The Reserve Bank has left the official cash rate unchanged at 3%.View the live webcast from Reserve Bank governor Alan Bollard here.View the complete monetary policy statement here.The central bank said interest rates are now projected to rise to a
The Reserve Bank has left the official cash rate unchanged at 3%.
View the live webcast from Reserve Bank governor Alan Bollard here.
View the complete monetary policy statement here.
The central bank said interest rates are now projected to rise to a more limited extent over the next two years than signalled in its September statement.
"The pace of economic growth appears to have moderated. Corporate investment intentions are now below average. Household spending also remains weak, with household credit still flat and housing market activity slowing further," the RBNZ said.
It warned house prices may decline further and said this continued household and business caution suggested current low interest rates are having a less stimulatory effect than in the past.
On the positive side, the RBNZ said, activity in New Zealand’s trading partners continued to expand.
"Growth in the Asia-Pacific region remains strong, and growth in the US and UK has turned out a little stronger than was projected. Consistent with this, export
commodity prices, which were already very high, continue to increase. While this is encouraging, downside risks to global growth and export prices persist."
As already known, repairs to earthquake damage in Canterbury are expected to add to GDP growth over the projection period. The earthquake appears to have caused about $5 billion of damage to infrastructure, and residential and commercial property.
"While the near-term outlook for GDP growth has softened, beyond this, higher export volumes and earthquake repairs are expected to push GDP growth above that projected in the September statement," the RBNZ said.
As growth recovers, current spare capacity will gradually be used up, causing underlying inflation to pick up. More immediately, the recent increase in the rate
of GST will cause headline CPI inflation to spike higher temporarily, although there is little evidence of this spike affecting price and wage setting behaviour.
"While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing."
The RBNZ said the New Zealand dollar had appreciated significantly since the September statement and that sustained strength in the currency was inhibiting the rebalancing of economic activity towards the tradable sector.
"Accelerated elimination of New Zealand’s fiscal deficit could help improve national savings, thereby easing current pressure on interest rates and the New Zealand dollar, and reducing New Zealand’s dependence on international borrowing," RBNZ governor Alan Bollard said.
“The credit boom and subsequent bust is of a magnitude not observed in New Zealand in recent history. As such, it is difficult to know just what the implications are of this swing in credit growth, nor how enduring these will be.”
The main bright spot – the export sector – is still enjoying historically high prices but is also being hurt by a high New Zealand dollar/US dollar cross-rate.
Although this has improved since October’s highs of close to $US0.79cents (partly courtesy of Standard and Poors putting New Zealand’s sovereign credit rating on negative watch) it is still harming the recovery, Dr Bollard said.
“The New Zealand dollar has appreciated significantly since the September statement,” this morning.
“Sustained strength in the currency is inhibiting the rebalancing of economic activity towards the tradable sector.”
The outlook for the currency, on a trade weighted index (TWI) basket of currencies basis is for the New Zealand dollar to run higher than previously forecast.
