RBNZ holds interest rate at 2.5pc

JAMES WEIR
Last updated 11:11 25/07/2013

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The Reserve Bank is expected to start lifting official interest rates early next year after shifting to what economists called a "clear bias" towards raising rates.

Ruling out a rate rise this year after holding official interest rate steady at 2.5 per cent this morning, the Reserve Bank is seen to be taking a firmer line than it did in June, so rates could could up sooner than expected, one economist said.

Reserve Bank Governor Graeme Wheeler said: "Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year."

In past statements, Wheeler has repeated that the central bank "expected to keep the OCR unchanged through the end of the year", but today's statement added "the removal of monetary stimulus will likely be needed in future" - suggesting interest rates rises are around the corner next year.

Westpac said the shift to an "explicit hiking bias" was the first material shift in stance towards rate rises since the end of 2011 when the central bank kept to its "firmly on hold" line.

Westpac said that was a sign rates would rise early 2014 rather than later in the year. The Reserve Bank seemed to be taking more seriously the potential for inflation to rise on the back of economic growth, Westpac said.

Wheeler warned that how much interest rates rose would depend on the spill-over into inflation from rapidly rising house prices, the building boom in Christchurch and the pickup in Auckland.

Westpac expected the first rate rise in March 2014 and that the cash rate would increase to 5.5 per cent by the end of 2016, a lift of 300 basis points.

ANZ Bank also said there was now a firm bias towards lifting rates, in a clear shift from a more balanced view by the Reserve Bank in April.

The central bank was becoming more confident about the spreading economic pickup, and the dollar was high, but no longer overvalued ANZ said.

ASB chief economist Nick Tuffley said the governor was taking a slightly firmer line than in June.

ASB continued to expect the first rate rise in March 2014, with rates gradually rising to 4 per cent in late 2015. The central bank's concerns about the housing market and general inflation could prompt earlier action.

"We see the risks as balanced and today's statement highlights that earlier hikes are a possibility," Tuffley said.

Wheeler again flagged rapid house price rises and said the New Zealand dollar remained high, rather than saying it was "overvalued" as he has in the past. The currency ticked up slightly to US79.6c on the statement.

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Economic growth was picking up and becoming more widespread, but remained uneven. The global outlook was "mixed".

Consumption was increasing and reconstruction in Canterbury would be reinforced by a broader national recovery in building work, particularly in Auckland, Wheeler said. This would support total activity and eventually help to ease the housing shortage.

"In the meantime rapid house-price inflation persists in Auckland and Canterbury," he said.

"As previously noted, the Reserve Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of the supply response.

"Despite having fallen on a trade-weighted basis since May 2013, the New Zealand dollar remains high and continues to be a headwind for the tradeables sector, restricting export earnings and encouraging demand for imports.

"Fiscal consolidation will weigh on aggregate demand over the projection horizon.

"CPI inflation has been very low over the past year, reflecting the high New Zealand dollar and strong international and domestic competition. However, inflation is expected to trend upwards towards the mid-point of the 1-3 per cent target band as growth accelerates over the coming year.

"The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures."

In its latest review of the official cash rate, the central bank kept rates unchanged since March 2011.

Economists had widely expected rates to be kept on hold, although some still expected the first move up by the end of this year, while others were picking a move in March next year.

The New Zealand dollar was trading at US79.3c just before this morning's announcement, rising slightly to US79.6c soon after. The currency has rebounded from a low of US77c earlier this month. But the dollar remains well down on the peak this year of just above US86c in April.

There had been a radical change in market sentiment in recent weeks, moving to price in three rises in the official cash rate by the end of 2014. That reflected the drop in the New Zealand dollar against the US currency, and a growing set of figures showing the economy was firmly in the grip of an economic upturn, economists said.

The improving economy would push inflation up over time, but a high dollar had suppressed inflation in the short-term.

On the other hand, the New Zealand dollar was only about 4 per cent lower than the central bank expected in June, because it has risen against the Australian dollar.

Some of the Reserve Bank's work to cool the housing market had already been done by banks lifting fixed-term mortgage rates by up to 25 basis points in recent weeks.

- BusinessDay.co.nz

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