The Reserve Bank left the official cashrate unchanged at 3.5% today.
Bank governor Graeme Wheeler said: “New Zealand’s economy is expected to grow at an annual pace of 3.7% over 2014. Global financial conditions remain very accommodative and are reflected in low interest rates, narrow risk spreads & low volatility across a range of asset markets. Accommodative financial conditions are supporting a moderate rate of global growth, albeit uneven across regions.
“New Zealand’s economic growth continues to be supported by increasing construction activity & ongoing strength in consumption and business investment. A high level of net immigration is adding to domestic demand as well as productive capacity. Economic growth is projected to moderate in response to recent commodity price declines and the impact of policy tightening. The high exchange rate continues to restrain growth in the traded sectors.
“The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified & unsustainable. We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise.
“The economy appears to be adjusting to the policy measures taken by the bank over the past year. House price inflation continues to ease, despite strong net immigration. CPI inflation remains moderate, reflecting subdued wage increases, well anchored inflation expectations, weak global inflation & the high $NZ.
“However, spare capacity is being absorbed and annual non-tradables inflation is expected to increase. Risks also remain around how strongly net immigration will affect housing demand and the extent to which pressures in the construction sector will impact broader inflation.
“In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening & export price reductions, it is prudent to undertake a period of monitoring & assessment before considering further policy adjustment.
“Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2% target midpoint and ensure that the economic expansion can be sustained.”
Attribution: Bank release.