The Reserve Bank of New Zealand today increased the Official Cash Rate by 25 basis points to 2.75 percent, the first increase in interest rates for New Zealand since 26 July 2007.
The New Zealand Reserve Bank slashed the Official Cash Rate from 8.25 percent in June 2008 to lows of 2.5 percent in April last year as the global financial crisis took hold across the country.
Reserve Bank Governor Alan Bollard believes the New Zealand economy is in its second year of recovery from the GFC and there is a need to ratchet rates up slowly much like the Reserve Bank of Australia has done.
“The recovery in trading partner activity is continuing, with growth in Asia particularly strong. Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets. Against this backdrop, New Zealand’s export commodity prices have increased sharply over the past few months, boosting export incomes.” Governor Bollard said.
“In contrast to signs of global economic recovery there has been renewed turmoil in financial markets. Currently, we expect the main impact on New Zealand to come through continuing upward pressure on the cost of funds to the banking system.”
“In New Zealand, growth of around 3½ percent is expected this year and next. The main drivers of this outlook are higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment. However, we expect households to remain relatively cautious, with the housing market and credit growth staying subdued. This moderate household spending contributes to some rebalancing in the economy.
“Underlying CPI inflation is expected to track within the target range even as the economy expands further. That said, headline CPI inflation will be boosted temporarily by the announced increase in GST and other government-related price changes. Provided households and firms do not reflect this price spike in their wage and price-setting behaviours we do not expect a lasting impact on inflation.
