13 Jun 2014

Election not a factor for Reserve Bank

6:55 am on 13 June 2014

The Reserve Bank has indicated it intends to continue raising rates, even though the country will head to the polls in September to elect the next government.

On Thursday, as was widely expected, Reserve Bank Governor Graeme Wheeler raised the Official Cash Rate (OCR) from 3 to 3.25 percent.

But contrary to market expectations, he left the forecasts for interest rates through to 2017 virtually unchanged, making it likely he will raise the OCR again in July, and possibly in September and December.

Mr Wheeler said he expected inflation pressures to mount and that therefore interest rates needed to rise from their still relatively low levels to something more neutral.

As well, he expected the economy to grow about 4 percent this year before moderating only slightly and that even though commodity prices were easing, they would settle at historically high levels.

Mr Wheeler repeatedly said he did not believe the currency's present high levels were sustainable.

But Westpac currency strategist Imre Speizer said the market did not appear to be paying any attention.

In defiance of Mr Wheeler's express wishes, the New Zealand dollar shot higher spiked after Thursday's statement, and wholesale interest rates also rose.

Financial markets had been expecting Mr Wheeler to moderate the pace of OCR increases.

"Unless the Reserve Bank is going to do something explicitly about it, my guess is the market will just ignore that," he said.

"Interest rates have jumped on the content of today's Monetary Policy Statement and if interest rates are higher, relative to other countries, then the exchange rate will continue to rise."

Situation incorrectly read

Westpac chief economist Dominick Stephens said financial markets had read the situation incorrectly.

"I think financial markets are a little bit beguiled by international news, where interest rates are falling, and declines in New Zealand dairy export prices.

"But actually, there's a lot more to the New Zealand economy than just dairy. Other export prices have actually been rising and, of course, we've got this booming net immigration, we've got GDP that's extremely strong and we're likely to see very strong GDP data next week."

The 20 September election was not a factor in the Reserve Bank's thinking as it was an independent body, Mr Stephen said.

"That's precisely why you give monetary policy to an independent central bank.

"It needn't be influenced by elections. Its job is to keep inflation at 2 percent, on average, over the medium term, and there's no reason really to deviate from that job just because an election is coming up."

Mr Wheeler said he was not concerned that the continued shift into fixed-rate mortgages would undermine the effectiveness of monetary policy by insulating home owners from rising interest rates.

The average duration to maturity of mortgages in New Zealand was still a little less than 10 months, which was low by international standards, so monetary policy changes would still carry quite a punch.