At its July meeting the Reserve Bank of New Zealand (RBNZ) stated that due to the recovery in New Zealand’s economic growth it saw little need for the March 2011 0.50% ‘insurance cut’ to remain in place much longer. 

At the time most economists forecast that the RBNZ would increase the cash rate at its September meeting.   However the RBNZ did preface its July statement with “Provided current global financial risks recede” and since this time global economic data and financial markets (an indicator of financial risks) have weakened considerably with the United States share market having fallen over 10%.   Another factor influencing RBNZ Governor Alan Bollard will be the meeting of global central bankers at the Jackson Hole Economic Policy Symposium in the United States taking place this week.   The mood of this conference is likely to be relatively pessimistic and reflect on the economic challenges in the United States and Europe which are both confronted with slowing economic growth and reduced government spending. 

As a result of these factors most economists now expect that the Reserve Bank will not increase the cash rate until its December meeting.   The significant move from fixed rate to floating mortgages over recent years also provides the RBNZ with increased flexibility to delay any interest rate rise as it knows that the impact on the economy will work more quickly than in the past.

Jonathan Windust