Monetary Policy Statement for December 2013

Release date
12/12/2013
Main file
Supplementary file

Policy assessment

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

Growth remains moderate but mixed for New Zealand's main trading partners. Nevertheless, export prices for New Zealand's main commodities, and especially dairy produce, have continued to increase.

New Zealand's GDP is estimated to have grown at over three percent in the year to the September quarter and the expansion in the economy has considerable momentum. New Zealand's terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by the Canterbury rebuild and the response to the housing shortage in Auckland.

Continued fiscal consolidation and the high exchange rate will partly offset the strength in domestic demand. The high exchange rate is a particular headwind for the tradables sector and the Bank does not believe it is sustainable in the long run.

House price inflation is high in Auckland and other regions due to the housing shortage, and demand pressures associated with low interest rates and rising net inward migration. Restrictions on high loan-to-value mortgage lending, introduced in October, should help slow house price inflation. Data to date are limited on the effects of these restrictions. We will continue to monitor outcomes in the housing market closely.

Annual CPI inflation increased to 1.4 percent in the September quarter and inflation pressures are projected to increase. The extent and timing of such pressures will depend largely on movements in the exchange rate, changes in commodity prices, and the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures.

The Bank will increase the OCR as needed in order to keep future average inflation near the two percent target midpoint.

Graeme Wheeler
Governor