Friday, March 29, 2024

Cash rate up but pause signalled

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Reserve Bank governor Graham Wheeler has put the Official Cash Rate up to 3.5% because the dollar remains unjustifiably and unsustainably high.
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With the exchange rate yet to adjust to weakening commodity prices there was potential for a significant fall, he said as he raised the OCR 25 basis points. He acknowledged primary sector incomes would fall.

As commentators expected he signalled a pause in the raising process to assess progress.

“Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year.

“It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.

“The speed and extent to which the OCR will need to rise will depend on the assessment of the impact of the tightening in monetary policy to date and the implications of future economic and financial data for inflationary pressures,” Wheeler said.

The economy was expected to grow at an annual pace of 3.7% this year.

Global financial conditions remained very accommodative and were reflected in low interest rates, narrow risk spreads, and low financial market volatility.

Economic growth among NZ’s trading partners had eased slightly in the first half of 2014 but this appeared to be caused by temporary factors.

Construction, particularly in Canterbury, was growing strongly. At the same time, strong net immigration was adding to housing and household demand though house price inflation had moderated further since June.

“Over recent months export prices for dairy and timber have fallen and these will reduce primary sector incomes over the coming year.

“With the exchange rate yet to adjust to weakening commodity prices the level of the NZ dollar is unjustified and unsustainable and there is potential for a significant fall.

“Inflation remains moderate but strong growth in output has been absorbing spare capacity.

“This is expected to add to non-tradables inflation.

“Wage inflation is subdued, reflecting recent low inflation outcomes, increased labour force participation and strong net immigration.

“It is important that inflation expectations remain contained.

“Today’s move will help keep future average inflation near the 2% target mid-point and ensure that the economic expansion can be sustained,” Wheeler said.

 

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