Reserve Bank of New Zealand Governor Graeme Wheeler said Thursday that the central bank expects to keep the benchmark Official Cash Rate unchanged at 2.5 percent through the end of the year, while indicating that a stronger-than-expected currency may prompt the bank to cut the rate.
At its meeting on Thursday, the Reserve Bank decided to keep the OCR unchanged for a sixteenth consecutive month. The last policy change was in March 2011, when the rate was lowered by 50 basis points to the current level.
In a statement released after the policy meeting, Wheeler said the economy is expected to grow at an annual rate of between 2-3 percent over the forecast period. Inflation is expected to rise gradually towards the 2 percent midpoint of the target range.
While there are both upside and downside risks to this outlook, the central bank expects "to keep the OCR unchanged through the end of the year," he said.
Wheeler noted that the the economic recovery is uneven. While demand and output are expanding, the labour market remains weak.
He noted the "overvalued New Zealand dollar is undermining profitability in export and import competing industries, and worsening drought conditions are creating difficulty in much of the country." Also, he expects ongoing fiscal consolidation to slow overall demand.
In the monetary policy statement, the central bank said "if the exchange rate rose for reasons not justified by New Zealand's economic fundamentals, all other things equal, this would lead to a lower-than-expected OCR."
"All other things equal, a higher exchange rate relative to the baseline, in the absence of a corresponding relative strengthening of New Zealand's economic outlook, would warrant lower interest rates," the statement read.
At the same time, the central bank appeared worried about a possible uptick in inflationary pressures stemming from strong housing demand. Wheeler noted that house price inflation is increasing and the Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply.
The bank observed that if a strong New Zealand dollar forces the bank to cut rates further, there is a risk that lower interest rates would result in greater momentum in the housing market than assumed. In addition, any related increase in household spending and imports would likely result in a greater deterioration in external balances, it warned.
by RTT Staff Writer
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