RBNZ keeps OCR at 2.5%, sees tame inflation, too-high dollar

Article – BusinessDesk

RBNZ’s Wheeler keeps OCR at 2.5 percent, brushes off weak inflation and points to high dollar

RBNZ’s Wheeler keeps OCR at 2.5 percent, brushes off weak inflation and points to high dollar

By Paul McBeth

April 24 (BusinessDesk) – Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.5 percent, talking down the threat of soft inflation in recent months and reiterating his view the New Zealand dollar is “overvalued”. The kiwi jumped after the statement.

“The high New Zealand dollar continues to be a significant headwind for the tradables sector, restricting export earnings and encouraging demand for exports,” Wheeler said in a statement. “At this point, we expect to keep the OCR unchanged through the end of the year.”

Wheeler said the currency “remains overvalued and is higher than projected in March” with the Bank of Japan’s recent announcement of massive monetary stimulus underpinning some of those gains. In its March forecasts, the RBNZ saw the currency staying above 75 on the TWI until the June quarter next year, having previously seen it falling below 73 by the end of this year.

The kiwi dollar rose to 84.44 US cents from 83.98 cents immediately before the statement was released. The trade-weighted index climbed to 78.15 from 77.82.

Last month, Wheeler gave markets a reminder that a surging kiwi dollar could force a rate cut as cheaper imports and a stronger currency diminish demand for exporters.

The central bank has been juggling a booming housing market in Auckland and property shortage in Christchurch against a rampant kiwi dollar that’s kept a lid on tradable inflation.

Government figures last week showed consumer prices rose at an annual pace of 0.9 percent in the first three months of the year, the third quarter in a row where it’s been below the central bank’s target of between 1 percent and 3 percent.

“Weak near-term inflation prospects need to be balanced against our projection for inflation to gradually rise towards the 2 percent target midpoint,” Wheeler said. CPI is “expected to remain close to the bottom of the target range this year.”

Last month, RBNZ assistant governor John McDermott said the central bank could achieve its inflation target faster if it cut rates, though that could come at the expense of pumping an already bubbling property market.

Wheeler said the housing market is still a concern for the central bank, with house price inflation “high in some regions, despite prices already being elevated.”

“The bank does not want to see financial or price stability compromised by housing demand getting too far ahead of supply,” Wheeler said.

The Reserve Bank has previously said it estimates house prices increased in real terms at an annual pace of 6 percent last year, and will rise 6.2 percent and 3.6 percent this year and the next.

The national median sale price reached $400,000 for the first time in March, according to Real Estate Institute figures. About 90 percent of the increase was driven by Auckland and Canterbury. The spillover effects may be yet to come, including households finally feeling wealthy enough to spend more.

The central bank expects to introduce macro-prudential tools to help take the steam out of asset bubbles, such as a housing boom, in the middle of the year.

In a note before the announcement, ANZ economists said the Reserve Bank is torn between a strong currency and heating housing market, and “prudential policy could be first cab off the rank later in 2013.”

Wheeler said the New Zealand economy has picked up with increased consumer spending and the Canterbury rebuild gathering momentum, though that growth is being held back by fiscal consolidation and the lower agricultural production from the recent North Island drought.

The central bank expects the 90-day bank bill, often seen as a proxy for the OCR, to start increasing in June next year, before accelerating in 2015 and rising to 4 percent the following year. It had previously projected the rate staying on hold until December this year, rising to 3.3 percent in March 2015.

Traders are betting the central bank will increase rates 11 basis points over the coming 12 months, according to the Overnight Index Swap curve. That’s down from 22 basis points of increases priced in at the March review.

New Zealand’s OCR has been on hold for a record 17 meetings since Wheeler’s predecessor, Alan Bollard, sliced half a percentage point in March 2011 as insurance against the impacts of the Canterbury earthquake that levelled the country’s second-biggest city.

(BusinessDesk)

Content Sourced from scoop.co.nz
Original url