Reserve Bank governor Graeme Wheeler has kept the official cash rate at 3.5 per cent, saying any more rate hikes will be at a later stage as the central bank pulled back its track for future increases as tepid inflation provides scope to let the economy grow rapidly for longer.
"Modest inflation pressures suggest the expansion can be sustained for longer than previously expected with a more gradual increase in interest rates," Wheeler said in today's monetary policy statement. "Some further increase in the OCR is expected to be required at a later stage."
Wheeler left the OCR unchanged, as expected, and trimmed the forecast track of the 90-day bank bill rate, often seen as a proxy for the cash rate, by 30 basis points, adding to the 0.5 of a percentage reduction by which the bank lowered its expectations in September. The rate is seen rising to 3.9 per cent in September next year, and 4.5 per cent by the end of 2017. It had previously seen the rate rising to 3.9 per cent by March next year and 4.8 per cent by the middle of 2017.
That's broadly in line with Westpac Bank market strategist Imre Speizer's expectations, who said in a note before the release that a 30 basis point reduction in the forward track was his central forecast, and would likely have little impact on currency and swap rate markets.
The pace and timing of future hikes will depend on how the economy has responded to the 100 basis points of increases earlier this year, with three important considerations being how pricing decisions interact with capacity pressures and inflation, how house price inflation develops and how lower dairy incomes affect spending, the bank said.
The New Zealand dollar rose as high as 78.01 US cents, from 76.85 cents immediately before the 9am statement. It was recently trading at 77.74 cents.
In July, Wheeler signalled a pause in the bank's current tightening cycle, saying the bank needed to take "some time" as "a period of assessment" was needed to gauge the impact of the four rate hikes this year. At last month's review he dropped the reference that "further tightening will be necessary to keep inflation near the 2 per cent target."
The bank has been surprised by the country's tepid pace of inflation, which slowed to an annual 1 per cent rate in the September quarter as a resilient kiwi dollar continues to keep imports cheap, while increased construction activity in Christchurch and Auckland fails to spill-over into broader consumer price rises.
Wheeler said the strong exchange rate, falling oil prices and more subdued non-tradable inflation was the cause of soft inflation, and the bank expects that slow pace to persist through the first half of 2015 before creeping higher. Tradable inflation also faces a short-term downside risk, with oil prices falling below the bank's assumed range when it set the forecasts for today's repor
