Reserve Bank governor Alan Bollard has hiked the official cash rate by 25 basis points to 3% and accompanied it with decidedly downbeat comments about the economy.
This unusual combination - which follows the formula adopted by the Bank of Canada last we
Reserve Bank governor Alan Bollard has hiked the official cash rate by 25 basis points to 3% and accompanied it with decidedly downbeat comments about the economy.
This unusual combination - which follows the formula adopted by the Bank of Canada last week – reflects both the relatively low levels of the OCR as well as a fragile world economy and a softening domestic market.
The OCR remains at stimulatory levels – the current consensus among economists is that a neutral rate is somewhere between 4.5% and 5%. The Reserve Bank had also increased the rate by 25 basis points seven weeks ago off a record low 2.5 percent, where it had been for 13 months.
Dr Bollard this morning also signalled any further increases are likely to be lower, and perhaps less frequent, than was signalled in the Reserve Bank’s June 10 monetary policy statement.
“Even after today’s move, the level of the OCR is still very supportive of economic activity,” Dr Bollard said.
“The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement.”
The Reserve Bank is keeping a wary eye on what happens to inflation when the range of government imposts seeps in to pricing levels over coming months.
Accident compensation levies rose from this month, and the emissions trading scheme’s impact on energy prices also kicked in on July 1.
Tax changes to life insurance policies are also expected to see premiums rise over the current financial year. The big increase however is in GST, from 12.5% to 15%, in October.
These are expected to push the headline annual inflation rate above 5% towards the end of the year.
The issue for the Reserve Bank is the extent to which people pass on those costs. With a relatively soft domestic economy, and growing evidence New Zealanders are using any spare cash to pay off debt and/or add to their savings, the propensity for firms to pass on those increases is less than it might have been.
At the moment the Reserve Bank is proceeding on the basis the various imposts will not have a major flow-on inflationary impact. The central bank does note, however, that inflation is just under 2%, which is high for an economy coming out of recession.
Dr Bollard also made one of his rare direct comments on the New Zealand dollar – it has appreciated in recent weeks, something which is inconsistent with not only the subdued domestic economy but also the moderating of commodity prices recently.
