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RBNZ Pauses Again As Inflation Stays Benign Despite House Price Gains

RBNZ Pauses Again As Inflation Stays Benign Despite House Price Gains

The Reserve Bank of New Zealand announced Wednesday its decision to leave interest rate unchanged at levels it has been in the past two years, as Governor Graeme Wheeler expects inflation to remain contained even as economic growth gathers momentum.

Wheeler said the central bank has decided to keep the benchmark official cash rate, or OCR, unchanged at 2.5 percent at this meeting. The central bank also said it intends to retain the rate at this level through the end of the year as indicated in the March monetary policy statement.

The governor said inflation this year is expected to remain close to the bottom of the 1-3 percent medium-term target range. The consumer price index increased 0.9 percent in the year to the March quarter, according to official data.

"Weak near-term inflation prospects need to be balanced against our projection for inflation to gradually rise towards the 2 percent target midpoint," Wheeler said.

"Growth in the New Zealand economy has picked up," he said. "Consumer spending has increased and rebuild activity in Canterbury is gaining momentum."

However, the central bank appeared to be concerned about the high level of house price inflation in some regions despite prices already being elevated. "The Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of supply," Wheeler said.

"The RBNZ is currently caught between two opposing forces. Local growth has picked up considerably, driven by the post-earthquake Canterbury rebuild and rising house prices," said Dominick Stephens, Chief Economist at Westpac. "We now expect the OCR will remain on hold at 2.5 percent until March 2014," Stephens added.

Wheeler said fiscal consolidation is constraining aggregate demand at present. In addition, drought has lowered agricultural production and could negatively affect farm output in the coming season. He also noted that international dairy prices have spiked higher in response to the drought, but maintained that these price gains could prove "temporary."

RBNZ remained mindful of the strength of the currency. Wheeler said that the New Zealand dollar remained "overvalued" and is "higher than projected" in March partly due to the spillover effects from Bank of Japan's recent quantitative easing program.

Wheeler cautioned that the high New Zealand dollar continued to be a significant headwind for the tradables sector, restricting export earnings and encouraging demand for imports.

At the same time, RBNZ was slightly positive on the global economic developments. Wheeler said despite continued strains in Europe and disappointing data in some countries, "global financial market sentiment remains buoyant and the medium-term outlook for New Zealand's overall trading partner GDP growth remains firm."

by RTT Staff Writer

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