As expected the Reserve Bank of NZ joined its Australian counterpart this morning in not changing interest rates, leaving the Official Cash Rate (OCR) unchanged at 1.75%.
Two factors drove the decision – one very obvious, stronger economic activity in NZ and around the globe in the past few months, higher inflation, and the unstated explanation – NZ is now in election mode with the national poll due on September 23.
The tone in this morning’s statement from RBNZ Governor Graeme Wheeler was more positive than it has been for a while (as was the tone of the RBA statement on Tuesday afternoon).
But the RBNZ’s twin headaches of a stronger than desired property market and rising exchange rate remain resent and a concern.
But like the RBA, the Kiwi central bank looks like sitting on this level for quite a while. There is a slight chance of a rate cut if the global economy worsened, but no chance of an increase. The property boom has slowed.
The high level of the Kiwi dollar remains a concern, as does the rise in the value of the Aussie dollar for the RBA – but both central banks know nothing can be done about this except some more jawboning’ of the market to try and keep the currencies steady.
In the statement this morning the political reason was not cited anywhere, but the strong growth globally stood out, as did firming inflation.
"Economic growth in New Zealand has increased as expected and is steadily drawing on spare resources. The outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity.
“Dairy prices have recovered in recent months but uncertainty remains around future outcomes,” Wheeler said.
"Recent moderation in house price inflation is welcome, and in part reflects loan-to-value ratio restrictions and higher mortgage rates. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand.
"Headline (NZ) inflation has returned to the target band as past declines in oil prices dropped out of the annual calculation. Inflation is expected to return to the midpoint of the target band gradually, reflecting the strength of the domestic economy and despite persistent negative tradables inflation.
"Longer-term inflation expectations remain well-anchored at around 2 percent.
"Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.
"The recovery in commodity prices and more positive business and consumer sentiment in advanced economies have improved the global outlook. However, major challenges remain with on-going surplus capacity in the global economy and rising geo-political uncertainty,” the RBNZ said.
"Global headline inflation has increased, partly due to rising commodity prices. Global long-term interest rates have increased. Monetary policy is expected to remain stimulatory, but less so going forward, particularly in the US.”
“New Zealand’s financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate.
"The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed,” Wheeler demanded.
