RBNZ rate increase towards neutrality

With the recent increase in the OCR by 25 basis points to 3% interest rates are now heading to towards a neutral rate – one that is neither contractionary or expansionary. The macroeconomic indicators reflect the following:

* Annual inflation at 1.5% is not that far from the mid- point of the RBNZ target band, especially considering the temporary effect that an appreciating currency has on headline inflation. See graph below from BNZ.

* The economy has limited spare capacity – capacity utilisation is close to long term average and firms are having more difficulty than normal in finding labour.

* Economic growth is above trend and looks set to push further above trend this year.

These economic indicators suggest that the economy is in reasonable shape and will be able to avoid a severe correction over the nest couple of years.

NZ CPI

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