this adjustment soon.

The Bank remains committed to increasing the OCR as needed to keep future average inflation near the 2% target mid-point. The scale and speed of the rise in the OCR will depend on future economic indicators.

Comments from our readers

On 30 January 2014 at 10:46 pm Andy said:

An umbrella won't stop the rain - it will only make an attempt to keep you dry!

Likewise - raising the OCR will not stop immigration and the resulting pressure on housing (and following economic growth). Bollard didn't understand this, and in the process managed to single-handedly send the NZ economy into recession. Control immigration, supply more houses - THAT will control inflation. Making it harder for people to buy, or KEEP their homes will cause unnecessary hardship, pushing them into rental accommodation that is clearly overpriced and will continue to be so while housing is in short supply in the main centres.

Mr Wheeler - if you want to do something positive for the economy - work on the balance of payments deficit. Try encouraging locally manufactured products rather than importing goods! And stop playing with the OCR. I would have thought that encouraging higher term deposit rates was inflationary in itself.

On 3 February 2014 at 10:10 am Amused said:

Well said Andy.

On 5 February 2014 at 11:31 am Richard said:

Sadly Wheeler and his team seem incapable of understanding cause and effect. Punishing kiwis for unfetterred Asian immigration and foreign funds is simply madness. But what else do we really expect from government departments?

On 10 February 2014 at 8:17 am AFA Muggins said:

Of course the RBNZ will raise the OCR - the banks have been raising mortgage rates all last year. The banks move first.

The gap between the OCR and the floating rates have been wider than the historical average for the last year, so one way or another the gap will fill.

The Reserve Bank left the OCR at 2.50% today and reaffirmed it was committed to increasing the rate. It didn's say when it would start the rises though,

Thursday, January 30th 2014, 9:03AM 4 Comments

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