New Zealand's New 'Go Slow' Interest Rate Policy

by: Econ Grapher

The RBNZ (Reserve Bank of New Zealand) increased the official cash rate at its July meeting 25bps to 3.00% and signaled that further rate rises will likely be on the go-slow. It noted that policy normalization may be more moderate going forward, but of course with the caveat of monitoring the economic environment and financial market developments:

"Given this, some further removal of monetary policy stimulus is appropriate at this stage. Even after today’s move, the level of the OCR is still very supportive of economic activity. The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement. Our policy assessment will be continually reviewed in light of economic and financial market developments." (Click to enlarge)

Indeed, this is probably the correct approach as the policy rate is still well below average, and is certainly in the stimulus zone, but against a backdrop of still subdued economic activity (recovery yes, but below trend, yes too). The New Zealand economy is in recovery mode and is growing, but is still dealing with the damage from the global financial crisis and the deep recession. It is also dealing with a spate of finance company collapses that began prior to the crisis and are still continuing. (The banking system remains firmly intact, as none of the finance companies were particularly systemically important, but a lot of investors got burned).

"In New Zealand, domestic demand is subdued. Households are cautious, with retail spending growing only modestly, housing turnover in decline and household credit growth weak. While this caution has been evident for some time, the recent slowing in net immigration will act to further dampen consumer spending. Business investment remains very low, with corporate lending continuing to be subdued."

On the inflation front, though, the headline inflation rate is widely expected to temporarily spike above 3% as government related price changes, e.g. GST come into force. However, the RBNZ does not expect this to translate through into core inflation, though there is the risk that firms and households raise their inflation expectations as a result, and that could lead to more genuine inflation.

So the outlook seems fairly predictable for New Zealand, the main wild-cards come from abroad, both upside and downside.

Disclosure: No positions