New Zealand central bank puts rates on hold after run of increases
Reserve Bank raises key interest rate to3.5 per cent, spurring fall in NZ dollar
New Zealand's central bank lifted its official cash rate by 25 basis points to 3.5 per cent as expected yesterday, but then suspended its rapid-fire run of interest rate rises to study their impact on the economy.
It was the Reserve Bank of New Zealand's fourth consecutive rise in as many policy meetings, taking the rate from 2.5 per cent in March to July's 3.5 per cent.
"It is prudent there now be a period of assessment before interest rates adjust further to a more-neutral level," RBNZ governor Graeme Wheeler said.
He said rates would still need to rise in the future, but the economy was feeling the impact of its previous tightening, with commodity prices falling, and inflation moderate.
Consumer price inflation ran at an annual rate of 1.6 per cent in the second quarter, Statistics New Zealand said last week, below the 1.8 per cent annual pace forecast in a survey.
The bank's forecasts in June implied the cash rate reaching 3.75 per cent by the end of the year, two additional increases of 25 basis points this year, and a steady pace through 2015.
"Our view remains unchanged, we think the Reserve Bank is on hold until December, and they will start raising rates again then, but at a far more gradual pace," said ASB Bank chief economist Nick Tuffley.
While the RBNZ's economic comments largely met expectations, it surprised with its aggressive comments about the exchange rate.
"With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall," Wheeler said.
The New Zealand dollar plunged a full cent to a six-week low of 85.93 US cents before paring its losses slightly to settle at about 86 US cents.
"We interpret this as a direct warning that the RBNZ may intervene in foreign exchange markets by selling New Zealand dollars," said Westpac chief economist Dominick Stephens.
The RBNZ said inflation was moderate, house price growth has slowed and wages were subdued, but spare capacity was being used up, driven by the earthquake reconstruction and strong migration gains. Separately, data showed another solid trade surplus in June.
