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RBNZ’s Wheeler keeps OCR at 2.5 percent , signals steeper rate hikes next year

Thursday 12th September 2013

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Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.5 percent, and signalled expected rate hikes next year will likely be steeper than previously anticipated as the housing market and construction sector continue to gather momentum.

"OCR increases will likely be required next year," Wheeler said in a statement. "The extent and timing of the rise will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures."

The New Zealand dollar rose immediately on the announcement from 80.80 US cents to 81.11 US cents.

The central bank ramped up its forecast for increases to the 90-day bank bill rate, often seen as a proxy for the OCR, with a sharper lift in the middle of next year. The bank sees the rate rising to 3 percent in the June quarter and 3.6 percent by the end of 2014, before steadily increasing to 4.2 percent by March 2016. It had previously predicted the rate would be at 3.2 percent by the end of 2014, rising to 4.2 percent in early 2016.

The higher projection was due to stronger-than-expected net migration and export commodity prices, and the recent depreciation in the New Zealand dollar, the bank said in the September monetary policy statement.

Traders are pricing in a hike of about 25 basis points early next year, and about 100 points over the coming 12 months, according to the overnight index swap curve.

Wheeler held his current view that the OCR will probably stay on hold for the rest of the year, while trying to talk the currency down, saying it was still high despite the recent decline.

"A lower rate would reduce headwinds for the tradables sector and support export industries," he said.

Wheeler has been balancing rising house prices in Auckland and Christchurch, the country's two biggest cities, and the pressure they may put on broader inflation against increasing the appeal of an already strong kiwi dollar by hiking interest rates.

The bank kept its forecasts for consumer price increases largely intact, and Wheeler said inflation is likely to move towards 2 percent in the coming year. The central bank governor is tasked with keeping annual inflation between 1 percent and 3 percent.

"In particular, we will be looking for signs that underlying price and wage inflation has turned a corner and begun to move back towards levels more consistent with the mid-point of the inflation target," the bank said. "In that context, pressures in the housing and construction sectors are likely to be particularly important."

A hot housing market has yet to appear in broader inflation, and consumer prices rose at an annual pace of 0.7 percent in the June quarter, while Quotable Values figures this week showed property values rose at an annual pace of 8.5 percent in August

Last month, Wheeler announced plans to introduce restrictions on low equity home lending as a means to quell demand and take pressure out of the housing market. The bank estimates the restrictions will lower annual house price inflation by between 1 and 4 percentage points, and trim household credit growth by between 1 and 3 percentage points.

The Reserve Bank kept its forecast for stable economic growth intact as the $40 billion rebuild of Canterbury and housing markets drive construction activity, and as global commodity prices for exports remain high. It sees annual growth of 2.8 percent in March 2014, accelerating to 3 percent in the March 2015 year and slowing to 2 percent the following year.

New Zealand's OCR has been on hold for a record 20 meetings since Wheeler's predecessor, Alan Bollard, sliced half a percentage point in March 2011 as insurance against the impacts of the Canterbury earthquake that levelled the country's second-biggest city.

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