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OCR increased to keep future inflation near 2 percent target

OCR increased to keep future inflation near 2 percent target

(13 June 2014 – New Zealand) The Reserve Bank of New Zealand (RBNZ) increased the official cash rate (OCR) by 25 basis points to 3.25 percent on 12 June, in line with bank economists’ forecasts.

The RBNZ cited the country’s considerable momentum in economic expansion and GDP growth estimated at 4 percent in the year to June.

Economic growth among New Zealand’s trading partners is gradually improving and global inflation remains low.

Prices for New Zealand’s export commodities remain historically high, but their recent falls will reduce farm incomes over the coming year, the RBNZ statement said.

A continued acceleration in construction in Canterbury, and more broadly, is supporting growth, together with strong net immigration flows that are adding to housing and household demand.

Business and consumer confidence remains buoyant, as do businesses’ reported intentions to invest and to hire.

While house price inflation remains high, the housing market has moderated since late last year when restrictions were applied to high loan-to-value ratio mortgage lending and when mortgage interest rates began rising the RBNZ said.

Fiscal consolidation continues to moderate demand growth, though by less than previously assumed.

The exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so. The Bank does not believe the exchange rate is sustainable at current levels.

The central bank expects inflationary pressures to increase.

“In this environment, it is important that inflation expectations remain contained and that interest rates return to a more neutral level.

“The speed and extent to which the OCR will need to rise will depend on future economic and financial data, and its implications for inflationary pressures.

“By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained,” it said.

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