Historic Charts: NZ Official Cash Rate

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The Reserve Bank has left the Official Cash Rate (OCR) at 6.75 per cent.

Reserve Bank Governor Alan Bollard said: "Since our June Monetary Policy Statement, economic indicators have broadly confirmed the slowdown in activity that commenced in the second half of 2004. The slowdown has been concentrated in sectors such as manufacturing and tourism that have been exposed to the high exchange rate. The non-traded sectors of the economy on the other hand, such as household and business services and construction, have maintained their high growth of recent years. The housing market in particular has remained strong, underpinning consumption growth. Reflecting the slow pullback in domestic demand, capacity and labour shortages are expected to persist well into 2006.

"New developments in oil prices have made the future more uncertain. Oil prices have surged in recent months and are now 20 per cent higher than projected in June, some 60 per cent up from the end of 2004. As a consequence, headline CPI inflation is now forecast to approach 4 per cent over the next few quarters before returning below 3 per cent by early 2007. Monetary policy will not attempt to offset the unavoidable first-round price effects of the oil price spike. However, it will be used to resist any flow-through to ongoing price and wage inflation. Further out, the higher oil prices are expected to have a dampening effect on both world and domestic economic activity, thus taking some pressure off monetary policy in the medium-term.

"Fiscal policy is also adding to uncertainty. The shape and economic impact of new post-election policies is not clear at this point. However, it does appear likely that fiscal policy will become more expansionary in the period ahead.

"Right now, it is too early to make a call on the relative strength of the emerging cross-currents and how these will translate into medium-term inflation pressures. It will be several months before the persistence and global impact of the oil shock become more apparent. A similar period could be needed for the fiscal outlook to be clarified. We are concerned, however, that the risk of higher medium-term inflation has increased. Consequently, further monetary policy tightening may still prove necessary to ensure inflation is kept within the 1 per cent to 3 per cent target band on average over the medium-term. Certainly there remains no prospect of a cut in the OCR in the foreseeable future."

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The Reserve Bank has increased the Official Cash Rate (OCR) by 25 basis points to 7.00 per cent.

Reserve Bank Governor Alan Bollard said: "As noted in our September Monetary Policy Statement, medium term inflation risks remain strong. Persistently buoyant housing activity and related consumption, higher oil prices and the risk of flow-through into inflation expectations, and a more expansionary fiscal policy are all of concern. While there has been a noticeable slowing in economic activity, and a particular weakening in the export sector, we have seen ongoing momentum in domestic demand and persistently tight capacity constraints. Hence, we remain concerned that inflation pressures are not abating sufficiently to achieve our medium term target, prompting us to raise the OCR today.

"The most serious risk to medium term inflation is the continuing strength of household spending, supported by a relentless housing market and rapid growth in mortgage lending. Significant dis-saving by the household sector is showing through in a worsening current account deficit, now 8 per cent of GDP. Borrowers and lenders alike need to recognise that the current rate of debt accumulation is unsustainable. The correction of these imbalances and associated inflation pressures will require a slowdown in housing, credit growth and domestic spending. We also expect a significantly lower exchange rate. The longer these adjustments in behaviour and asset prices are deferred, the more disruptive they are likely to be.

"Today's increase in the OCR, combined with higher world interest rates and pipeline effects from the repricing of fixed rate mortgages, are expected to slow the housing market and household spending over the coming months. However, the prospect of further tightening may only be ruled out once a noticeable moderation in housing and consumer spending is observed. Certainly, we see no prospect of an easing in the foreseeable future if inflation is to be kept within the 1 per cent to 3 per cent target range on average over the medium term."

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The Official Cash Rate (OCR) will increase by 25 basis points to 7.25 per cent.

As emphasised in our September MPS, and again at the October OCR Review, we remain concerned about the tightness of resources and the persistence of inflation pressures. Exporters and other businesses exposed to the very high exchange rate are under considerable pressure and general business sector confidence is falling in the face of declining profit margins. However, overall demand continues to outstrip available capacity. The main driver of the strong demand is household spending, linked to a still-buoyant housing market. Increasing government spending and continued strong business investment are also boosting total demand. The resulting excess demand, reflected in a growing current account deficit, is continuing to fuel inflation.

