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Monetary Policy Statement June 2013

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.

Policy assessment

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.

The global outlook remains mixed with disappointing data in Europe and some other countries, and more positive indicators in the United States and Japan. Global financial sentiment continues to be buoyant and the medium term outlook for New Zealand's main trading partners remains firm.

Growth in the New Zealand economy is picking up but remains uneven across sectors. Consumption is increasing and reconstruction in Canterbury continues to gather pace and will be reinforced by a broader national recovery in construction activity, particularly in Auckland. This will support aggregate activity and eventually help to ease the housing shortage.

In the meantime rapid house price inflation persists in Auckland and Canterbury. As previously noted, the Reserve Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of the supply response.

Despite having fallen over the past few weeks, the New Zealand dollar remains overvalued and continues to be a headwind for the tradables sector, restricting export earnings and encouraging demand for imports. Fiscal consolidation will continue to constrain aggregate demand over the projection horizon.

Annual CPI inflation has been just below one percent since the September quarter of 2012, largely reflecting falling prices for tradable goods and services. While tradables inflation is likely to remain low, annual CPI inflation is expected to trend upwards through the forecast period.

Reflecting the balance of several forces, we expect annual GDP growth to accelerate to about 3.5 percent by the second half of 2014, and inflation to rise towards the midpoint of the one to three percent target band.

Given this outlook, we expect to keep the OCR unchanged through the end of the year.

Graeme Wheeler

Monetary Policy Statement media conference video - 13 Jun 2013