Cash rate left at record low
Bollard leaves the OCR at 2.5%, as expected - but talk about possible future rises has undergone a significant shift.
Bollard leaves the OCR at 2.5%, as expected - but talk about possible future rises has undergone a significant shift.
The Reserve Bank has left the official cash rate at a record low of 2.5%, as expected - but talk of any future rises has undergone a significant shift.
The bank is holding off any changes to the official cash rate until the strength of the economic recovery becomes clearer.
Governor Alan Bollard this morning opted to keep the OCR at 2.5% - as expected – but talk of any future rises has undergone a significant shift.
At the last review Dr Bollard said the current OCR level was likely to remain necessary “for some time.”
Today, he warned that as the economic recovery picks up, underlying inflationary pressures will emerge.
“A gradual increase in the OCR over the next two years will be required to offset this, such that CPI inflation tracks close to the midpoint of the target band over the latter part of the projection. The pace and timing of increases will be guided by the speed of recovery, but for now the OCR remains on hold.”
In other words, he will not shoot until he sees the whites of the economic recovery’s eyes.
The recovery itself has put in a number of brief appearances but then ducked for cover
since the recession officially ended in mid-2009, with several stop-start pick ups in both hard data and business mood surveys.
The Reserve Bank began lifting the OCR in June last year in what some critics have since felt was a premature move. With signs emerging in the second half of 2010 that the recovery was stalling, the OCR went on hold and then, following the 22 February earthquake, Dr Bollard made an emergency cut from 3% to 2.5%.
This morning’s decision makes it clear the Reserve Bank thinks the recovery is now under way, but wants to be sure the economy is strong enough to remove the current, stimulatory, level of the OCR.
“Strong global demand remains in place with New Zealand’s export commodity prices very high. Unlike the 2007/08 price spike, which was primarily due to high dairy prices, the current price is brad-based, with most commodity exporters enjoying high prices. In addition, climatic conditions have been very favourable since December, substantially benefiting agricultural production.”
A continuation of this though is not certain, and uncertainties about the economic outlook in Europe and the United States are causes for concern.
Related to both these is the high New Zealand dollar against the US currency, which, although it has kept inflation lower than it would otherwise have been, is constraining New Zealand’s economic rebalancing.
Domestically, the Reserve Bank does not anticipate a substantial pick up in household spending. The high level of consumer debt is one factor; the other is the government’s tough budget, delivered last month, which projects lower growth in government spending over the next few years.
“Lower public sector employment growth and tighter eligibility for welfare payments will negatively affect household income growth.”