New Zealand seems to be growing, so the country’s central bank has decided it wants to board the interest rate rise express, but not quite yet.
Certainly, not as soon as Australia, with three rate rises in three months under the belt.
But instead of lifting rates, as signalled for the past few months, at the end of 2010, Governor Allan Bollard has advanced the timing to midway through next year.
“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010,” Reserve Bank Governor Bollard said in a statement yesterday after leaving the official cash rate unchanged at 2.5%.
"The New Zealand economy continues to recover, reflecting the positive impacts of an improved world outlook, higher export commodity prices and increased house prices," The RBNZ said in its latest monetary policy assessment, released yesterday.
"Domestically, we believe New Zealand has moved out of recession and estimate that the economy grew only slightly below trend through the second half of 2009.
"However, we continue to see little need to increase the OCR immediately, given tighter financial conditions brought about by appreciation in the New Zealand dollar, growing market expectations of an increase in the OCR and increasingly aggressive competition for deposits among financial institutions.
"Importantly, annual CPI inflation is forecast to remain inside the target range over the medium term.
"We expect growth to be relatively strong over the coming year or so, as activity regains its pre-recession."
But Dr Bollard said despite the improvement, "there remains considerable uncertainty about the durability of the expansion".
He said global activity has continued to rebound, "most obviously, in Australia, China and emerging Asia continues to increase and solid growth is expected over the next few years.
"The picture is more mixed in the major developed economies.
"While activity is expanding, sustained growth is not assured.
"Financial sectors are still impaired in a number of economies and economic activity is still heavily dependent on policy support."
He said the NZ economy continues to recover, reflecting improved world growth, higher export commodity prices, increased government spending and housing strength.
"A key uncertainty is the extent to which higher house prices are eventually reflected in increased consumer spending.
"At this point credit growth remains subdued suggesting households are being relatively cautious."
Business confidence has improved, but actual business spending remains weak.
But the high level of the New Zealand dollar (it jumped yesterday after the release of the statement on rates) has limited the scope for exports to contribute to the recovery.
"After some short-term correction the current account deficit is expected to widen in the future.
"Annual CPI inflation is expected to remain below 2 percent until early 2011 and track within the target range over the medium term.
"The economy is being assisted by both monetary and fiscal policy support.
"As growth becomes self sustaining, fiscal consolidation would help reduce the work that monetary policy might otherwise need to do.
"If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010.
"Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action."
In other words the strengthening in the value of the Kiwi dollar is acting as a monetary policy restraint.
That’s what is supposed to be happening in Australia, but as we saw this week, the economy seems to be growing strongly, in spite of the rise in the value of the Aussie dollar (over 30% this year).
