News Column

RBNZ Raises Official Cash Rate To 3.25%

June 11, 2014

WELLINGTON (Alliance News) - The Reserve Bank of New Zealand on Thursday hiked its Official Cash Rate by 25 basis points, from 2.00% to 3.25%.

The decision was in line with expectations, and it marked the third straight meeting in which the RBNZ has hiked the OCR.

It followed 24 straight meetings in which the rate was not changed.

"New Zealand's economic expansion has considerable momentum, with GDP estimated to have grown by around 4% in the year to June. Global financial conditions remain very accommodative and are reflected in low long-term interest rates and narrow risk spreads. Economic growth among New Zealand's trading partners is gradually improving and global inflation remains low," Reserve Bank Governor Graeme Wheeler said in a statement that accompanied the decision.

The central bank trimmed rates by 50 basis points in March 2011 to combat the threat of financial crisis, and it left the rate unchanged until it was comfortable that a recovery had firmly taken hold.

The RBNZ had plainly said it would begin raising the rate in early 2014, since it was pleased with the rate of recovery.

"Prices for New Zealand's export commodities remain historically high, but their recent falls will reduce farm incomes over the coming year. A continued acceleration in construction in Canterbury, and more broadly, is supporting growth, together with strong net immigration flows that are adding to housing and household demand. Business and consumer confidence remains buoyant, as do businesses' reported intentions to invest and to hire," Wheeler said.

The bank also wishes to keep overall inflation close to its target of 2.0%; in 2013, CPI was up 1.6% and trending to the upside.

"Headline inflation remains moderate and tradables inflation is expected to be low for some time. However, above-trend growth has been absorbing spare capacity and adding pressure to non-tradables inflation. These pressures are particularly evident in construction cost increases," Wheeler said.

Wheeler also suggested that the bank is not finished with rate hikes - although the pace of the increase will be determined by the trend of economic data.

"The speed and extent to which the OCR will need to rise will depend on future economic and financial data, and its implications for inflationary pressures. By increasing the OCR as needed to keep future average inflation near the 2% target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained," Wheeler said.

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Source: Alliance News

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