The Federal Reserve's decision to delay tapering its
bond-buying programme in the United States could complicate
the Reserve Bank's decision-making, ASB chief economist Nick
Tuffley said yesterday.
The Reserve Bank kept its official cash rate unchanged at
2.5%. Bank governor Graeme Wheeler said the recovery in the
US and other major advanced economies remained patchy.
''Nevertheless, world prices for New Zealand's export
commodities are very high.''
The Fed yesterday extended its support for a soft US economy
and sounded less optimistic about growth as it announced
plans to keep buying $US85 billion ($NZ102.8 billion) in
bonds each month.
In announcing the decision, the Fed acknowledged weaker
economic signals due in part to a fiscal fight in Washington
that shut down much of the government for 16 days last month.
Mr Tuffley said the Fed gave few fresh hints on tapering its
bond-buying programme - known as quantitative easing -
although US data appeared increasingly unlikely to give the
green light for a 2013 start.
''The longer until tapering starts, the greater the potential
for the New Zealand dollar to remain firm against the US
Mr Wheeler and Reserve Bank of Australia governor Glenn
Stevens had recently commented on the challenges quantitative
easing was causing them, Mr Tuffley said.
Mr Wheeler remarked it would have been helpful if the Fed had
started tapering in September and, in a speech, Mr Stevens
looked forward to when the Fed started to taper to ''start to
lessen some of the uncomfortable spillover effects''.
The ASB expects the Reserve Bank to start lifting the OCR in
March but Westpac economists have pushed their start date out
Westpac chief economist Dominick Stephens said compared with
previous missives, the Reserve Bank was more concerned
yesterday with the high exchange rate.
''As we anticipated, this concern was expressed via a
sentence pointing out the trajectory of the OCR will depend
on the exchange rate.''
As expected, the central bank appeared to have upgraded its
near-term forecast, in line with the flow of recent data, he
Mr Wheeler said the extent and timing of the OCR rise next
year would 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 governor repeated his sentiment from September the
loan-to-value ratios were expected to slow the market.
Mr Stephens said the OCR review was in line with his
expectations. Interest rate markets were not surprised and
did not react to the review.
''We still believe the economy is going from strength to
strength. But the exchange rate is now uncomfortably high and
we expect the trade-weighted index will be above 78 next
At those levels, we doubt the Reserve Bank will be prompted
into hiking the OCR early,'' he said.