Higher interest rates, a rising dollar and the prospect of
more foreign investment into New Zealand markets are likely
to follow a hawkish review of the economy by the Reserve
Reserve Bank governor Graeme Wheeler lifted the official cash
rate by 0.25% to 3.25%, as expected. What was not expected
was the tone of his remarks which indicated a further rise in
interest rates next month, instead of the long break he was
expected to take.
The dollar rose 0.5% against the Australian, Europe, British
and United States currencies after the announcement.
Craigs Investment Partners broker Chris Timms said Mr Wheeler
gave no indication of a pause in the rate rises, catching
markets by surprise.
Asked if retail banks were caught out after dropping fixed
lending rates recently, Mr Timms said the interest rate curve
recently had shown rising short-term interest rates and
falling longer-term rates.
Mr Wheeler's statement yesterday changed that immediately.
''It is fair to say some banks have been caught out.''
The governor pointed to a strongly growing economy, while
acknowledging some prices for New Zealand's exports,
particularly dairy products, were falling.
As interest rates rose in New Zealand, overseas investors
would start looking for better returns than those being
received in Europe, where the European Central Bank had
introduced negative interest rates, the first major central
bank to do so, Mr Timms said. That would keep upward pressure
on the dollar.
BusinessNZ chief executive Phil O'Reilly said the needs of
exporters must be factored in to any additional OCR rises
The rise in the exchange rate following the announcement was
not what the economy needed.
''The Reserve Bank clearly expects the exchange rate to fall,
given weaker international dairy prices. But exporters would
nevertheless invite caution.''
There was still potential for New Zealand's economic growth
to slow, despite the current enviable rate of expansion.
Inflationary pressures were not widespread in the economy, he
Current inflationary pressures often stemmed from central and
local government-imposed regulation.
''In this environment, the Reserve Bank should pay heed to
the needs of New Zealand exporters and the productive sector
when thinking and deciding upon further rate rises,'' Mr
BNZ market economist Stephen Toplis said the Reserve Bank
appeared to have a July rise firmly in its sights, followed
by a pause in September then a further increase in October or
''There is very clear evidence in both the data in the
Monetary Policy Statement and the Reserve Bank's rhetoric it
wants to get the cash rate up to 3.5% as soon as possible.
Hence, our maintained call for July.''
There was no indication anywhere a near-term pause was being
contemplated, he said.
It was likely the Reserve Bank would pause for the election
to give it time to rethink the overall strategy.
Before the next OCR review, first quarter GDP (economic
growth) would be published on June 19. The Reserve Bank had
increased its forecast to 1.1%, in line with most forecasts.
On July 16, second-quarter inflation would be published. The
Reserve Bank was picking 0.3% to give inflation of 1.7% for
The BNZ was forecasting quarterly inflation of 0.5% and 1.9%
Mr Toplis said there was nothing seen yesterday to change his
view the tightening cycle had a long way to run before it
''July will be the next step along the way, September a pause
and the track from thereon will be highly data-dependent,
with the currency the variable of most interest to us.''
Mr Wheeler said while house price inflation remained high,
the housing market had moderated since late last year when
restrictions were applied to high loan-to-value ratio
mortgage lending and when mortgage interest rates started
Inflationary pressures were expected to increase.
''It is important inflation expectations remain contained and
interest rates return to a more neutral level. The speed and
extent to which the OCR will need to rise will depend on
future economic and financial data and its implications for
At a glance
- Economic growth 4% for the year ended June
- OCR likely to peak at 5% next year
- Concern from exporters about strength of dollar
- Inflation expected to increase