NZ central bank raises OCR a third time to 3.25%, keeps track broadly intact; kiwi jumps
By Jonathan Underhill
June 12 (BusinessDesk) - The Reserve Bank of New Zealand raised the official cash rate for a third time while keeping
its track for interest rates broadly in line with its March projections, suggesting the bank sees no need to pause in
removing stimulus in an accelerating economy. The New Zealand dollar jumped three quarters of a cent against the US
dollar following the announcement.
Governor Graeme Wheeler raised the OCR to 3.25 percent, as expected, saying as inflationary pressures are expected to
increase, “it is important that inflation expectations remain contained and that interest rates return to a more neutral
level.”
Gross domestic product grew an estimated 4 percent in the year to June, and has “considerable momentum,” he said. While
low interest rates had played an important part in supporting growth in the past few years, “more recently, growth has
become more self-sustaining and very low interest rates are no longer appropriate given the rise in inflationary
pressures.”
The New Zealand dollar touched a three-week high of 86.27 US cents following the announcement, and was recently trading
at 86.22 cents, from 85.50 cents immediately before the 9am announcement.
Wheeler is signalling no pause in the tightening cycle to a market that has moderated its expectations for hikes in the
OCR this year by about 15 basis points since March. Based on the Overnight Interest Swap market at the end of May, the
market had priced in the OCR reaching 3.7 percent by March 2015 compared to the 3.85 percent being priced in at the time
of the March MPS.
The Reserve Bank attributed this change to overseas investors being the dominant market participants driving rates
lower, “more than offsetting the flows from domestic banks wanting to fund fixed rate mortgages that put upward pressure
on rates.”
The impact since March has been less than the bank wants because lenders have benefited from lower global wholesale
rates and have less need to seek funding because of the inflow of deposits. Added to that, rivalry in the home loan
market means lenders have been keep mortgage rates lower than expected.
The Reserve Bank signalled in March it may hike the OCR by 200 basis points over two years and the monetary policy
statement does nothing to moderate that view. The 90-day bank bill rate, seen as a proxy for the OCR, is projected to be
4 percent by year-end, unchanged from the March MPS. Since then the bank bills have gained to 3.46 percent from around
3.07 percent.
By the end of 2015, the central bank sees the 90-day bank bills at 4.7 percent, little changed from the 4.9 percent rate
it saw in March.
Annual inflation breaks through the mid-point of the bank’s 1 percent-to-3 percent target range in the June quarter of
2015, at 2.1 percent, three months earlier than was projected in the March MPS, before slipping back to 1.9 percent.
Part of that is driven by the central bank’s assumption that current price pressures moderate. It notes that “strong
increases in construction spending will support robust domestic demand over coming years” and expects the sector will
grow to about 10.5 percent of potential GDP in the next two years.
Strong net immigration and income growth will boost housing demand, but house price inflation is expected to moderate as
more supply becomes available, the bank said.
New Zealand property values increased at an 8.2 percent annual pace in May, the slowest in nine months, according to QV
data, suggesting the Reserve Bank’s loan to value restrictions have cool demand.
The bank’s projections assume that annual net immigration peaks in mid-2014 at 37,000 working-age people, with some
70,000 people added to the population over its forecast horizon to June 2017.
Yet the composition of migration means it is likely to stoke demand less than in the peaks of the early 2000s, mainly
because much of the increase reflects a drop in New Zealanders moving overseas and more kiwis returning home,
“encouraged by New Zealand’s relatively favourable economic performance.”
“We think that market expectations for a significant downgrade in the RBNZ’s interest rate forecasts will be
disappointed,” Imre Speizer, director, NZ rates strategy, at Westpac Banking Corp, said before the MPS was released.
“The data flow since the last MPS has been mixed. Soft inflation and wage costs, lower dairy prices and a high NZD have
been offset by stronger migration, lower mortgage rates, and a fiscal impulse.”
The biggest revisions to the bank’s provisions are for the track of the trade-weighted index, which was recently at
79.83 from 79.97 at the time of the last MPS on March 13. The central bank expects the TWI to average 80 in the June
quarter, up from its March projection of 78.4, and hold above 79 through 2014, before declining in 2015.
“Our projection assumes that the TWI falls gradually, by about 7 percent over the next three years,” Wheeler says in
the monetary policy statement released today. “To date, the fall in the currency has been smaller than the drop in
commodity prices would suggest. If the exchange rate remains strong, it is likely to be reflected on continued low or
negative tradables inflation.”
(BusinessDesk)