The visible hand in economics

December 07 MPS – OCR unchanged at 8.25%

Posted on: December 6, 2007

The December quarter monetary policy statement was released today. Alongside this they announced that the OCR would remain unchanged, as they believe “current level of the OCR remains consistent with future inflation outcomes of 1 to 3 percent on average over the medium term”. This times they give the feeling that tax cuts are incorporated in their view of inflation outcomes, however they still view the emissions trading scheme and financial market uncertainty as risks to their forecasts.

It is interesting to note that their forecasts of the 90 day bill rate are marginally higher in the short-term, implying that their is a greater chance of interest rate hikes. However, out into 2008/09 90 day bill rate remains significantly higher, implying that the Bank feels it will have to leave rates higher for longer. They feel that interest rates will have to stay higher in order to dampen inflationary expectations that may stem from a higher retail price for petrol and relative tightness in the input markets.

There growth forecast is a little higher in the short-term, namely as a result of the strong June quarter (and the associated upward revisions). Out into 2008/09, they expect a lower level of growth directly as a result of higher interest rates and the associated strength in the NZ currency.

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