The Bank felt it appropriate to suspend the tightening cycle at that stage and allow the full impact of the previous interest rate increases to work their way through the pipeline. Furthermore, domestic demand was slowing and there were signs of some easing in capacity pressures.
One of the reasons for the slowing in demand through 2006 was a sharp increase in petrol prices, which saw annual inflation peak at 4 percent in mid-2006. As petrol prices eased through the second half of 2006, and the Government’s Working for Families package provided its greatest impetus to household income growth, domestic demand picked up, and resource pressures did not ease as fast as we had projected.
Through the first few months of 2007, economic indicators were suggesting that this was more than just a
temporary recovery resulting from lower petrol prices. In particular, the housing market appeared to be experiencing a third wind, and business confidence was improving. Furthermore, world dairy prices had increased sharply.
Financial market participants increasingly concluded that stronger inflation pressures meant that a higher OCR was likely to be required, raising longer-term interest rates and the exchange rate. The Bank increased the OCR by 25 basis points at both the March Statement and the April OCR review.
The Finance Minister announced on 29 May that Dr Bollard had been reappointed Reserve Bank Governor, and that he and the Governor had signed an unchanged Policy Targets Agreement (PTA).