Reserve Bank of NZ – where to from here with interest rates?

A recent Westpac publication looked at the apparent confusion in New Zealand concerning interest rates. The Reserve Bank of NZ stated that interest rates will remain at an expansionary level till maybe the end of the year. With this in mind the RNBZ are assuming that there is spare capacity in the economy in that this expansionary monetary policy will not threaten the 1-3% inflation target. The graph below shows 3 scenarios over this year:

1. Status Quo – inflation and growth remained subdued in the NZ economy. The Christchurch rebuilding doesn’t generate any inflationary pressure and little GDP growth.
2. RBNZ – as above their is growth in the economy but spare capacity nullifies any inflationary pressure.
3. Bank Economists – a lot suggest that stronger GDP will cause inflationary pressure

Inflation figures, whether increasing or subdued, will have a significant influence on interest rates. Some analyst have said that the Official Cash Rate (OCR) will remain low for this year i.e. expansionary. But with the Christchurch rebuild there are indications that their will be a tightening early next year. However is an increase in the OCR from 2.5% – 3% a tightening? It really depends on what the neutral OCR rate is – 4%?

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