Excluding one-off oil price effects, inflation has been trending upwards. Furthermore, while headline inflation is expected to return below the upper end of our target band by mid-2006, it is projected to remain high throughout the projection period. In addition, there is a risk that inflation could track higher. Mortgage credit growth and house prices have held up longer than anticipated; we are forecasting these to slow markedly in 2006, but continued strength remains a risk. The current high rates of increase in labour and other business costs present a further risk, particularly if inflation expectations become locked in at current high levels.

The main downside risk to our projections is the prospect of a faster-than-expected correction in domestic demand, leading to a harder landing for the economy and a more rapid easing of inflation pressures. A further downside risk arises if the current exchange rate strength persists, putting greater downward pressure on activity and medium-term inflation.

This outlook, combined with the lack of inflation headroom, has led us to increase the OCR today. Whether further tightening is needed will depend on the extent to which housing and demand pressures show signs of moderating over the months ahead. However, we do not yet see any prospect of a policy easing in the foreseeable future.

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The Official Cash Rate (OCR) will remain unchanged at 7.25 per cent.

Reserve Bank Governor Alan Bollard said: "The economy has continued to slow in recent months, broadly in line with the outlook contained in our December Monetary Policy Statement. GDP growth slowed in the third quarter of 2005, due to the impact of the high exchange rate on the export and import-competing sectors, and a fall in construction. Looking to 2006, while there are some early indications, we are yet to see hard evidence of a sustained slowdown in domestic demand. To date, strong domestic demand has been fuelled by strong employment, wage growth, rising house prices, and growth in Government spending. Overall, total spending continues to outstrip growth in production, contributing to an unsustainably large current account deficit.

"Over recent years, considerable pressures have built up on resources, leading to the current high level of inflation. While capacity and resource constraints appear now to be easing, inflation pressures remain of concern. Annual CPI inflation stands at 3.2 per cent, and our forecasts point to inflation remaining toward the upper end of the target band over the next couple of years. Continuing increases in wages, energy prices and other business costs suggest that inflation pressures will not subside quickly. Of particular concern, inflation expectations remain uncomfortably high.

"Given this situation, we do not expect to raise the OCR further in this cycle; however, this possibility cannot be ruled out until we see clear evidence of a sustained weakening in domestic demand. Certainly we see no prospect of an OCR easing, given the relatively high medium-term inflation outlook. An early decline in interest rates, as expected by some in the financial markets, would risk reigniting spending and hence inflation pressures."

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The Official Cash Rate (OCR) will remain on hold at 7.25 per cent.

Reserve Bank Governor Alan Bollard said: "Recent data have confirmed our earlier view that economic growth is slowing. Business activity and confidence have been softening for some time. On the other hand, household spending has only recently started to wane. A key driver of strong household spending has been the buoyant housing market which, while showing signs of cooling, still remains very active. Over the next two years, we expect overall growth to remain subdued while a major rebalancing takes place, with a recovery in net exports as domestic demand weakens. A decline in the New Zealand dollar exchange rate is expected to play a role in this rebalancing.

"Despite the slower growth, inflation and cost pressures remain persistent. Labour market and resource pressures have built up over many years of high growth and will take some time to dissipate. Labour costs in particular are growing strongly, at a time when firms are finding it difficult to lift sales and productivity. Realistic wage and price setting behaviour will be an important factor determining the severity of the downturn as inflation pressures are brought under control. The other key inflation risk over the next two years remains the housing market. We need to see this market continue to slow, so that consumption moderates and helps to reduce inflation pressures.

"As long as these inflation risks remain under control, we do not expect to raise interest rates again in this cycle. However, given the time that it will take to bring inflation back towards the mid-point of the target band, we do not expect to be in a position to ease policy this year. Any earlier easing would require a more rapid reduction in domestic inflation pressures than the substantial slowing already assumed in our projections."

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The Official Cash Rate (OCR) will remain at 7.25 per cent.

