Although the Official Cash Rate was left at 2.5% today there is still a belief amongst many economist that growth and inflation will prove stronger than forecast and that, as a consequence, interest rates need to be rising now to offset these risks. Stephen Topliss of the BNZ used the famous economist J K Galbraith to describe the frame of mind of Reserve Bank of New Zealand.
“In the short term it is far better to be consistently inaccurate than inconsistently accurate. To err consistently is almost as good as being right”. J K Galbraith
RBNZ has remained steadfast that the strength in the New Zealand dollar and tightening fiscal policy will have offset the inflationary concerns associated with rising domestic demand, in general, and the housing market, specifically. Moreover, the Bank continues to believe that its recently implemented LVR restrictions will have a significant dampening impact on activity and house price inflation. With that in mind, the Bank has consistently stated that it would not raise the cash rate in 2013 and that it would start the process in 2014, with a relatively aggressive follow through.