The Reserve Bank of New Zealand increased the official cash rate to 3.25% from 3.0% as expected, but is now projecting a slightly more gradual run of increases than anticipated in March.
The high exchange rate is still having an unexpectedly strong downward pressure on inflation, Reserve Bank governor Graeme Wheeler said Thursday.
“Headline inflation remains moderate and tradable inflation is expected to be low for some time,” he said.
However above-trend growth is absorbing spare capacity and adding pressure to non-tradeable inflation. These pressures are particularly evident in construction cost increases, Wheeler said.
“Nevertheless, overall wage inflation remains moderate, reflecting low headline inflation, increased labor force participation and strong net immigration,” he added.
The projection for annual inflation has been revised downwards. The March monetary policy statement had inflation at 1.9% by the end of the year but Thursday’s statement forecasts 1.5%, which is the current rate of inflation.
“The speed and extent to which the OCR will be raised will depend on future economic data and its implications for inflationary pressures,” Wheeler said.
Wheeler had less to say about the currency than in the past. The press release made no reference to the New Zealand dollar in the comment on future economic data, where it has previously featured prominently.
The New Zealand dollar is still expected to fall, the statement said, but it “has not yet adjusted to weakening commodity prices, although it is expected to do so.”
“The Bank does not believe the exchange rate is sustainable at current levels,” the statement said.