The Reserve Bank has left the official cash rate unchanged at
its record low of 2.5 per cent.
In the latest economist survey there was 42 per cent support
for an increase in the OCR from 2.5 to 2.75 per cent today
and 19 per cent support for an even higher rate.
Support for keeping rates on hold today dropped to 39 per
cent from 55 per cent when the bank last reviewed the OCR six
New Zealand's economic expansion has considerable momentum.
Prices for New Zealand's export commodities remain very high,
especially for dairy products.
Consumer and business confidence are strong and the rapid
rise in net inward migration over the past year has added to
consumption and housing demand. Construction activity is
being lifted by the Canterbury rebuild and by work in
Auckland to address the housing shortage. Continued fiscal
consolidation will partly offset the strength in demand. GDP
grew by 3.5 per cent in the year to September, and growth is
expected to continue around this rate over the coming year.
While agricultural export prices are expected to come off
their peak levels, overall export demand should benefit from
improving growth in the global economy. However, improvements
in the major economies have required exceptional monetary
accommodation and there remains uncertainty about the timing
of withdrawal of this stimulus and its effects, especially on
emerging market economies.
Annual CPI inflation was 1.6 per cent in 2013, and
forward-looking measures of firms' pricing intentions have
been rising. Construction costs are increasing and risk
feeding through to broader costs in the economy.
At the same time, there appears to have been some moderation
in the housing market in recent months. The high exchange
rate continues to dampen inflation in the traded goods
sector, but the Bank does not believe the current level of
the exchange rate is sustainable in the long run.
While headline inflation has been moderate, inflationary
pressures are expected to increase over the next two years.
In this environment, there is a need to return interest rates
to more-normal levels. The Bank expects to start this
The Bank remains committed to increasing the OCR as needed to
keep future average inflation near the 2 per cent target
mid-point. The scale and speed of the rise in the OCR will
depend on future economic indicators.
Graeme Wheeler is set to deliver the Reserve Bank's quarterly
Monetary Policy Statement on March 13.
NZIER economist Kirdan Lees said earlier this week that
waiting until March to lift rates would give Wheeler the
chance to use a full suite of communication tools - including
a monetary policy statement, press conference and select
committee testimony - to tell the public why interest rates
need to go up.
"But the economy is building up steam. Business confidence is
soaring, consumers are ready to spend and the Canterbury
rebuild will pressure inflation higher over 2014 and beyond.
Loan-to-value restrictions also need help to slow the pace of
house price rises in Auckland," he said.