As expected the Reserve Bank of New Zealand has left official interest rates on hold at 3.5% as it assesses the impact of the four rate rises so far in 2014.
In a statement issued in Wellington this morning, Governor Graeme Wheeler made it clear the rise of uncertainty had made the central bank more cautious, including the still too high value of the Kiwi dollar.
The rate decision was announced as the bank issued its latest monetary policy statement in which he didn’t rule out future rate rises for an economy in rude health (especially compared with the sluggish Australian economy).
The June quarter GDP figures are due out next week and are forecast to show growth of around 0.5% from the March quarter.
Bank mortgage rats have risen by around 1% this year in the wake of the four increases and combined with the restrictions on loans with a high valuation ratio, have helped cut house price inflation to 6% from 10% a year ago.
But the big imponderable is the damage to domestic demand from the recent 30% plus slide in dairy prices. That won’t be known for some months.
Kiwi rates on hold after four hikes in 2014
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"(I)t is prudent to undertake a period of monitoring and assessment before considering further policy adjustment," Mr Wheeler said in the statement.
"Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained."
"The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable. We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise.
"The economy appears to be adjusting to the policy measures taken by the Bank over the past year. House price inflation continues to ease, despite strong net immigration.
"CPI inflation remains moderate, reflecting subdued wage increases, well-anchored inflation expectations, weak global inflation, and the high New Zealand dollar. However, spare capacity is being absorbed, and annual non-tradables inflation is expected to increase.
"Risks also remain around how strongly net immigration will affect housing demand, and the extent to which pressures in the construction sector will impact broader inflation.
"New Zealand’s economy is expected to grow at an annual pace of 3.7 percent over 2014. Global financial conditions remain very accommodative and are reflected in low interest rates, narrow risk spreads, and low volatility across a range of asset markets. Accommodative financial conditions are supporting a moderate rate of global growth, albeit uneven across regions.
"New Zealand’s economic growth continues to be supported by increasing construction activity and ongoing strength in consumption and business investment. A high level of net immigration is adding to domestic demand as well as productive capacity.
"Economic growth is projected to moderate in response to recent commodity price declines and the impact of policy tightening. The high exchange rate continues to restrain growth in the traded sectors.
"The economy appears to be adjusting to the policy measures taken by the Bank over the past year. House price inflation continues to ease, despite strong net immigration. CPI inflation remains moderate, reflecting subdued wage increases, well-anchored inflation expectations, weak global inflation, and the high New Zealand dollar. However, spare capacity is being absorbed, and annual non-tradables inflation is expected to increase," Mr Wheeler said.
