As widely expected, the Reserve Bank raised the Official Cash Rate this morning for the first time, from 4.5 per cent to 5.0 per cent, and said it was time to ease back on the accelerator.
However, the move is not expected to have an immediate impact on mortgage interest rates. Most lenders have already factored in the OCR increase by raising their floating rates a few weeks ago.
Reserve Bank Governor Don Brash told journalists today that the bank believed that the economy had been growing for close to 18 months. "We ran the risk of falling below the curve if we only moved (the OCR) by 25 basis points."
"Over the next year or two, we see monetary conditions moving to a more neutral stance."
For the first time, Dr Brash's news conference was streamed live over the Bank's website and was available to both local and international viewers.
Key points made by Brash:
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The lift in the OCR to 5.0 per cent means that monetary policy will remain stimulatory in the near term, but less so than before. "The Reserve Bank's foot is easing back on the accelerator, but not applying the brakes, at least at this stage."
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The June quarter aside, the Bank says the economy has been growing at a reasonably brisk pace since mid 1998. It sees annual growth continuing at around four per cent over the next two years, supported by a stronger world economy.
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That sustained growth will absorb the economy's spare capacity, so that monetary conditions will need to be less expansionary to keep inflationary pressures in check.
Brash said New Zealand was in a different environment to the 1980s or early 1990s and, with inflation expectations now running at lower levels, he did not expect interest rates to hit the levels seen in the mid 1990s.
The Reserve Bank's next official review of the OCR will be on 19 January 2000.