Reserve Bank Governor Alan Bollard said: "Data since our March Monetary Policy Statement (MPS) indicate that, while the economy has weakened faster than expected, short-term inflation pressures have intensified.

"The anticipated slowdown in domestic demand commenced in the latter part of 2005 and is projected to continue through this year. This will be partly offset by growth in exports and import substitution, reinforced by the recent decline in the exchange rate. Recent economic indicators suggest the economy will continue to grow modestly through 2006.

"Despite the easing in resource pressures, the short-term inflation outlook has worsened. The exchange rate drop will boost import prices. We also expect significant further price rises over coming quarters as a result of the ongoing world oil shock. These effects are expected to keep annual CPI inflation above 3 per cent for longer than previously projected and risk putting upward pressure on inflation expectations.

"Monetary policy remains focussed on ensuring that inflation settles back within the 1-3 per cent target band over the medium term. As we have stated previously, policy will not try to counteract the one-off boost to prices from the exchange rate and oil price shocks. In this regard, we still do not expect to raise interest rates again in this cycle. However, monetary policy must remain vigilant against these price shocks spilling over into inflation expectations, and price and wage-setting behaviour. Given the current outlook, we maintain our March MPS view and continue to see no scope for a cut in the OCR this year."

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The Official Cash Rate (OCR) will remain at 7.25 per cent.

Reserve Bank Governor Alan Bollard said: "Recent economic activity has been weaker than projected in the March Monetary Policy Statement. However, the short-term inflation outlook has worsened.

"Growth is expected to remain low through 2006, before recovering in 2007. The much awaited economic rebalancing from domestic spending to exports commenced in late 2005, and is expected to continue over the next two years. Export growth will recover as a result of the lower exchange rate and buoyant demand in world markets. At the same time, household spending will be constrained by a continued weakening in the housing market, high petrol prices and a slowdown in employment growth.

"While weaker economic activity will reduce medium-term inflation pressures, the short-term inflation outlook has deteriorated. The sharp decline in the exchange rate over March and April will lead to higher prices on imported goods, although weak domestic demand and foreign exchange hedging by importers may dampen this increase. In addition, oil prices have risen by around 20 per cent since the March Statement, leading to higher prices for petrol and other transport items. These two effects together are now expected to keep headline CPI inflation above 3 per cent well into 2007.

"Given the unavoidable nature of these price shocks, it would be inappropriate for monetary policy to try to counteract their short-term inflation effects. However, it is essential that monetary policy hold the line against any second-round effects that could be felt in wages, prices and inflation expectations. A failure to do so would risk inflation becoming entrenched at a higher level, ultimately delaying a return to stronger growth.

"We do not expect to tighten policy in response to the high headline inflation in the short term. But, equally, we cannot afford to ease policy until we have more certainty that future inflation outcomes will be trending down comfortably below 3 per cent. Given this situation, we see no scope for an easing of the OCR this year."

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The Official Cash Rate (OCR) will remain unchanged at 7.25 per cent.

Reserve Bank Governor Alan Bollard said: "Recent economic developments have been broadly in line with our June Monetary Policy Statement. However, economic activity has been a little stronger than expected. Indicators of both consumer demand and business activity have not softened to the degree anticipated. We are also seeing slightly more short-term inflation pressure as a result of the continued upward trend in world oil prices. Headline annual CPI inflation reached 4 per cent in the June quarter and is likely to persist around this level for several quarters to come. We remain wary of the risks to inflation expectations presented by these high headline inflation rates.

"Our medium-term view is for underlying inflation pressures to trend downwards. Economic growth is forecast to remain subdued through 2006 and 2007, and CPI inflation is expected to return within the 1-3 per cent target range by late 2007. The rebalancing of economic activity - away from domestic demand and towards exports and import substitution - is expected to continue and will help to alleviate domestic inflation pressures. The rebalancing will be supported by the weaker New Zealand dollar exchange rate and ongoing upward pressure on effective mortgage rates. Foreign interest rate trends and domestic market expectations are both now working to support our domestic policy stance.

