The Reserve Bank has lifted the benchmark Official Cash
Rate by 25 basis points to 3.5 per cent.
With this fourth successive increase in the official cash
rate widely expected, the focus is now what the brief
accompanying statement indicates on the Reserve Bank's
thinking about the duration and conditionality around the
likely pause to follow.
The 16 forecasters polled by Reuters put a 75 per cent
probability on the bank raising the OCR 25 basis points to
3.5 per cent this week, but six of them expect that to be it
until next year, and the other 10 don't see the bank raising
rates again until December.
A fourth OCR lift today means the bank has delivered half of
the tightening it projected in June would be necessary over
New Zealand's economy is expected to grow at an annual pace
of 3.7 per cent over 2014.
Global financial conditions remain very accommodative and are
reflected in low interest rates, narrow risk spreads, and low
financial market volatility. Economic growth among New
Zealand's trading partners has eased slightly in the first
half of 2014, but this appears to be due to temporary
Construction, particularly in Canterbury, is growing
strongly. At the same time, strong net immigration is adding
to housing and household demand, although house price
inflation has moderated further since the June Statement.
Over recent months, export prices for dairy and timber have
fallen, and these will reduce primary sector incomes over the
coming year. With the exchange rate yet to adjust to
weakening commodity prices, the level of the New Zealand
dollar is unjustified and unsustainable and there is
potential for a significant fall.
Inflation remains moderate, but strong growth in output has
been absorbing spare capacity. This is expected to add to
non-tradables inflation. Wage inflation is subdued,
reflecting recent low inflation outcomes, increased labour
force participation, and strong net immigration.
It is important that inflation expectations remain contained.
Today's move will help keep future average inflation near the
2 per cent target mid-point and ensure that the economic
expansion can be sustained. Encouragingly, the economy
appears to be adjusting to the monetary policy tightening
that has taken place since the start of the year. It is
prudent that there now be a period of assessment before
interest rates adjust further towards a more-neutral level.
The speed and extent to which the OCR will need to rise will
depend on the assessment of the impact of the tightening in
monetary policy to date, and the implications of future
economic and financial data for inflationary pressures."