Reserve Bank governor Graeme Wheeler kept the official cash rate at 3.5 percent and signalled he won't be as aggressive with future rate hikes as previously thought as inflation remains tamer than expected.
Wheeler kept the key rate unchanged, as expected, saying the economy was adjusting to the bank's rate hikes earlier this year, though risks still remained as to how much strong net migration will impact on housing, and the extent to which construction activity spills over into broader inflation.
"CPI inflation remains moderate, reflecting subdued wage increases, well-anchored inflation expectations, weak global inflation and the high New Zealand dollar," Wheeler said in a statement. "In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment."
Still, Wheeler said more rate hikes will be needed "to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained."
The New Zealand dollar fell below 82 US cents after the statement from 82.15 cents immediately before. The trade-weighted index dropped to 78.49 from 78.65.
In July, Wheeler signalled a pause in the bank's current tightening cycle, saying the bank needed to take "some time" for "a period of assessment" was needed to gauge the impact of the four rate hikes this year. The market has pared back expectations for Wheeler to raise the key rate again this year as global commodity prices fall from their earlier highs, and as consumer prices rise at a tamer pace than anticipated.
The Reserve Bank cut the forecast track for the 90-day bank bill rate, often seen as a proxy for the OCR, by about 50 basis points over the projected horizon, with the rate rising to 3.9 by March next year and 4.8 percent by the middle of 2017. In the June monetary policy statement, it had seen rates rising to 4.3 percent by March 2015 and 5.3 percent by June 2017.
The central bank said there are signs the rate hikes have started having the desired effect of slowing growth in demand and keeping inflation in check, and it will monitor how the housing market is responding to policy changes and increased net migration, the impact of capacity pressures on inflation, business and household inflation expectations, and how the exchange rate is responding to falling export prices.
The September monetary policy statement projects a lower pace of inflation through to the end of 2015, and the bank said it's closely watching "how the housing market and domestic demand are developing, how capacity pressure is passing into inflation, and how the exchange rate will respond o falling export prices."
New Zealand consumer prices rose at an annual pace of 1.6 percent in the second quarter, just missing analyst forecasts and in line with the central bank's expectations. Falling food prices in July firmed up analysts expectations the bank will hold off raising interest rates again this year.
Wheeler continued to jawbone the kiwi dollar down, calling the exchange rate's strength "unjustified and unsustainable" and that the bank expects "further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise." However, the kiwi is expected to remain relatively strong and a "headwind" for exporters and import-competing industries.
In July Wheeler ramped up his rhetoric in talking down the kiwi, calling it "unjustified", a requirement of the bank's policy to intervene in foreign exchange markets, and earlier this month traders speculated the bank may have been active in the market.
Wheeler said the economy continues to be supported by increased building activity, consumer spending and business investment, though that will likely moderate due to recent drops in commodity prices and higher interest rates.
The economy is expected to grow at an annual pace of 3.7 percent in calendar 2014, the same pace Wheeler said in the July review, with the official forecast for gross domestic product growth of 3.6 percent in the March 2015 year, up from 3.5 percent in the June MPS.
Higher interest rates, loan restrictions rein in house prices, RBNZ says
The Reserve Bank's moves to hike interest rates and impose restrictions on low-equity home loans has helped slow the pace of house price increases, the central bank says.
House price inflation has dropped to an annual pace of 6 percent from a peak of 10 percent in September last year, reflecting the central bank's four interest rate increases and the imposition of restrictions on high loan-to-value ratio mortgage lending, the bank said in in its September monetary policy statement.
Rapid increases in house prices in Auckland and Christchurch, New Zealand's two biggest cities, were a headache for governor Graeme Wheeler last year, who was trying to cool a heated property market without having to resort to interest rate hikes for fear of fuelling demand for an over-valued currency.
Since then, the bank's actions have contributed to a cooler housing market, though the central bank is closely monitoring the impact 11-year high migration inflows are having on the property sector.
"Our projection takes a view that net immigration is having a more muted and more lagged effect on house prices than in past cycles," the MPS said. "This, along with higher interest rates, strong construction activity that increases housing supply, and falling net immigration is behind the expectation that house price inflation will continue easing over the forecast horizon."
House affordability has been a heavily politicised topic in recent years after a lull in property development after the collapse of the local mezzanine finance sector left a funding gap for new construction and created a supply shortage in Auckland, while the Christchurch quakes demolished large tracts of housing stock in the Canterbury city.
The government yesterday tasked the Productivity Commission to revisit housing, with an investigation into how local authorities can improve processes and regulation of land supply and development capacity.
The Reserve Bank said private lenders have lifted their floating rates in line with hikes in the benchmark official cash rate, though fixed rates, particularly two-year mortgages, have only edged up as competition for borrowers remains strong.
Fixed mortgage rates have become increasingly attractive to borrowers, and the central bank said just 29.9 percent of mortgage holders were on floating rates in July, down from a peak of 63 percent in April 2012.