"We maintain our view that the current level of the OCR is consistent with returning inflation to the target range. While second-round wage and price effects remain a risk, we do not expect to have to tighten the OCR further in this cycle. However, a sustained period of adjustment in domestic spending is necessary, and it will be some time before an easing in the OCR can be considered. Certainly we will need to be confident that future inflation is heading back comfortably within the target range."

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The Official Cash Rate (OCR) will remain unchanged at 7.25 percent.

Reserve Bank Governor Alan Bollard said: "The New Zealand economy continues to show resilience. As reported in earlier statements, we have seen clear signs of easing activity and a rebalancing of demand from the domestic to the external sector since late last year. However, economic activity appears to have been stronger than expected through the first half of 2006, with the expansion of employment particularly surprising. Net exports and Government spending have contributed to the buoyancy in activity, while the easing in household consumption has been more moderate than projected. Similarly, while the housing market has slowed, it continues to exhibit momentum. We expect further dampening effects on demand from high oil prices and higher effective mortgage rates over the period ahead. But, even allowing for these effects, we see more inflation pressure than in earlier reviews.

"With overall resource pressures easing more gradually than forecast, annual inflation is not expected to fall below 3 percent until late 2007. Oil price increases and the depreciation of the exchange rate earlier in the year have pushed headline annual inflation to 4 percent in the June quarter. Inflation expectations have continued to drift upwards, influenced by the rising headline inflation numbers. While second-round flow-on effects have so far been limited, this remains a risk given the persistence of demand and labour market pressures. We assume that wages and prices are not unduly influenced by the short-term peak in headline inflation.

"Given the continued strength of medium-term inflation pressures, the outlook for monetary policy has become more finely balanced. With inflation now taking longer to move comfortably within the target band of the Policy Targets Agreement (PTA), there is little leeway to withstand further surprises to medium-term inflation pressures. In these circumstances, we are less confident that no further policy tightening will be required in this cycle. In this regard, we will want to be clearer about the economic situation and outlook. However, there is clearly no prospect of an OCR cut for some considerable time."

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The Official Cash Rate (OCR) will remain unchanged at 7.25 percent.

Since our September Monetary Policy Statement, there has been a significant improvement to the near-term inflation outlook, mainly as a result of the recent decline in oil prices. We expect lower fuel prices, together with the recent rebound in the exchange rate and Statistics New Zealand's reweighting of the CPI, to give an unusually low December quarter CPI increase. These are temporary factors, however, and, apart from the likely favourable impact on inflation expectations, they are not expected to impact materially on medium-term inflation.

Indicators of medium-term inflation pressures remain significant. Overall GDP growth in the second quarter was consistent with our September projections and the continued rebalancing of demand away from domestic spending towards exports. Continued strength in most of New Zealand's international markets and a return to a downward trending NZ dollar exchange rate should support this rebalancing. On the domestic side, however, the housing market remains resilient, supported by net inward migration and ongoing mortgage credit expansion at low interest margins. Further, we could see a pickup in household consumption in the third quarter as a result of the drop in petrol prices. On balance, inflation pressures appear to be abating gradually. But some indicators of resource pressures, such as high capacity utilisation and a tight labour market, continue to signal caution.

Taking all of this into account, monetary policy pressure will need to be maintained for some time to bring inflation back sustainably within the 1-3 percent target band. In this regard, the policy outlook is little changed from our September statement. The balance of inflation risks remains skewed to the upside. Further monetary policy tightening cannot be ruled out, and any easing of policy remains a considerable way off.

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The Official Cash Rate (OCR) will remain unchanged at 7.25 percent.

Reserve Bank Governor Alan Bollard said: “Medium-term inflation pressures remain persistent. While the short-term inflation outlook has improved, we are less optimistic about medium-term prospects. Economic activity has been stronger than expected, given the resilience in domestic demand, and medium-term inflation risks appear weighted to the upside.

“A welcome decline in oil prices has improved the near-term inflation outlook. As foreshadowed in our October OCR Review, we expect to see a very low December quarter CPI figure. Annual inflation could be as low as 2 percent next year, which should help to restrain inflation expectations and therefore give some assistance in containing medium-term inflation pressures.

