12 Sep 2014

Analysts consider RB signals

8:27 am on 12 September 2014

The Reserve Bank now believes the economy can grow faster while generating less inflation.

Reserve Bank governor Graeme Wheeler.

Reserve Bank governor Graeme Wheeler announced yesterday that the OCR would remain at 3.5 percent. Photo: RNZ / Diego Opatowski

In its latest forecasts, the central bank has mostly revised up its forecasts for growth between September this year and June 2017 and revised down its forecasts for inflation through to March 2016.

For example, in June the Reserve Bank expected 0.6 percent growth in the December quarter of this year and it now expects 0.9 percent.

In June it was forecasting 2.1 percent inflation in the year ending June next year but now it expects a 1.7 percent outcome.

As a result, the central bank now expects to raise its official cash rate just one percentage point from 3.5 percent currently through to 2017, down from its previous projection of a 1.5 percentage point increase.

Deutsche Bank economist Darren Gibbs said the Reserve Bank was now less hawkish.

"One of the key changes is that the Reserve Bank has assumed that the economy can grow a little more quickly without generating inflation. They've assumed that the economy has a little bit more spare capacity than what had been assumed back in June so you can accomodate a little more growth and you get a lower inflation profile across the forecast period."

Although later growth forecasts have been revised upwards, the central bank marginally lowered its expectation for growth in the June quarter to 0.8 percent - the figures are due next week.

'Green light' for dollar to fall

A foreign exchange strategist says the Reserve Bank has given the green light for the New Zealand dollar to fall further.

In yesterday's monetary policy statement, which left interest rates unchanged, Reserve Bank governor Graeme Wheeler said that even though the dollar has fallen significantly since it peaked in July, its current level is still unjustified and unsustainable.

The New Zealand dollar peaked at 88.35 US cents in July and fell as low as 81.78 cents yesterday, the lowest it has been since 4 February.

Bank of New Zealand's Raiko Shareef said the central bank certainly wants a lower currency.

"For now, the decision is essentially a green light from the New Zealand side of the story for kiwi to head lower. What we'll look for going forward is a green light from the US central bank, which is due to meet next week to push the US dollar higher."

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