The Reserve Bank has held its interest rate-driving official cash rate (OCR) at its presentrecord low of 2.5% as expected, but looks likely to bring forward its first rate hike by a several months to at least mid-2010.
New Zealand's housing market remains a concern to the Reserve Bank as house-price inflation has breached 10%, raising "uncertainty" of what effect it will have on consumer spending.
ASB economist Jane Turner said the markets had been expecting a repeat of October's dovish statement by Reserve Bank Governor Alan Bollard, rather than the "mildly hawkish" sentiment expressed yesterday.
Compared to October, the Reserve Bank was more willing to acknowledge the stronger than expected economic developments, she said.
"We expect the housing market to continue challenging the Reserve Bank's comfort zone," Ms Turner said.
Reserve Bank Governor Alan Bollard said New Zealand's economy continued to recover "but there remains considerable uncertainty about the durability of the expansion".
"In New Zealand the economy continues to recover, reflecting improved world growth, higher export commodity prices, increased government spending and housing strength.
"[However,] a key uncertainty is the extent to which higher house prices are eventually reflected in increased consumer spending," Dr Bollard said in a statement yesterday.
Ms Turner said there was no longer much scope for the Reserve Bank to absorb shocks in terms of the outlook for inflation other than to lift rates earlier than intended.
Ms Turner predicted the Reserve Bank would act earlier than its "mid-2010" suggestion and opt for a 0.50% ORC hike in April.
Before the 9am announcement yesterday, the New Zealand dollar was rising, later spiking 0.5c against the United States dollar, while the one-year swap rate lifted 14 basis points and the five-year rate 11 points.
Dr Bollard said while business confidence had improved, actual business spending remained weak and the high level of the New Zealand dollar had also limited the scope for exports to contribute to the recovery.
"If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010.
"Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action," he said.
The BNZ maintained its view yesterday that the first rate hike would be in June next year, while ANZ chief economist Cameron Bagrie revised his stance, moving back from a September hike to June.
"Reading between the lines, the Reserve Bank has still given itself a lot of flexibility in terms of when they tighten," Mr Bagrie said in a statement.
Key gauges to watch were credit growth, house prices and the flow-on to consumer spending, corporate spending, fiscal policy and, lastly, the global scene and steps other policymakers were taking.
Dr Bollard said global activity had continued to rebound, with activity in Australia, China and emerging Asian countries continuing to increase and solid growth expected over the next few years.
"[However], the picture is more mixed in the major developed economies.
While activity is expanding, sustained growth is not assured," Dr Bollard said.
Council of Trade Unions economist Bill Rosenberg was critical of Dr Bollard's inference the OCR might be adjusted earlier than late-2010 as increasing interest rates would encourage a further rise in the exchange rate, something which is already hurting manufacturing exporters, and discourage resumption of investment in the economy.
"This is not a time for cuts in government spending, nor major tax cuts, nor for tightening monetary policy," he said in a statement.
Instead, to head off "the worrying signs of another housing-price bubble", measures such as encouraging the provision of new housing would be preferable.