“But household spending continues to show surprising resilience. The labour market remains very firm, with continued strong growth in incomes despite some easing in employment in the third quarter. There has been some improvement in business and consumer confidence. The housing market appears to have developed new momentum after slowing in the first half of the year. Houses are now selling as fast as at any time this year.

“Many exporters are feeling pressure from the high exchange rate which, if sustained, could threaten the ongoing rebalancing of the economy. However, primary exporters are getting significant relief from favourable world commodity prices, which are now expected to continue for longer as a result of global supply shortages.

“While overall medium-term inflation pressures have increased, the balance of risks also appears to be on the upside. The housing market could continue to defy predictions of a downturn, and domestic demand could be further boosted by a fiscal expansion over and above the stimulus that is already allowed for in our projections (based on the Government’s 2006 Budget).

“Looking ahead, our projections and risk assessment suggest that a firmer monetary policy stance could still be required to maintain downward pressure on inflation in the medium term. Further tightening cannot therefore be ruled out. This will depend on economic outcomes and in particular the emerging trends in housing and domestic demand indicators. Any easing of policy must remain some considerable way off.”

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The Official Cash Rate (OCR) will remain unchanged at 7.25 percent.

Reserve Bank Governor Alan Bollard said: “While indicators show that economic growth was continuing to moderate in the third quarter of 2006, it is increasingly apparent that domestic demand has rebounded since then, with retail trade picking up, a resurgent housing market and consumer and business confidence recovering strongly. The main drivers appear to be the decline in petrol prices since last October, a pickup in net immigration and an expansionary fiscal policy.

“At the same time, headline inflation has reduced as a result of the lower oil prices and the strengthening of the exchange rate in the fourth quarter. Annual CPI inflation fell to 2.6 percent in December and is projected to decrease considerably further through 2007, thus helping to lower inflation expectations. But the medium-term outlook is less rosy, with annual rates of inflation projected to return to the upper part of our target range through 2008 and into 2009.

“While the near-term inflation outlook is relatively benign, we remain concerned about the upside risks to medium-term inflation. In particular, our assumption that the housing market and consumer demand will resume their slowing trend over 2007 and 2008 is looking more uncertain, particularly if further fiscal expansion occurs.

“In the absence of clear indications of a moderation in housing and domestic demand, it is likely that further policy tightening will be required. The situation will be reassessed in the light of a full review of our economic forecasts at the March Monetary Policy Statement. A return to a moderating trend in housing and domestic demand will be essential if we are to see a reduction in medium-term inflation pressures.”

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The Official Cash Rate (OCR) will increase by 25 basis points to 7.50 percent.

Reserve Bank Governor Alan Bollard said: “Recent indicators show clear evidence of a pick-up in economic activity in late 2006 and early 2007. Strengthening domestic demand is being supported by a resurgence in the housing market and an expansionary fiscal policy. The acceleration in housing reflects firming net immigration, a recovery in confidence, a continuing rapid expansion of mortgage credit at very low margins, and strong growth in household incomes. The recent lift in export commodity prices – particularly dairy – may also be a factor. All this is adding to resource pressures and increasing the risk of a re-emerging inflation problem in the medium term.

“The short-term inflation outlook continues to ease. CPI inflation is projected to be around the middle of the target band through 2007, benefiting from lower oil prices and the high exchange rate. Domestic price inflation is also expected to moderate somewhat in 2007, assisted by the effect of lower headline inflation on inflation expectations. Despite this, domestic inflation is projected to remain at high levels over the medium term and is subject to considerable upside risk.

“Our concern is that the recent pick-up in housing and domestic demand may gain momentum, giving rise to a stronger cyclical upturn at a time when resources are already very stretched. This could reverse the rebalancing of the economy that has been underway since late 2005 and present substantial risks to the medium-term inflation outlook. It would also increase the prospect of a more costly correction in the country’s external deficit.

