New Zealand Monetary Policy

New Zealand

New Zealand: Reserve Bank of New Zealand extends interest tightening cycle and raises OCR to 3.50%

July 24, 2014

At its 24 July monetary policy meeting, the Reserve Bank of New Zealand (RBNZ) increased the official cash rate (OCR) from 3.25% to 3.50% in order to “help keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained.” The Banks’s move represents the fourth consecutive rate hike, a decision that was widely expected by the markets.

In the accompanying statement, monetary authorities noted that New Zealand GDP is expected to grow a solid 3.7% in 2014. The Bank underlined that the continued growth in the domestic construction sector as well as increasing net immigration have provided a boost to housing and private consumption. Regarding the international environment, the Bank reaffirmed that, “[g]lobal financial conditions remain very accommodative,” and that it expects the slowdown in economic growth among New Zealand’s trading partners to be due to temporary factors only. Moreover, the Bank pointed out that the high level of the New Zealand dollar is “unjustified” and that there is, “potential for a significant fall.”

Regarding price developments, the Central Bank underlined that, “inflation remains moderate, but strong growth in output has been absorbing spare capacity,” which is expected to increase inflation in the non-tradable sector. In addition, the Bank pointed out that export prices for dairy products and timber have declined, which is expected to lead to lower primary sector incomes during the next year.

The RBNZ signaled a pause to the interest tightening cycle in order to assess the impact of the past rate hikes in stating that, “[i]t is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.” The next monetary policy meeting is scheduled for 11 September.

Accordingly, the majority of FocusEconomics panelists expect the Bank to continue raising the OCR this year, with an average forecast of 3.67%. For 2015, participants see interest rates ending the year at 4.22%.

Author: Teresa Kersting, Economist

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New Zealand Monetary Policy Chart

New Zealand Monetary Policy June 2014 0

Note: Official Cash Rate (OCR) in %.
Source: Reserve Bank of New Zealand.

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