29 Jan 2015

OCR on hold as economy expands

1:12 pm on 29 January 2015

The Reserve Bank has left the Official Cash Rate (OCR) unchanged at 3.5 percent, and signalled it will stay there for some time.

The central bank is dealing with a growing economy and falling inflation.

Reserve Bank Governor Graeme Wheeler said the economy was expanding more than 3 percent, underpinned by rising construction activity and more people in work, while Auckland's housing market was showing signs of picking up.

Reserve Bank governor Graeme Wheeler.

Reserve Bank governor Graeme Wheeler. Photo: RNZ / Diego Opatowski

Plunging fuel prices will also bolster household's purchasing power and lower the cost of doing business.

But Mr Wheeler pointed out a lower dairy payout, the risk of drought and the still-high dollar would weigh on growth.

The risk of deflation globally had already persuaded a number of central banks around the world to cut interest rates or print money to stimulate their economies.

Mr Wheeler expected inflation to be below its 1 to 3 percent target band this year, and said it could become negative for a time before gradually moving back towards 2 percent.

Some business groups and unions have urged the Reserve Bank to cut interest rates in response to falling inflation.

Mr Wheeler remained unconvinced for now, and he intended to keep the cost of borrowing unchanged for some time.

However, he conceded cuts may be needed, though that depends on how the economy performs.

The OCR has stood at 3.5 percent since last July. At its last interest rate review in December, the Reserve Bank forecast rate hikes.

Economists respond to OCR decision

Most economists still expect the next move in rates will be up, but they do not expect the Reserve Bank will act until well into next year.

ANZ Bank chief economist Cameron Bagrie said falling inflation had forced Mr Wheeler to concede that rate cuts could not be ruled out.

"A lot of that reflects that there's a lot more uncertainty out there - the global scene is certainly looking a lot more wobblier."

Mr Bagrie said while inflation continued to fall, the economy was still growing robustly.

"Our central scenario is interest rates are going to remain on hold for the coming couple of years."

Westpac chief economist Dominick Stephens said the chance of a rate cut was low at the moment due to the strong economy.

"What the Reserve Bank is telling us is the next move could be either up or down - and in this uncertain world, I'd tend to agree with that assessment," he said.

"Look, I'd give the odds of the next move being down - I'd put those odds at roughly 20 percent."

Mr Stephens said today's announcement triggered a fall in wholesale swap rates, which are used to set fixed mortgage rates.

He said that was likely to result in further declines in home loan rates.

The dollar has fallen more than a cent today to its lowest level in nearly four years against its US counterpart and a short time ago was trading at 73.2 US cents.

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