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Monetary Policy Statement September 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. GDP growth in Australia and China has slowed and some emerging market currencies have come under considerable downward pressure. At the same time, the major developed economies continue to recover and New Zealand's export commodity prices remain very high.

Although long-term interest rates have risen globally in recent months, largely due to uncertainty around the timing of the Federal Reserve's exit from quantitative easing, global financial conditions overall continue to be very accommodating.

In New Zealand, GDP is estimated to have increased by three percent in the year to the September quarter. Consumption is rising and reconstruction in Canterbury will be reinforced by a broader national recovery in construction activity, particularly in Auckland. This will support aggregate activity and start to ease the housing shortage.

In the meantime rapid house price inflation persists in Auckland and Canterbury. As has been noted for some time, the Reserve Bank does not want to see financial or price stability compromised by continued high house price inflation.

Restrictions on high loan-to-value residential mortgage lending, which will come into effect next month, are expected to help slow the national housing market.

Despite having fallen on a trade-weighted basis since May 2013, the exchange rate remains high. A lower rate would reduce headwinds for the tradables sector and support export industries. Fiscal consolidation will weigh on aggregate demand over the projection horizon.

CPI inflation has been very low over the past year, partly reflecting the high New Zealand dollar and strong international and domestic competition. However, inflation is expected to rise towards the mid-point of the one to three percent target band as growth strengthens over the coming year.

OCR increases will likely be required next year. The extent and timing of the rise in policy rates 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. We expect to keep the OCR unchanged in 2013.

Graeme Wheeler

Monetary Policy Statement media conference video - 12 Sep 2013