OCR rise ruled out

The Reserve Bank is ruling out any increase in its official cash rate, which will be a relief to exporters and those who are battling a high dollar driven by this country's high interest rates compared with Australia's.

The OCR in New Zealand is 3.5% and the Reserve Bank of Australia has an official lending rate of 2.25%, which is now unlikely to be dropped to 2% next month as previously expected.

Australian inflation data came out this week at an annual rate of 1.3%.

It would have been 2.2%, if not for a slump in petrol prices.

Reserve Bank assistant governor John McDermott was yesterday the latest central bank official to speak in public about the economy, this time in a speech titled: ''The dragon slain? Near-zero inflation in New Zealand''.

Dr McDermott said the bank was not considering any increase in interest rates.

''Before considering any tightening in monetary policy, we would need to be confident increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation.''

Evidence of weakening demand and domestic inflationary pressures would prompt the Reserve Bank to consider lowering interest rates, he said.

There were some areas of uncertainty in the outlook for capacity pressures, including the lingering effects of the recent drought, fiscal consolidation, lower dairy incomes and the impact of the high exchange rate for some export and import-substitution industries.

The Reserve Bank was also assessing the outlook for tradables inflation, which was being dampened by global conditions and the high exchange rate.

The fact the exchange rate had appreciated while key export prices had been falling was unwelcome, Dr McDermott said.

''We remain vigilant in watching wage bargaining and price-setting outcomes. Should these settle at levels lower than our target range for inflation, it would be appropriate to ease policy.''

ASB chief economist Nick Tuffley said after the speech the Reserve Bank was mindful low inflation could filter through to people's expectations of inflation and, in turn, mute wage and price-setting behaviour.

The central bank also cited research suggesting most New Zealand businesses were looking back at where inflation had been, not where it was likely to be.

As well, research suggested firms became more backward-looking when inflation was low and more reactive to down-side inflation surprises, he said.

The Reserve Bank would be watching carefully for behavioural shifts, although any evidence would take time to appear.

At this stage, measures of inflation expectations were still consistent with the inflation target.

The Reserve Bank had ruled out OCR increases but weaker domestic inflation would prompt it to consider lowering interest rates, Mr Tuffley said.

''The bank doesn't have a lot of leeway left with its inflation target. If a return to the 2% inflation target mid-point came under question, then a lower OCR has a green light.''

The Reserve Bank said the dollar's increase while dairy prices were falling was unwelcome.

The ASB believed the dollar was the more immediate catalyst for an OCR cut, particularly if it was to lift further and materially change the inflation outlook, he said.

''We didn't see the speech as showing any changes in the Reserve Bank's approach. The speech did reinforce the risks to the OCR outlook in the short term were down rather than up and we still put around a 25% probability of a cut this year.

''The focus is on whether capacity pressures or behavioural shifts mean inflation will not lift as quickly as assumed.''

Data proving or disproving that would take time to show through, so the risk of imminent OCR cuts was low, Mr Tuffley said.

The Reserve Bank is expected to hold the OCR at 3.5% in its statement on April 30.

 


At a glance

• Reserve Bank rules out interest rate rise

• Commentators believe a rate cut is not imminent

• Rate cut certain if wages and prices remain low

• High dollar and low dairy prices remain a concern


 

 

 

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