OCR unchanged, dollar rises

New Zealand interest rates and the value of the dollar rose yesterday after Reserve Bank governor Graeme Wheeler released his first Monetary Policy Statement (MPS) and kept the official cash rate at 2.5%.

The kiwi rose to US82.81c from US82.49c, immediately before the monetary policy statement was released. The trade-weighted index rose to 73.84 from 73.68.

Two-year swap rates rose 0.9%.

Mr Wheeler warned that repairs and construction in Canterbury continued to gather pace and that the housing market was strengthening, particularly in Auckland.

Lower funding costs for New Zealand banks, along with increased competition for lending, had seen mortgage rates reduce.

''Dampening factors include the Government's fiscal consolidation and continued cautiousness by households and businesses in their spending decisions.

''The high New Zealand dollar continues to be a significant headwind, restricting export earnings and encouraging demand for imports,'' Mr Wheeler said.

BNZ economist Stephen Toplis said the world had changed now New Zealand had a central bank governor who was committed to seeing annual consumer price inflation not only within the bank's target band but at the mid-point of that band - 2%.

''Governor Wheeler said so when he signed the Policy Targets Agreement but actions speak louder than words and the actions of the governor today loudly say that he is very much determined to make that target stick.''

However, it was not as though Mr Wheeler ''did anything''. In fact, he did nothing as the bank's projected official cash rate track was unchanged from the September MPS, Mr Toplis said.

But that happened despite a recent string of relatively weak data, a stronger-than-anticipated currency and weaker-than-expected inflation outcomes.

''In times gone past, a lower inflation track might well have been accompanied by a lower interest rate projection. That it didn't happen this time around reflects the fact that the end point of the inflation track is still 2% - bang on where the governor wants it,'' Mr Toplis said.

ASB chief economist Nick Tuffley said the Reserve Bank appeared to be more wary of the strength in housing market activity in recent months.

While the central bank was mindful of the risks of excessive house price inflation on consumer price inflation (CPI) and financial stability, for now it expected the continued focus by households to pay down debt would mute the flow-on effects to household spending.

The Reserve Bank also expected fiscal tightening to dampen demand in the New Zealand economy in coming years, Mr Tuffley said.

''We have a slightly stronger growth outlook relative to the Reserve Bank over much of the projection period, largely reflecting out stronger net export outlook.''

ASB continued to expect the Reserve Bank to keep the OCR on hold until the September 2014 MPS, but acknowledged the bank was indicating a rise in the OCR early next year in its forecasts, he said.


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