The Reserve Bank has kept the official cash rate at 3% and says rate hikes to previous levels may not be required.“Over time, it is likely that further removal of monetary policy support will be required,” Reserve Bank governor Alan Bollard sa
The Reserve Bank has kept the official cash rate at 3% and says rate hikes to previous levels may not be required.
“Over time, it is likely that further removal of monetary policy support will be required,” Reserve Bank governor Alan Bollard said in announcing this morning’s decision.
“The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement.”
The central bank has scaled back its GDP forecast for the current March year – in June, it expected 3.5%: as of today it expects 2.8%. The forecast for the next year has been scaled back further – from 3.6% to 2.6%.
This morning’s decision came as no surprise – weakening signs from the domestic economy, worse unemployment, housing and retail figures than were expected at the Reserve Bank’s last Monetary Policy Statement on June 10, along with a confidence-sapping earthquake and finance company bailout meant any decision other than “hold” would have come as a shock.
The impact of the Christchurch earthquake is likely to be a short-term fillip in GDP toward the end of the year and into 2011 but although GDP will be higher this is because of repairs to damage, not an increase in New Zealand’s wealth or productive capacity.
The central bank still sees the current OCR level as stimulatory but says changing behaviour by New Zealanders means this level is not as stimulatory as it would have been in the past.
Despite historically low interest rates, borrowing by businesses and individuals has been much lower than it would have been in the past – in fact, as a net figure, business borrowing has actually shrunk,
This is driven by both lender and borrower caution and means the stimulatory OCR level has been “providing less support than history would suggest,” says the central bank’s Monetary Policy Statement, which was also released with the OCR decision.
“Furthermore, elevated bank funding costs have caused these interest rates to be quite high relative to the OCR.
“This all suggest that the current level of the OCR is providing much less support than has historically been the case.”
This could just be a short-term burst of post-recession caution – although the aftermath of previous recessions has not seen such behaviour.
Alternatively it could indicate a “structural change” in New Zealanders’ attitude to debt.
RAW DATA:
Webcast
Full policy statement (PDF)
By the numbers (3.4MB Excel file)
