Falling dairy prices may cause the Reserve Bank to rethink
interest rate rises. Photo by DairyNZ.
New Zealand has experienced a constellation of economic
developments which, in unison, raise questions about the
urgency for official cash rate rises, Westpac chief economist
Dominick Stephens says.
Most important among those developments were the precipitous
falls in dairy and log export prices.
''This is quite different to the period of falling dairy
prices in March and April. They were anticipated by the
Reserve Bank whereas the latest episode was not.
"To make matters worse for exporters, the exchange rate is
even higher than it was early in the year.''
On the domestic front, the economy had lost some of its
considerable momentum and the Consumers Price Index failed to
produce a ''smoking gun'' of accelerating non-tradeables
inflation, he said.
Fixed mortgage rates, which had been too low for the Reserve
Bank's liking, had risen sharply.
The solitary upside development of the past few weeks had
been net immigration which had again turned out stronger than
the Reserve Bank anticipated, Mr Stephens said.
After mulling over the plethora of downside developments, Mr
Stephens was sure the Reserve Bank would conclude the
requirement for OCR rises had eased, but had not been
The June Monetary Policy Statement showed the Reserve Bank
expected to raise the OCR by 1.5% over the next two years.
The requirement might now be for a rise of only 1.25%.
The latest data developments might provide discussion within
the Reserve Bank whether the OCR rise on Thursday was still
However, the Reserve Bank was likely to proceed and increase
the OCR by 0.25% to 3.5%, he said.
Among the reason for the lift were the current central bank
administration had built an ''admirable record'' of clear and
accurate communication regarding further OCR changes.
Failing to lift on Thursday would risk squandering that
The Reserve Bank had always maintained its raising cycle
would be ''front loaded'' - OCR rises would be rapid at first
and slow later. There was no reason to shy away from that
strategy, Mr Stephens said.
''Although we expect the Reserve Bank to persist with its
hike, the recent bout of weaker data has strengthened the
case for a pause in the OCR cycle beyond July. Such a pause
was always in the Reserve Bank's plan.''
At the end of the year, Westpac expected inflation to be
still at 1.6%, below the Reserve Bank's target of 2%.
The housing market was unlikely to rebound as vigorously as
the Reserve Bank feared, he said.
The OCR was likely to remain at 3.5% from July until January.
Following the July OCR review, the Reserve Bank might
consider intervening in foreign exchange markets by selling
New Zealand dollars, Mr Stephens said.
That would address the real nub of the central bank's current
problem of the exchange rate refusing to fall even as export
conditions were deteriorating.
The Reserve Bank had often mentioned it would prefer a
different mix of monetary conditions, involving higher
interest rates to restrain the housing market and a lower
At a glance
• OCR to rise to 3.5% on Thursday
• Pause in rate rises until January
• Communicating a pause may prove problem for Reserve
BankCurrency intervention not ruled out