Posted on 29-1-2004
Unexpected
hike in official cash rate
Reserve Bank Governor Alan Bollard surprisingly hiked the
cash rate today in a move that is almost certain to send the
kiwi dollar rocketing higher.
He justified the quarter of a percentage point increase in
the Official Cash Rate (OCR) to 5.25 per cent as a move to check
the booming domestic economy, particularly the housing market.
But it is likely to hurt exporters who are already in pain
from the soaring currency.
"An increase in the OCR appears warranted to ensure that
inflation remains comfortably within the (1-3 per cent) target
range over the medium term," Dr Bollard said in a statement.
Inflation in 2003 was just 1.6 per cent and few economists
expected a rate hike so soon, especially as the kiwi is restraining
import prices.
Westpac New Zealand chief foreign exchange dealer Basil Payn
said last night that the currency market had not factored in
a rate rise and he predicted the market would aggressively buy
the currency on a rate hike.
The kiwi dollar rose one US cent yesterday and was at US67.90c
before the announcement. It is up 3 per cent this year and rose
25 per cent last year and 23 per cent in 2002.
New Zealand's economy is expected to slow this year while the
United States economy is growing strongly, but minutes before
Dr Bollard's move the US Federal Reserve decided to leave its
rates unchanged at 1 per cent -- a 45-year low.
Dr Bollard said the New Zealand economy had experienced a period
of impressive growth other the past two years.
"But now productive capacity and the labour market are
becoming relatively tight.
"Reflecting this, inflation pressures in some parts of
the domestic economy have started to become more apparent.
"Although falling import prices due to the rising exchange
rate have so far kept CPI (consumer price index) inflation low,
those reductions are unlikely to be sustained.
"If domestic inflation is left unchecked, the CPI may
start to rise to uncomfortable levels," Dr Bollard said.
His move is almost certainly aimed at the housing market where
prices rose on average more than 20 per cent last year.
Dr Bollard said that data since December had pointed to stronger
activity than had been expected in areas such as household spending,
construction, and the housing market.
That was fuelling inflation, he said.
Dr Bollard expects further inflation pressure in the next few
months from higher construction costs and energy (power prices).
Interest rates had been stimulating demand as shown in the
"further solid growth in household credit", he said.
The "prudent" move was to act now to move rates to
less stimulatory levels and that could mean less aggressive
rate moves later this year, he said.
"By raising rates now, we hope to avoid having to increase
interest rates more aggressively later on."
Dr Bollard said he did not expect a large adjustment in rates
would be necessary.
He said the bank was aware that the dollar had risen sharply
and this had placed pressure on the export sector.
This morning it opened sharply lower at US67.37 cents after
the US Federal Reserve made its interest rate announcement.
The kiwi started to rise after the Reserve Bank raised its cash
rate.
"However, as yet this has not had much effect on spending
in the local economy," Dr Bollard said.
"In time this will happen, probably reducing the need
for interest rates to rise as much as they might otherwise."
Yesterday, dairy giant Fonterra, which produces 20 per cent
of the country's exports, blamed the soaring currency for a
$650 million fall in sales.
The main commercial banks may not necessarily respond to Dr
Bollard's move.
ASB, BNZ, and Westpac all lifted their floating mortgage rates
from 7.10 per cent to 7.25 per cent in November and December
despite the Reserve Bank not lifting the cash rate.
The ANZ-National, which had earlier left its rates unchanged,
also lifted them to 7.25 per cent.
Deutsche Bank chief economist Ulf Schoefisch questioned why
Dr Bollard felt the urgency to move now, especially with immigration
cooling and the housing market plateauing.
"We didn't think they were under any pressure to act early,
particularly with the currency being strong and early signs
that the housing market is cooling.
"I didn't think the urgency was there... particularly
as there is always the chance that in four weeks time we will
have the kiwi at US70 cents."
"In that situation, you just wonder if a tightening cycle
is necessary," said Dr Schoefisch.
"Obviously, the Reserve Bank is very worried about inflation
and inflation is sitting at 1.6 per cent. But the RB doesn't
believe it is going to stay there for long."
Dr Schoefisch said the RB was obliged, now a tightening cycle
had been started, to deliver another tightening in March.
"It really depends on the currency. Beyond that (March)
it is not obvious to me that there will be further rate hikes
in April and June."
He doubted today's hike would crimp economic growth, which
Deutsche Bank, now expects to be around 2.75 per cent this year
against 3.50 per cent last year.
Deutsche Bank expects the New Zealand dollar to rise above
US70 cents in the next few months.
"What it means is that foreign investors can look forward
to continued higher interest rates here that are higher than
expected in the short term," said Dr Schoefisch.
He noted the New Zealand dollar had already gone up on the
cross rate against the Australian dollar. New Zealand's cash
rate rise puts into line Australia's official rates.
"The rate rise will just underpin the strong currency
and just underpin the pressure on the export sector."
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