The New Zealand dollar rallied by about half a US cent after
the Reserve Bank issued a more hawkish than expected monetary
The central bank left its official cash rate at 2.5 per cent
but said it was likely to increase the rate next year.
By 9.40 am the Kiwi was at US81.26c, up from US80.80c just
before the release of the bank's official cash rate review
and monetary policy statement.
Dealers said it appeared the currency market was reacting to
confirmation from the Reserve Bank that it would begin
tightening earlier than it had previously telegraphed.
Westpac economists said the statement was more "hawkish" - or
tough on inflation - than it had expected.
The main surprises were a more explicit description of the
start date for tightening and a significantly elevated 90-day
interest rate projection, which implied a tightening start
date of April next from July previously, Westpac said.
Increasing activity and inflation pressures were noted, as
was the uncertain impact of the new loan-to-value (LVR)
housing loan restrictions.
"We think the market was positioned for a neutral outcome,
expecting the LVR impact uncertainty to be emphasised,"
The Reserve Bank said it expected the introduction of LVR
restrictions to help to slow house price inflation.
In the big picture, Governor Graeme Wheeler said the global
economic outlook remained mixed.
Economic growth in Australia and China had slowed and some
emerging market currencies had come under downward pressure.
At the same time, the major developed economies continued to
recover and New Zealand's export commodity prices remained
very high, he said.
"Although long-term interest rates have risen globally in
recent months, largely due to uncertainty around the timing
of the Federal Reserve's exit from quantitative easing,
global financial conditions overall continue to be very
accommodating," he said.
In New Zealand, gross domestic product was estimated to have
increased by 3 per cent in the year to the September quarter.
"Consumption is rising and reconstruction in Canterbury will
be reinforced by a broader national recovery in construction
activity, particularly in Auckland," Wheeler said. "This will
support aggregate activity and start to ease the housing
In the meantime, rapid house price inflation persisted in
Auckland and Canterbury.
The Reserve Bank has repeatedly said it does not want to see
financial or price stability compromised by continued high
house price inflation.
"Restrictions on high loan-to-value residential mortgage
lending, which will come into effect next month, are expected
to help slow the national housing market," Wheeler said.
Despite having fallen on a trade-weighted basis since May
2013, the exchange rate remained high, he said.
Consumer price inflation had been very low over the past
year, partly reflecting the high New Zealand dollar and
strong international and domestic competition.
"However, inflation is expected to rise towards the mid-point
of the 1 to 3 per cent target band as growth strengthens over
the coming year,' Wheeler said. He said rate increases were
likely to be required next year.
"The extent and timing of the rise in policy rates will
depend largely on the degree to which the momentum in the
housing market and construction sector spills over into
broader demand and inflation pressures," Wheeler said.
"We expect to keep the official cash rate unchanged in 2013."
The rate has been at an accommodative 2.5 per cent since