OCR held, but for how long?

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The Reserve Bank has, as expected, kept its official cash rate at its historic low of 2.5%, but again warned increases are coming.

Thursday, December 12th 2013, 9:02AM 2 Comments

While it hasn’t indicated when the OCR will rise, it said in its statement today, that “the bank will increase the OCR as needed in order to keep future average inflation near the 2% target midpoint.”
Elsewhere it notes that annual CPI inflation increased to 1.4% in the September quarter and inflation pressures are expected to increase. It says this number is well above the 1% inflation had been running at over the past year.
The bank says, in its Monetary Policy Statement, that there had been an expectation that growth in the economy would absorb spare capacity and begin putting upward pressure on inflation.
The factors which are going to impact on inflation area the exchange rate, changes in commodity prices and “the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures.”
It fully expects the annual CPI inflation to rise towards the mid-point of the one to three percent target range and that is likely to trigger an OCR increase.

Housing concerns amplified
The Reserve Bank says that house prices have risen by 18% over the past two years.
Because of factors including low interest rates, population growth and region-specific supply demand issues, house price inflation is likely to “persist than longer than assumed at the time of the (previous) statement.”
However it does say that the risks around this outlook are “broadly balanced.”
The bank suggests that property buyers in Auckland are not been driven by rising demand for accommodation, rather a desire to purchase.
It says there is a shortfall of accommodation in Auckland but this maybe less than previously thought.
“While rental inflation has been somewhat stronger in Auckland than elsewhere, house price rises in Auckland have substantially outpaced rental inflation.”
“This suggests that demand to purchase houses in Auckland might be rising more quickly than the demand for accommodation.”

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