KEY POINTS:
Reserve Bank Governor Alan Bollard will sit back for several months now to see if his latest interest rate increases will finally squeeze the life out of the housing market, economists say.
Bollard lifted the official cash rate a further quarter of a percentage point to 7.75 per
cent yesterday but gave few clues about his future intentions. He also attempted to keep a lid on the high-flying kiwi dollar by hinting the bank may intervene in currency markets.
The Reserve Bank said recent economic indicators confirmed that the resurgence in economic activity that began late last year had continued over recent months mainly because the housing market refused to soften and government spending continued to rise.
The bank also cited New Zealand's increased international buying power, net immigration, and a robust labour market.
Recent data shows headline inflation running at 2.5 per cent - well within the bank's 1 per cent to 3 per cent target band - but non-tradeables or domestic inflation is at 4.1 per cent, indicating demand remains strong and is continuing to overstretch key parts of the economy.
Bollard said recent gains by the kiwi against the currencies of New Zealand's major trading partners would "exert some downward pressure on medium-term inflation". He also noted the recent increases in fixed mortgage interest rates. Yesterday's increase was intended to ensure inflation outcomes remained consistent with the bank achieving its 1 per cent to 3 per cent inflation target "on average over the medium term".
Economists noted a lack of explicit guidance about the bank's future intentions.
"We do not think that this indicates that the bank has moved to a neutral bias," said Deutsche Bank chief economist Darren Gibbs. "But we do think that this indicates that the bank is unlikely to consider further policy tightening until July at the very earliest."
ASB chief economist Nick Tuffley expected the Reserve Bank to keep rates on hold for some time. "It will now sit back and assess how much impact higher mortgage rates and the New Zealand dollar will have on the economy."
Westpac chief economist Brendan O'Donovan said with the lack of guidance in the commentary the bank had given itself "complete flexibility" to do what was required.
"We've got a central bank that doesn't want to hike again ... they want to give themselves some time to see the impact that that has."
Yesterday's commentary also contained a transparent attempt to keep a lid on the New Zealand dollar, which has risen substantially in recent weeks, partly on expectations of yesterday's rate increase.
The bank noted that the exchange rate was now at levels that are both "exceptional by historical standards, and unjustified on the basis of medium-term fundamentals".
ASB chief economist Nick Tuffley said the bank's choice of words indicated current conditions met most of the criteria under which it has said it may intervene in the currency market.
However, he didn't believe the bank had a realistic opportunity to do so as the US dollar was under pressure, New Zealand interest rates were among the highest in the developed world and there remained the prospect they may need to go higher again to contain inflation.
"We believe the statement is merely a subtle attempt to remind all and sundry that the New Zealand dollar is not a one-way bet higher - an attempt to put a cap on the New Zealand dollar."
The kiwi dollar, which hit a 22-year post-float high of US74.93c a week ago and was trading at US74.40c immediately before the announcement, initially jumped around following the announcement but traded higher over the session to close at US74.81c.
The brakes
* Reserve Bank Governor Alan Bollard has lifted the official cash rate to a record 7.75 per cent, the second highest level in the developed world after Iceland.
* He also hinted yesterday that the Reserve Bank might intervene on currency markets to try to push the dollar lower.
* Economists and currency strategists say the intervention hints are merely an attempt to talk down the kiwi.