RBNZ raises rates for third time this year

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RBNZ raises rates for third time this year
Date
June 12, 2014 - 8:20AM

• Australian dollar jumps over 94 US cents after NZ rates decision
New Zealand's central bank raised interest rates on Thursday and said the strength of the currency and data would dictate the pace of future rises as it pointed to a steady but moderate tightening of policy.
The Reserve Bank of New Zealand lifted its official rate by 25 basis points to 3.25 per cent as expected, the third consecutive rise in as many meetings. It said rates would need to go higher as strong economic growth fuels inflation pressures, making it the only central bank among developed economies to be raising rates in the current cycle.
"The speed and extent to which the OCR (official cash rate) will need to rise will depend on the future economic and financial data, and its implications for inflationary pressures," RBNZ Governor Graeme Wheeler said in a statement.
The statement was largely similar to that issued in March and April, reiterating that inflation pressures are building, particularly in the construction sector, and that terms of trade and migration gains were underpinning growth, although the high exchange rate was offsetting.
"In this environment, it is important that inflation expectations remain contained and that interest rates return to a more neutral level."
The RBNZ's forecasts of wholesale interest rates were little changed from the March statement, and implied two further 25 basis point rate increases this year, and a steady pace through 2015.
The bank has previously said it expects to raise rates by about 200 basis points through to late 2015 as post-earthquake reconstruction in the Canterbury region, a booming housing market, high terms of trade, and increasing migration drive the economy.
The RBNZ said it estimated that the economy has grown by about 4 per cent in the year to June, although it trimmed its forecast slightly for future years. It also reduced inflation forecasts a shade.
The New Zealand dollar rose around half a cent to a high around $0.8635 after the announcement, while interest rate futures edged lower.
The bank repeated its familiar comment that the New Zealand dollar remained unsustainably high despite the sharp fall in commodity prices in New Zealand dollar. The kiwi has come off its highs in the past month, but the trade weighted currency basket, which is the RBNZ's preferred currency measure, has remained above the bank's forecast.
The RBNZ said it was factoring in further softness in commodity prices and a lower exchange rate.
Analysts said the RBNZ seemed intent on not giving the impression it is easing up on tackling inflation.
"They still want to get rate to a more neutral levels and that's a clear reaffirmation of their tightening bias," said Michael Turner, a strategist at RBC Capital Markets. "The odds are leaning to one more hike in July and maybe a pause after that."
Turner said it remained an open question as to what neutral interest rates might be. "There's a suggestion it might be around 5 per cent, but that seems very high in this low-rates world."
Markets are pricing 96 basis points of hikes in the next 12 months, but a sedate reading of consumer inflation and a stubbornly strong currency have raised speculation the RBNZ may slowdown its planned rate rises.
Annual inflation slowed fractionally to 1.5 per cent in the first quarter, and subsequent readings on wages, jobs, and consumer and business sentiment have all been modest, backing the view the RBNZ can afford to be gradual in future rate rises.
The RBNZ said major world economies looked to be recovering albeit at a modest pace, and it expected global inflation pressures and stimulatory policies to stay in place for some time.
Reuters
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