Friday, March 29, 2024

Cash rate rises to 2.75%

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Reserve Bank Governor Graeme Wheeler acted as predicted this morning and raised the official cash rate, the basis for commercial interest rates, from 2.5% to 2.75%.
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Very high prices for export commodities and strong domestic growth meant inflationary pressures were becoming apparent, Wheeler said.

“Growth in demand has been absorbing spare capacity and inflationary pressures are becoming apparent, especially in the non-tradables sector.

“In the tradables sector, weak import price inflation and the high exchange rate have held down inflation.

“The high exchange rate remains a headwind to the tradables sector. The bank does not believe the current level of the exchange rate is sustainable in the long run.

“While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years.

“In this environment it is important that inflation expectations remain contained.

“To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand.

“The bank is commencing this adjustment today.

“The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging 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.

New Zealand’s economic expansion had considerable momentum and growth was becoming more broad-based.

GDP was estimated to have grown by 3.3% in the year to March.

Growth was gradually increasing in NZ’s trading partners.

However, improvements in major economies had required exceptional support from monetary policy. Global financial conditions continued to be very accommodating, with bond yields in most advanced countries low and equity markets performing strongly.

Prices for NZ’s export commodities remained very high, especially for dairy.

Domestically, the extended period of low interest rates and continued strong growth in construction sector activity had supported recovery. A rapid increase in net immigration over the past 18 months had also boosted housing and consumer demand.

“Confidence is very high among consumers and businesses and hiring and investment intentions continue to increase,” Wheeler said.

There had been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending were starting to ease pressure and rising interest rates would have a further moderating influence.

“However, the increase in net immigration flows will remain an offsetting influence.”

View the Monetary Policy Statement:

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