Official Cash Rate remains unchanged for now

Official Cash Rate remains unchanged for now

featureThe Reserve Bank today left the Official Cash Rate unchanged at 3.5% but its says that further increases will be expected next year as inflationary pressures increase.

The New Zealand distributors of new light commercial and passenger vehicles, as well as the used car and light commercial vehicle importers can breathe a sigh of relief for now, thanks to interest rates remaining unchanged but the Reserve Bank warns that the Kiwi dollar is overvalued.

Despite the fall in dairy prices which are expected to recover in 2015, it says New Zealand’s economic growth is running at an annual rate of around 3½% thanks to the momentum of domestic demand and the ongoing growth in consumption and construction activity.

Low interest rates also continue to support domestic demand.

The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. The bank says it expects to see a further significant depreciation.

Consumer Price Index (CPI) inflation remains modest, at 1% in the year to September. Weak global inflation, falls in international oil prices and the high exchange rate are the main influences.

Growth is expected to remain at or above trend through 2016, with unemployment continuing to decline. The economy’s productive capacity is being boosted by high labour force participation, strong net immigration and continued investment growth.

Risks to the growth outlook include dairy prices, which are expected to recover in 2015, the overvalued exchange rate, and the strength of construction activity.

Inflation risks include the impact of rising capacity pressures on domestic inflation, the response of house prices to the strong migration inflows, and the impact of lower oil prices.

With output projected to grow at or above capacity, CPI inflation is expected to approach the 2% midpoint of the Reserve Bank’s target range in the latter part of the forecast period. Some further increase in the OCR is expected to be required at a later stage.

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