The Reserve Bank has taken a more aggressive stance to
raising the official cash rate, governor Graeme Wheeler saying
yesterday increases would be likely next year.
In response the New Zealand dollar pushed higher to above
US81.5c, the highest level since May 31.
Mr Wheeler kept the OCR unchanged at 2.5%, the same as the
current Australian rate, but warned inflation was expected to
rise towards the mid-point of the bank's 1% to 3% target
range as economic growth strengthened.
''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 spilled over into
broader demand and inflation pressures.''
The central bank expected to keep the OCR unchanged this
year, he said.
Westpac chief economist Dominick Stephens said the Reserve
Bank's new stance was more realistic.
''We have long argued that rising house prices and a
construction boom would eventually provoke inflation
pressures and would require a substantial OCR hiking cycle -
similar to the experience of past decades.
''It is right for the central bank to warn markets and the
populace at large that a period of higher interest rates is
Moving early might limit the eventual extent of OCR hikes
that were required, he said. The anticipation of future OCR
hikes had caused markets to push fixed mortgage rates up,
which would slow the housing market earlier than OCR hikes on
their own could have.
The Reserve Bank's higher loan-to-value ratios (LVRs) come
into effect on October 1 and as expected, the bank revised
down its house price outlook by 2.5%.
Council of Trade Unions economist Bill Rosenberg wanted more
focus on employment from the Reserve Bank.
The slow fall in unemployment anticipated by the central bank
reinforced the need for wider objects of monetary policy, he
Its forecasts still had the unemployment rate at 6% at the
end of the year and above 5% out to 2016.
''These are well above levels we know we can achieve and they
are levels we should not be happy with.''
The bank commented on the state of the labour market keeping
down wage rises, Mr Rosenberg said. The CTU did not want
unemployment being accepted as an anti-inflation tool and one
that depressed the real living standards of New Zealand wage
and salary earners.
The Reserve Bank forecasts saw annual economic growth (GDP)
peaking at 3.5% in June next year before sliding back to
growth rates of 2% by the end of the following year.
''While it was interesting to hear the governor saying the
exchange rate was one of the factors he would take into
account in deciding on future interest rate rises, he also
made clear it was too high and burning off exporters and
firms competing with imports.''
For a better-performing economy in the longer run, a clearer
focus on the exchange rate was needed, Mr Rosenberg said.
ASB chief economist Nick Tuffley said the Reserve Bank noted
developed economies faced an outlook of ''slowly improving
growth'' while highlighting the slightly slower recent growth
in China and Australia.
Much of the perceived risk in the international outlook
appeared to have shifted to emerging economies in Asia.
As the reduction of Federal Reserve asset purchases -
quantitative easing - neared, bringing with it an expected
tightening of liquidity conditions, many emerging economies
faced sudden exchange rate depreciation and very
poorly-performing equity markets.
Large exchange rate falls might have an adverse affect on
some of those economies, he said.
Despite clear risks remaining, New Zealand's trading partner
growth was still expected to slowly improve over the forecast
period, underpinned by accommodative monetary policy in the
The Reserve Bank believed the recent tightening in offshore
credit conditions had not affected New Zealand's major banks.
Strong deposit growth had reduced pressure on funding,
conditions for which remained ''comfortable'', Mr Tuffley