Brian Fallow

The Economics Editor of the NZ Herald

Wait-and-see hold on rate rises

OCR lifted to 3.5 per cent but Governor's strong stance on dollar drops it to a 6-week low.

Reserve Bank governor Graeme Wheeler intensified the rhetoric on the kiwi dollar yesterday. Photo / Mark Mitchell
Reserve Bank governor Graeme Wheeler intensified the rhetoric on the kiwi dollar yesterday. Photo / Mark Mitchell

The Reserve Bank raised its official cash rate to 3.5 per cent yesterday, as widely expected, but said it would now remain on hold for "a period of assessment" before resuming its rise towards more neutral levels.

At 3.5 per cent, the OCR is still below the 4.5 per cent the bank considers neutral. And it expects the economy to grow 3.7 per cent over 2012, which is about a percentage point higher than the rate it considers sustainable without inflation becoming a problem.

That combination portends further OCR rises, but the bank's guidance statement in yesterday's announcement was that the speed and extent to which the rate would have to rise depended on the effect of the tightening in monetary policy "and the implications of future economic and financial data for inflationary pressures".

Bank of New Zealand economist Stephen Toplis said the reference to "financial data" indicated that credit growth and the New Zealand dollar were as important in the reckoning as economic data.

Governor Graeme Wheeler intensified the rhetoric on the dollar.

"With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall," he said.

Westpac chief economist Dominick Stephens interpreted that as a warning the Reserve Bank might intervene in the foreign exchange market, selling New Zealand dollars.

The bank's pre-conditions for intervention are that the exchange rate be exceptionally high or low and unjustified by economic fundamentals.

But intervention must also be consistent with the bank's mandate and "opportune" in that market conditions give a reasonable chance of success.

Stephens said the kiwi was looking vulnerable to a drop.

The turning point might have been a week or two ago.

"We have dropped from above US88c to US86c, and our forecast is it will average US83c for the rest of the year."

The New Zealand dollar dropped to a six-week low of US85.83c as at 5pm in Wellington from US87.02c immediately before the Reserve Bank announcement.

ASB chief economist Nick Tuffley doubted the bank would intervene.

"We don't think the Reserve Bank has too much chance of success right now, given the yield advantage New Zealand has and is likely to keep over the major economies over the rest of the year," he said.

ANZ chief economist Cameron Bagrie said the governor's comments and the pause in the tightening cycle opened the door to intervention.

He said the highs of the exchange rate might be behind us, as foreign observers might not be interested in differentiating between a pause and the top of the cycle.

ANZ has brought forward its forecast of the first policy rate increase by the US Federal Reserve to March next year.

Apart from the language on the dollar, the Reserve Bank's statement was as expected, noting falls in export dairy and log prices, moderation in house price inflation, and subdued wage growth.

On the positive side it noted strong growth in construction, especially in Canterbury, the surge in net immigration, and that strong output growth overall had been absorbing the economy's spare capacity and would add to non-tradeables inflation.

- NZ Herald

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