NZ Reserve Bank Governor keeps OCR at 2.5 percent ‘for now’ in debut review, watching inflation

Reserve Bank governor Graeme Wheeler kept the official cash rate at 2.5 percent in his debut review, and is keeping close tabs on the level of inflation after it dropped below the bank’s target band in the September quarter.

Wheeler reintroduced the caveat that the record-low setting for the benchmark rate remains appropriate “for now” and brought inflation back in focus after the annual pace of 0.8 percent in the September quarter was below the bank’s target band of between 1 percent and 3 percent. The bank expects inflation will head back toward the middle of the target range, he said.

“We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over coming months,” Wheeler said in a statement. “For now it remains appropriate for the OCR to be held at 2.5 percent.”

Wheeler is a former executive at the World Bank and most recently ran a consultancy in the US. He has signed a policy targets agreement with Finance Minister Bill English that is broadly unchanged from the one inked by predecessor Alan Bollard. Still, he said at the time it was signed last month that tweaks to the PTA gives the bank more authority “to lean against the build-up of financial imbalances” in the economy.

New Zealand is going through “modest” economic growth, with the Canterbury rebuild boosting the construction sector and housing market activity increasing as expected, Wheeler said.

Those gains were being hampered by fiscal consolidation and a strong New Zealand dollar “undermining export earnings and encouraging substitution toward imported goods and services,” he said.

Wheeler was more upbeat about the global outlook, saying the risks appear “more balanced” on improving market sentiment. Still, the global economy remains fragile with “further recovery dependent on policy implementation.”

That compares to Bollard’s past two statements that cited the weak outlook for New Zealand’s trading partners with ongoing woes of the Eurozone and slowing Chinese growth, and modest local growth locally.

Economists and markets were divided on how Wheeler would approach monetary policy, with a Reuters survey of economists unanimously predicting no change, and traders giving a rate cut a 30 percent chance.

“Anything could happen because he is a new man and we don’t know his character,” said Imre Speizer, market strategist at Westpac Banking Corp in Auckland before the release.

Last month, the central bank trimmed its forecast for the 90-day bank bill rate, often seen as a proxy for the OCR, with the rate on hold until December next year and rising to 3.3 percent in March 2015. It had previously seen the rate unchanged at 2.7 percent until June 2013, before peaking at 3.4 percent in March 2015.

The OCR has been on hold for a record 13 meetings since Bollard sliced half a percentage point in March last year as insurance against the impacts of the Canterbury earthquake that levelled the country’s second-biggest city.

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