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Wheeler lifts OCR to 2.75 percent in first hike since 2010, signals steeper rate track

Reserve Bank governor Graeme Wheeler lifted the official cash rate a quarter-point to 2.75 percent in the first move of a tightening cycle, and signalled potential for a steeper track for future hikes as he tries to prevent inflation accelerating.

"While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years," Wheeler said in a statement. "The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures."

The Reserve Bank sees a faster pace of inflation than in its December forecast, with the consumers price index rising to 2 percent as soon as the June quarter, a level the bank had previously expected in mid-2015. While a strong currency will keep a lid on imported inflation, the bank expects non-tradable inflation to increase to about 4 percent.

The monetary policy statement said the bank expects "the OCR will need to rise by about 2 percentage points over the next two years for inflation to settle around the target," depending on the economic outlook.

"By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the bank is seeking to ensure that the economic expansion can be sustained," Wheeler said. He's tasked with keeping CPI between a range of 1 and 3 percent, with a target to keep inflation near the mid-point.

The central bank raised its forecast track for the 90-day bank bill rate, seen as a proxy for the OCR, by about 20 basis points from the June quarter this year, and sees the rate rising to 4 percent by the end of 2014 and 5.3 percent by March 2017. It had previously seen the rate increasing to 3.8 percent by the end of 2014, and 4.8 percent by March 2016. Yesterday, traders were betting Wheeler will lift the OCR 134 basis points over the coming 12 months, according to the Overnight Index Swap curve.

"While the RBNZ's projected path of interest rate hikes could still reasonably be described as 'gradual' compared to past tightening cycles, it won't leave much room for dallying - consecutive hikes at some stage are a given, and in our view are more likely to occur up front," Imre Speizer, market strategist at Westpac Banking Corp, said in a note before the release.

Today's hike had been fully-priced in by the market after the central bank signalled rates needed to rise as the local economy gathers momentum. Wheeler had previously been reluctant to lift the key rate because of the strength of the currency, which yesterday reached a new post-float high 79.68 on a trade-weighted basis.

The trade-weighted index was an average 78.18 in the March quarter, higher than the Reserve Bank's December projection of 77.4. The bank now sees the New Zealand dollar remaining elevated for a longer period of time, with the TWI staying above 77 until the end of 2016.

"The high exchange rate remains a headwind to the tradables sector," Wheeler said. "The bank does not believe the current level of the exchange rate is sustainable in the long run."

The kiwi fell as low as 84.37 US cents before recovering to trade at 85 cents, from 84.73 cents just before the statement was released.

Wheeler said local economic growth has considerable momentum, underpinned by strong export commodity prices and construction activity, and is becoming more broad-based.

Growth has been buoyed by insatiable Chinese demand for New Zealand dairy products, making the world's most populous nation the nation's biggest trading partner, and keeping the terms of trade at a 40-year high.

The bank expects gross domestic product grew at a 3.3 percent pace in the year ending March 31, and forecasts growth of 3.2 percent the following year, up from a previous forecast of 2.7 percent. Growth is forecast to moderate to 2.2 percent in the years to March 2016 and 2017.

The Reserve Bank has held the OCR at a record low 2.5 percent since March 2011, a move similar to most of the world's major central banks seeking to stimulate economic growth after the global financial crisis froze credit markets.

That's largely ended as the US Federal Reserve notes a stronger American economy and sounder financial system, and has hinted at further winding back its bond buying programme. New Zealand is leading the pack, widening the interest rate gap with other developed economies, as the nation benefits from booming demand for its soft commodities, a pickup in home building, and increasingly confident businesses and consumers.

More by Paul McBeth

Comments and questions
15

Hoooooray for depositors!!!!!! long long overdue!!! it will make diddly squat to borrowers, they will still line up with their hands out, a 2% rise won't change that.

So why are lazy savers so important they should take their chances like any other investor.

The strength of s countries currency is one sign of a strong economy. Anyone ever seen a country with a strong currency and a weak economy? Thought not. the currency issue is over blown. If the US$ was 25cents the NZ economy would be so far into the tank that it wouldn't matter as exporters would be going broke because they couldn't avoid the imported inputs into their products. Exporters need to harden up and get with the programme and get more efficient rather than wanting to be subsidized by a weak currency that penalizes everyone else.

It is the strength of dairy exports that has pushed the currency up. Other exporters are struggling. It's like trying to export anything but oil out of Dubai or Saudi. Can't do it. Not competetive internationally. We're not at that extreme, but the same applies. Having one large and really strong industry makes it really hard to do anything else here competitively. I work with exporters who are hanging in there, but it is bloody tough. They are very effiicient, but might go out of business anyway because they just can't compete with low currency economies. Inputs (staff/rent/etc) are just too high by comparison when the dollar is high. Saying a weak currency penalizes everyone else is very short term thinking. In the long run if too many exporters go out of business, it hurts everyone here - no jobs, no foreign exchange, etc.

Obviously China completely disagree's with you as they have fixed their currency below everyone else's on the planet to get where they are at now.

Any increase in interest rate will reduce any chance of a possible NZ property bubble....

That's the sort of logic Wheeler used. Simply dumb. Raising the OCR will NOT stop foreign money coming in, nor will it fix Christchurch's lack of housing stock. Simplistic reaction to problems without understanding the causes. I'm stunned at such thoughtless shallow logic.

You are right, Wheeler is obviously a shallow thinker employing dumb logic - I think he was offered the Governor's job whilst he happened to be waiting for a bus on the Terrace...

His remit is financial stability - supply side issues aren't his concern or in his control. When NZ household's are amongst the most indebted in the world of course they will scream like junkies when the easy debt fix is taken away from them for the benefit of future financial stability.

If you have a problem with other issues not being addressed there is an election in September...

Change the record Richard, it's getting old. Foreigners are not the only source of buyers of Auckland property.

Anon, I have a name, I don't hide. I am closely involved with Real Estate sales in Auckland and I can tell you it is the ongoing Chinese buyup of central Auckland that is pushing up prices right across the region. To suggest otherwise displays ignorance of the facts.

You pretty much are being anonymous by using your first name. Just because I have a contrary view does not mean I'm ignorant of the facts.

Interesting that think tanks across the spectrum disagree with the rate rise. In the blue corner: EMA. In the left, BERL.

Both the socialists and the capitalists agree: inflation is not an issue right now. We have an ocean between where we are, where we need to be, and anything remotely resembling problematic inflation.

No property bubble? What do you call what we have in Auckland at the moment?

But fortunately, along with the first commenter, our mortgage is now so small, and on fixed rate, so that we do not have to participate in the 'tightening cycle'.

We have a great monetary policy that puts responsibility for fixing inflation squarely in the hands of the people who have mortgages, and particularly that portion of them who do not have long-term fixed interest debt. And to a lesser degree, on businesses who use variable rate debt to fund their working capital.

Might not be fair, but those in the right condition are sitting pretty.

won't higher interest rates to depositors attract more overseas money and thus drive up the NZ$ further?

Yes.