As expected, NZ’s central bank kept its benchmark interest rate at a record low yesterday, despite more signs the country’s economy is bouncing back strongly from the devastating impact of the second Christchurch earthquake.
“It remains appropriate for monetary policy to be supportive given the current softness of the economy and the inflated level of the New Zealand dollar,” Governor Alan Bollard said in the post-meeting statement after leaving the official cash rate unchanged at 2.5%.
He added, "The pace and timing of increases will be guided by the speed of the recovery" which is a clear message to the markets to expect a rate rise a bit sooner than expected if the economy continues to strengthen.
In fact the central bank warned there would be rate rises in the next two years to keep a lid on inflation, especially from next year onwards.
In March, the central bank cut 0.5% off its benchmark rate in a bid to shore up confidence in response to the quake on February 22.
That seems to have worked, though it has been aided by rising exports and higher prices for key products like dairy.
The NZ dollar has hit a succession of highs in response to the improving tone of the economy and yesterday it traded up half a cent at 82 USc after the rate decision was made public.
The NZ dollar rose as high as US82.42c in early afternoon trading from US81.52c at the opening yesterday, but was back at US81.96c at 5 pm, NZ time.
This compared to US81.78c on Wednesday.
Not that there was any doubt the central bank would leave rates where they were: all economists surveyed by Bloomberg forecast the steady as she goes decision.
Mr Bollard complained about the strength of the currency, which hit a 26-year post-float high of 82.64 USc last week, saying “This appreciation, supported by high export prices for primary producers, is negatively affecting other parts of the tradable sector, constraining rebalancing of the New Zealand economy".
But it is also helping keep a lid on inflation (as the strong Australian dollar is doing).
The New Zealand Institute of Economic Research pointed out that the high value of the Kiwi is allowing the central bank to hold the benchmark interest rate at a record-low.
The latest Monetary Policy Statement from the central bank underlined the beneficial impact of the high dollar on monetary policy (by tightening policy, it is relieving the bank of the need to push up rates).
The RBNZ bank gave its first full forecast for the economy since the quake. It expects the economy to grow 2.8% this calendar year.
The forecast for March 2011 gross domestic product growth rose to 1.2% from 0.9% in the March MPS, with the economy is expected to surge 4.6% by the 2013 year.
That is good news for the many Australian companies operating in NZ.
The big four banks can look forward to lending activity, especially in the Christchurch area, the need for trade finance will rise, retailers like Woolworths and Harvey Norman will see higher sales again in and around Christchurch in particular.
Fletcher Building will be a major player in the rebuilding work and even the insurance companies like IAG and Suncorp should have a better outlook, even though they are going to have to boost rates to meet the cost of higher reinsurance premiums for the next few years.
In fact the NZ outlook is quite encouraging compared to what it looked like back in March.
In his post-meeting statement, Mr Bollard said, "The outlook for the New Zealand economy has improved since the publication of the March Statement.
“Economic activity has been significantly disrupted by the Christchurch earthquake. However, while many firms and households – particularly within Canterbury – continue to be adversely affected, it appears the negative confidence effect of the earthquake on economic activity throughout the rest of the country has been limited.
“The early signs of recovery noted in the March Statement have continued. Despite some continuing signs of weakness in the world economy, commodity prices remain very strong and firms expect to increase their hiring and capital investment.
"Reconstruction in Canterbury is projected to add about 2 percentage points to GDP growth over 2012, and boost the level of activity for several years thereafter.
“Despite the strong outlook for export earnings, household expenditure is expected to grow only modestly. Household debt remains very high and is expected to constrain retail spending and the housing market for some time. Continued fiscal consolidation will also act to dampen activity.
“The New Zealand dollar has appreciated substantially over the past two months.
"This appreciation, supported by high export prices for primary producers, is negatively affecting other parts of the tradable sector, constraining rebalancing of the New Zealand economy.
“Headline inflation is currently being boosted by recent increases in indirect taxes, food and petrol prices, and surveyed expectations of future inflation have edged up.
"Despite this, indicators of capacity usage and core inflation suggest underlying inflation remains constrained.
“As GDP growth picks up, underlying inflation is expected to rise.
"A gradual increase in the OCR over the next two years will be required to offset this, such that CPI inflation tracks close to the midpoi