“We are continuing to assess alternative measures that might support the OCR, working with the relevant government agencies. These include a tightening of tax rules applying to housing investment and changes to bank capital requirements to help moderate the amplifying effect of credit on the housing cycle. However, we will continue to rely on the OCR as the primary instrument of monetary policy.

“The current policy tightening is aimed at reducing the risk of an unsustainable rebound in activity. Depending on the persistence of the current upturn, further tightening may be required. A return to a moderating trend in housing and domestic demand will be essential if we are to see a reduction in medium-term inflation pressures.”

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The Official Cash Rate (OCR) will increase by 25 basis points to 7.75 percent. Recent indicators confirm that the resurgence in economic activity that began in late 2006 has continued over recent months, with domestic demand continuing to expand strongly. As we noted in March, demand is being fuelled by a buoyant housing market, increases in government expenditure, a rising terms of trade, ongoing net immigration, and a robust labour market.
The lift in domestic demand is placing further pressure on already-stretched productive resources. Firms report that capacity is very stretched and that they are again experiencing increased difficulty in finding both skilled and unskilled staff. Consistent with these pressures, non-tradables inflation has remained persistently strong and has recently shown signs of re-acceleration.
The trade-weighted exchange rate has risen further, which will exert some downward pressure on medium-term inflation. The exchange rate is now at levels that are both exceptional by historical standards, and unjustified on the basis of medium-term fundamentals. Parts of the export sector continue to face challenging conditions, but the recent sharp lift in world dairy prices is expected to provide a boost to incomes in that sector and tourist arrivals are continuing to grow.
There has already been a recent rise in fixed mortgage interest rates. This further increase in the OCR is aimed at ensuring that inflation outcomes remain consistent with achieving the target of 1 to 3 percent inflation on average over the medium term.

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The Official Cash Rate (OCR) will increase by 25 basis points to 8.00 percent. Reserve Bank Governor Alan Bollard said: “Domestic demand has grown strongly since late 2006, particularly in the household sector. Housing market activity has been buoyant, consumer confidence has remained relatively robust and a range of business sector indicators, including employment and investment intentions, have been strong. As we have noted recently, government spending continues to increase, which is contributing to domestic demand.
“Following several years of strong growth, firms have indicated that capacity remains stretched and that finding both skilled and unskilled staff has become increasingly difficult. These pressures continue to underpin inflation.
“A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures. Lending rates have risen significantly in recent months, partly due to previous increases in the OCR. Given the usual lags, we have not yet seen the effect of these increases on domestic demand and inflation pressures. There are some early indications from recent opinion surveys and other data that growth may be starting to soften, but these are by no means conclusive. Indeed, at present the risks to domestic activity appear to remain on the upside.
“A significant development in the past six months has been a marked increase in dairy prices. While there are uncertainties about the future path of these prices, the increases will assist in narrowing New Zealand’s trade deficit. The rise in dairy sector incomes will provide a substantial boost to economic activity over the next few years, but will also add to inflation pressures.
“Parts of the export sector outside the dairy industry will continue to face challenging conditions due partly to the New Zealand dollar. As we noted in April, the exchange rate is at levels that are both exceptionally high and unjustified on the basis of New Zealand’s medium-term fundamentals.
“Had we not increased the OCR this year, it is likely that the inflation outlook would now be looking uncomfortably high. This further increase in the OCR is to ensure that inflation outcomes remain consistent with achieving the target of 1 to 3 percent inflation on average over the medium term.”

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Reserve Bank Governor Alan Bollard said: “The New Zealand economy is running strong. We are recording continued big increases in international commodity prices, especially dairy, reflecting solid world demand for our products.
“This is very good news for New Zealand. Given this positive situation, some of the negative commentary circulating about the economy is unwarranted.
“However, the continued tight labour market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures. That is why we are increasing the OCR today.
“The New Zealand dollar has reached very high levels recently, driven by US dollar weakness and New Zealanders’ heavy demand for borrowing. This level of the currency has been hurting exports.
“The high New Zealand dollar is not sustainable medium term and investors should understand this. The higher OCR now gives strong incentives to New Zealanders to save.
“New Zealanders have been showing early signs of moderating their borrowing.
Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation.”