As expected the Reserve Bank of NZ kept official interest rates on hold at 3% because of the uncertainty caused by the Christchurch earthquake, its $NZ4 billion estimated damages bill and the short term impact of that on the wider economy.
The announcement didn’t come as a surprise, as there was enough non-quake economic data around to justify leaving rates unchanged anyway.
“The earthquake has significantly disrupted economic activity and is likely to continue to do so for some time yet,” Governor Alan Bollard said in the statement. “The household sector remains cautious,” he added.
The RBNZ joins regional central bank peers from Australia to South Korea, Japan and Malaysia in pausing on rate increases as they wonder about the strength their economies and the world.
The RBNZ said the magnitude 7 quake near the South Island city of Christchurch on September 4 may reduce growth by 0.3% this quarter, but like the forecast from the NZ Treasury, the central bank believes the rebuilding could, in the end, be a positive for growth.
Yesterday’s decision to sit pat came after the RBNZ made its first rate increase in three years in June, and then again in July as the Kiwi economy emerged from the recession and started growing, dragged higher by expanding exports to Australia and Asia and rising consumption at home.
But domestic consumer spending now seems to have gone off the boil in the past month or two and now the quake adds to the uncertainty.
“Over time, it is likely that further removal of monetary policy support will be required,” Bollard said in the statement, but not quite yet because “The pace and extent of further rate increases is likely to be more moderate than was projected in June.”
Mr Bollard said: “While the global and domestic economies continue to recover, the outlook has weakened since our June Statement. We consider it appropriate at this point to keep the OCR on hold.
“The earthquake that struck Canterbury on 4 September has significantly disrupted economic activity and is likely to continue to do so for some time yet.
"Many homes and businesses have been damaged, as have significant parts of Canterbury’s public infrastructure.
"Eventual reconstruction and repairs will require considerable resources over the next year or two, particularly in the construction sector.
"If, in the aftermath of the earthquake, the prices of some goods and services increase temporarily, monetary policy would remain focused on the medium-term trend in inflation.
"The Policy Targets Agreement explicitly instructs the Bank to look through temporary price increases generated by a natural disaster.
“Looking more generally at the domestic economy, the household sector remains cautious, with consumer spending soft, house sales falling and house prices remaining flat.
“With continued soft demand for credit, this suggests household spending will not increase to the extent previously projected.
“The pace of expansion in the global economy appears to have slowed in recent months with forward indicators of US growth, in particular, deteriorating noticeably.
"Nevertheless, continued strong growth in Australia and China will support demand for New Zealand exports, reinforcing the continued contribution of high export commodity prices.
“Overall, despite the weakened outlook, we still expect that growth will progressively absorb current surplus capacity over the next few years.
"In addition, changes to indirect taxes and earthquake impacts will cause headline inflation to spike higher over the coming year.
"Previous experience of GST increases, the fact that annual CPI inflation has been near 2 percent for the past year and a half, and the subdued state of domestic demand suggest this inflation spike will have little impact on medium-term inflation expectations."
The central bank said the three-month bank bill is forecast to rise by 1.5 percentage points by March 2013, less than the 2.8 points projected in June.
“Several on-hold decisions are implied by this forecast,” it said.
The RBNZ completed its main forecasts before the earthquake earlier this month.
However, it published a separate note yesterday with a preliminary analysis of the impact showing that reconstruction will start to buoy the economy from the fourth quarter, and may add as much as 1 percentage point to annual average growth in the year ending March 31, 2012.
"This $4 billion estimate of damage to assets compares to an economy-wide net capital stock, excluding land, of over $560 billion and annual gross investment of $37 billion," the note on the quake said.
"While Canterbury’s productive capital stock has been damaged, this does not appear large enough to have a sustained material impact on the supply potential of the national economy.
"Retail and business services along with infrastructure provision (water and waste) have been the hardest hit.
"At this stage, there are few signs of significant losses of production capacity in the export sector, with agriculture and manufacturing activity continuing.
"This assessment might change if the damage to irrigation infrastructure on farms were to materially reduce agricultural production over the summer.
"Household and business spending has bee
