Official cash rate increases to 7.5%

Reserve Bank (RB) Governor Alan Bollard says a resurgence in the housing market is supporting strengthening domestic demand, which is bad for inflation.

Thursday, March 8th 2007, 11:06AM

by The Landlord

The acceleration in housing reflects firming net immigration, a recovery in confidence, a continuing rapid expansion of mortgage credit at very low margins, and strong growth in household incomes.
“Recent indicators show clear evidence of a pick-up in economic activity in late 2006 and early 2007,” says Bollard.
From the RB’s perspective, all this is adding to resource pressures and increasing the risk of a re-emerging inflation problem in the medium term.
Bollard’s concern is that the recent pick-up in housing and domestic demand may gain momentum, giving rise to a stronger cyclical upturn at a time when resources are already very stretched.

“This could reverse the rebalancing of the economy that has been underway since late 2005 and present substantial risks to the medium-term inflation outlook. It would also increase the prospect of a more costly correction in the country’s external deficit.”
The RB is assessing other measures that might support the official cash rate (OCR), including a tightening of housing investment tax rules and changes to bank capital requirements “to help moderate the amplifying effect of credit on the housing cycle”.
However, it says it will continue to rely on the OCR as the primary instrument of monetary policy.
The current policy tightening is aimed at reducing what the RB views as the risk of an unsustainable rebound in activity. Depending on the persistence of the current upturn, further tightening may be required, it warns.
The RB called for a return to a “moderating trend” in housing and domestic demand “if we are to see a reduction in medium-term inflation pressures”.

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