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Wheeler holds OCR at 2.5%, hints next move is up

What a difference two little words make.

Reserve Bank governor Graeme Wheeler this morning issued his first official cash rate (OCR) review and largely stuck to the script of his predecessor Alan Bollard.
There is only one subtle change in today's statement: Mr Wheeler says it is appropriate to hold the OCR at 2.5% "for now".  
Dr Bollard's more recent statements omitted the "for now" part of that line.
That raises the question of whether the next move is up or down. On this, the market and the economists who follow the New Zealand economy are pointing in different directions.  
The overnight index swap (OIS) markets have priced in a rate cut by early next year, while none of the economists are forecasting one – although at least one thinks Mr Wheeler should cut OCR – and all expect rises to start in the second half of 2013 or sometime in 2014.
Today's statement hints indirectly at the next move being up rather than down. Mr Wheeler lists eight factors he is taking into account.
Five of these weigh towards a rate rise and three towards a rate cut, with one of these now moving more towards neutral. 
Economic drivers pushing towards a rate rise are:
  • Inflation rising to the middle of the target range over the coming year.
  • GDP growing, albeit at a "modest" pace.
  • An improvement in market sentiment.
  • Housing market increasing "as expected" (and more on this below).
  • A construction sector boost from the Canterbury rebuild.
Weighing towards a cut are the high New Zealand dollar, tighter fiscal policy from the government and a "fragile" global economy, although Mr Wheeler says market sentiment has improved and the global risks are now more balanced than they were. 
A key question hanging over today's statement is how he sees recent developments in the housing market.
The new policy targets agreement signed with Finance Minister Bill English last month adds a new clause requiring the Reserve Bank to take into account asset price rises and their impact on the wider economy.
The question was whether Mr Wheeler would interpret the recent surge in housing demand, particularly in Auckland, as an inflationary concern. 
Today's statement suggests not – or not yet, anyway. 
The housing market is proceeding along unsurprising lines, Mr Wheeler says.
On inflation overall, the central bank is content to watch and wait – and warn. 
"While annual CPI inflation has fallen to 0.8%, the bank continues to expect inflation to head back towards the middle of the target range," Mr Wheeler says. The target band is 1% to 3% in the consumer price index (CPI).
"We will continue to monitor inflation indicators, such as pricing intentions and inflation expectation data, closely over the coming months."
The next OCR review – which will, unlike today, include an updated set of economic forecasts – is scheduled for December 6.

More by Rob Hosking

Comments and questions

The last thing we need now is an interest rate drop.
House prices are already heading towards the sky on the back of low interest rates and a huge under-supply
I say, fix the housing problem first.

Fix it how? Talk it into submission? Get real! No banks leading on housing developments. No one wants to live in little boxes/apartments in Auckland. Perhaps encourage economic development in parts of the country other than Auckland and encourage people to go there instead. That'll take the pressure off.

"Heading towards the sky" - In Auckland maybe. Nowhere else.

The NZD is too high for exporters upon whose success our economy relies. The next move should be a cut the rate to alleviate this and steer investment towards industry. A capital gains tax and release of crown held land for development will help control the housing market to some extent. It will certainly impact on those who invest in residential property.

My bet is the rate will go down to 2.25% in six weeks.

Ipredict has a 10% chance of a 2.5% fall on 6 Dec, and a 1% chance of an increase.

The Doctor need not worry too much.

The last thing we need is the currency to go higher ( it has already headed north since the announcement ) and our export sector is further crunched.

The Banks will now lift interest rates in anticipation of a rate rise. This is a bad call by the new Governor

Perhaps we at long last have a reserve bank governor who is capable of independent thought.
Perhaps he can see the bigger picture,ie, that we need an interest rate that attracts savings rather than deterring them.
Only in this way will we start to set a basis for resumption of economic growth by building some domestic investment capital rather than having to rely on overseas funding of our deficits.
Let's hope this governor has the foresight to move us ahead!

I have not met anyone who has said they have any confidence in the markets at all quite the opposite.

After the election Europe and America will crumble start finding a way to produce your food because its the end of the world..

Nz's in a real bad way its time to grab your ankles and take it.

Keep all the cash you can and make sure you have food..

Doomsday is on the way.

Lighten up chuckles!

I agree. I heard mussel shells were going to be the next form of currency so have been stockpiling them for the last 3 months. I've also set up a company that builds mud huts in anticpation of the financial apocolypse.

It has been said once, quite wisely that one should prepare ones self by stocking up on canned food, a shotgun and remote bushland. Not bad advice.

Best bet is AU rate at 3.25% will come in to 2.75% to meet NZ rate going up to 2.75% by Dec and NZD/AUD up to 82 cents from 79 cents

The Reserve Bank Govenor and the politicians et al cannot grasp the concept that small increases or even large ones will have no effect on the price of houses. It will have an impact on the 2% of the popn who buy 1M houses with 200K in, but has a huge impact on the 98% who own 200-800K houses nationwide. Altering interest rates from there current fixed 5% to 7-8% will have no decision making implications, It will just skyrocket the dollar and give investors a little more interest. What they get in comparism to what the rest of us will pay is insignificant. The majority of home owners with mortgages are 40ish. They have paid 10% in the early 90s and remember their parents paying 20%. upping the OCR even to 4.5 -5 % will have no impact on their decisions just make life harder still. Keep them low while the world is in dire straits and let us build some equity!!!!!!!

Unless ates rises whose going to put their savings into TDs Much better in the NZX or in property especially when you can borrow at 5%. No good telling baby boomers to save in TDs when theres no return. This will all add up to extreme pressure on governments as BBs retire in greater numbers and want increases in their Nat Super. Mark my words the BBers are going to be a powerful voting block in the future. Whoever wants to govern is going to have to keep them happy or face being in Opposition. Until KSaver kicks in ti replace Nat Super and that wont be until 20 years out 2032 governments are going to be tied to the wishes of BBers.

Yep - thats me - I have been telling them what to do for 40 years and they have never taken any notice.

It's real good to know my time in charge has come!!!

- 40 years experience and merories will do much better than a bunch of get rich quick newbies who dont understand where money comes from

Maybe Wheeler's like the hatchet man been bought in from the World Bank to drop the hammer on NZ economy once and for all?

I'm not sure why everyone seems to think a rate cut would bring the NZD lower. They have cut in OZ, and the market expects at least a couple more, and yet the AUD is still sitting close to its highs. We are living in a strange universe at the moment, and will be for years, and so other things are driving markets at the moment, Cutting interest rates, thinking your solving one problem, could easily end up not doing anything other creating another unintended problems, but ones that would be no surprise such as housing

Name one business making serious money - except Banks. The new Governor is hopefully showing only youthful irrationality and to signal that the next move might be up is misreading the state of the economy. The next move will be down - as the worlds a mess and not getting better in a hurry and the NZ economy has glandular fever - ie going no where fast.

Youthful irrationality - from a 60 year old?