Reserve Bank holds interest rate

21:10, Jan 29 2014

The Reserve Bank is holding official interest rates at 2.5 per cent, but this morning flagged a rise is just around the corner.

The central bank says it "remains committed" to increasing the OCR as needed to keep future average inflation near the 2 per cent target mid-point. The scale and speed of the rise in the OCR will depend on future economic indicators.

"While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years," Reserve Bank governor Graeme Wheeler said.

"In this environment, there is a need to return interest rates to more-normal levels. The bank expects to start this adjustment soon."

The central bank also took a jab at the high dollar.

"The high exchange rate continues to dampen inflation in the traded goods sector, but the bank does not believe the current level of the exchange rate is sustainable in the long run," he said.

The New Zealand dollar was trading at US82.6 cents shortly before the bank's announcement, but immediately dropped to US82.08c on confirmation that the cash rate was on hold, again.

The cash rate is sitting at a record low 2.5 per cent and before today's announcement, financial market pricing suggesting a move today was "50/50" with some bank economists predicting a rise.

A rate rise had been expected to spark another jump in the currency.

The United states Federal Reserve said this morning it would cut its monthly bond purchases by an additional $10 billion to $65b because of a strengthening US economy. It's doing so even though the prospect of reduced Fed stimulus and higher US interest rates has rattled global markets.

In its one page statement, issued at 9am, the Reserve Bank said New Zealand's economic expansion had "considerable momentum".

Prices for export commodities were "very high", especially for dairy products, consumer and business confidence were strong, and the rapid rise in net inward migration over the past year had added to consumption and housing demand. Construction was being boosted by the Canterbury rebuild and by work in Auckland to address the housing shortage.

That would be partly offset by continued government belt-tightening, the bank said.

The economy grew 3.5 per cent in the year to September, and growth was expected to continue around this rate over the coming year, the Reserve Bank said.

While agricultural export prices are expected to come off their peak levels, overall export demand should benefit from improving growth in the global economy.

However, improvements in the major economies have required "exceptional monetary accommodation" and there remained uncertainty about the timing of withdrawal of the US stimulus and its effects, especially on emerging market economies, the Reserve Bank statement said.

Annual inflation was 1.6 per cent in 2013, and forward-looking measures of firms' pricing intentions have been rising.

Construction costs were increasing and risk feeding through to broader costs in the economy.

"At the same time, there appears to have been some moderation in the housing market in recent months," the bank said.

The high exchange rate continued to dampen inflation in the traded goods sector, but the Bank did not believe the exchange rate was sustainable in the long run.

Many bank economists had expected rates to remain unchanged this week, but for the Reserve Bank to flag a rise in six weeks time at the March Monetary Policy Statement.

Stronger-than-expected inflation figures last week meant a possible rate rise this week was "a close call".

Expectation that official interest rates were rising this year had already seen longer-term mortgage rates jump, with three-year rates looking the best bet for borrowers, according to a Bank of New Zealand economist.

The floating mortgage rate is presently about 5.74 per cent but BNZ economists expected it to hit 6.25 per cent before the middle of the year and near 7 per cent by the end of the year, as the Reserve Bank pushed up the cash rate.

The Reserve Bank's last report in December implied four or five interest rate rises this year, starting in March of April.

But since the end of last year, three-year fixed-term mortgage rates have already jumped from just under 6 per cent to about 6.4 per cent.


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