RBNZ to keep OCR at 2.5% until end of the year

Reserve Bank governor Graeme Wheeler focuses on balancing the competing tensions of an "over-valued" currency and an overheating property market.

Reserve Bank governor Graeme Wheeler says he is likely to keep the official cash rate at 2.5 percent through 2013, repeating his view that the kiwi dollar is over-valued and that he stands ready to intervene again if needed.

The central bank affirmed its expectation the key interest rate will stay on hold this year, while saying it is prepared to hike rates if rising house prices spur another property bubble, or cut rates if the kiwi continues to appreciate.

"Despite having fallen over the past few weeks, the New Zealand dollar remains overvalued and continues to be a headwind for the tradables sector, restricting export earnings and encouraging demand for imports," Mr Wheeler says.

"If we see the opportunity to undertake intervention then we will take it."

Relative outperformer

Mr Wheeler has to steer monetary policy in a world where inflationary pressures are weak and New Zealand's economy is a relative outperformer.

Raising interest rates could re-ignite a kiwi dollar that the bank has used its own funds to weaken in recent months, though it would also take some of the steam out of a housing market driven by supply shortages in Auckland and Christchurch that threatens to ignite inflation.

"Monetary policy has been in a bind for some time, trapped between rising house prices and the high exchange rate," Dominick Stephens, Westpac Banking Corp chief economist for New Zealand, says in his MPS preview.

He expects "a slightly more hawkish tone" in next week's MPS, given that "economic buoyancy has become more intense" in recent months.

The New Zealand dollar fell to 79.35 US cents from 79.83 cents immediately before the statement. The TWI fell to 73.85 from 74.26.

Mr Wheeler says annual inflation is expect to rise towards the mid-point of the central bank's target 1 percent to 3 percent band, even as the currency keeps a lid on imported prices.

Consumer prices rose at an annual pace of 0.9 percent in the first three months of the year, the third quarter in a row where it has been below the central bank's target of between 1 percent and 3 percent.

Return to the band

The bank forecasts the annual consumer price index to return to the band in September of this year, rising above 2 percent in June 2015, when interest rates are tipped to start increasing as domestic demand spurs inflationary pressures.

It expects the 90-day bank bill, often seen as a proxy for the OCR, to start rising in June next year, with a slightly steeper curve starting in 2015, before reaching 4.2 percent in March 2016.

It had previously projected the rate unchanged until June next year, before accelerating in 2015 and rising to 4 percent in 2016. Before the announcement, traders priced in 24 basis points of increases in the coming year, according to the Overnight Index Swap curve.

The Reserve Bank sees house price inflation is continuing to build, with prices up 9 percent in the three months ended April 30 from the same period a year earlier.

While that is expected to rise modestly through the rest of this year before abating in 2014, it is still a key risk for the regulator. The bank's projections assume it has not used its new macro-prudential tools.

Housing Minister Nick Smith said government plans to free up housing supply aims to trim "super profits" from land banking, which is making property unaffordable in Auckland.

Real Estate Institute figures yesterday showed national stratified house prices have climbed 8.7 percent in the year ended May 31, with the number of sales up 7.1 percent from a year earlier.

Mr Wheeler says the economy is being driven by increasing consumption and the Canterbury rebuild gathering pace, which is get further impetus from residential construction in Auckland.

The bank trimmed 0.5 percent from its forecast for gross domestic product this year as the impact of the drought comes to bare. It sees annual growth of 2.8 percent in March 2014, accelerating to 3.3 percent in the March 2015 year and 3.1 percent the following year.

That compares to Treasury's budget forecast of 2.4 percent in 2014 before rising to 3 percent and 2.6 percent the following two years.

New Zealand's OCR has been on hold for a record 19 meetings since Mr Wheeler's predecessor, Alan Bollard, sliced half a percentage point in March 2011 as insurance against the impacts of the Canterbury earthquake that levelled the country's second-biggest city.

(BusinessDesk)

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