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ASB economists see RBNZ as bringing forward the time of its first official interest rate rise in response to the lower Kiwi dollar

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ASB economists see RBNZ as bringing forward the time of its first official interest rate rise in response to the lower Kiwi dollar
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

The Reserve Bank might have brought forward the timing of its first expected interest rate rise in response to the recent falls in the value of the Kiwi dollar, ASB chief economist Nick Tuffley says.

The universal expectation is that the RBNZ will leave the Official Cash Rate (OCR) at 2.5% (where it has been since March 2011) when it next reviews rates this Thursday.

But all eyes on Thursday will be on what the central bank says about the rapidly rising house market and whether there are any hints as to the eventual timing of interest rate rises.

In its last Monetary Policy Statement (MPS) released on June 13 the RBNZ implied that it would make its first upward move on interest rates in June 2014 or perhaps as late as September 2014.

The bank doesn't forecast movements in the OCR, but it does carry forecasts for the expected path of the 90-day bank rates, which as it happens closely follow the rate set by the OCR. In its forecasts contained in the MPS the RBNZ picked that the 90-day rate would move up from 2.7% in the March 2014 quarter to 2.8% in June and 3% in September.

But a key thing that has changed in recent weeks is that the Kiwi dollar has fallen in value. The high value of the dollar has been a significant contributor to New Zealand's low inflation rate, because obviously a strongly valued currency makes the price of imported goods cheaper.

The overall value of the New Zealand dollar as measured against our major trading partners is, however, now sitting about 3% below where the RBNZ was forecasting it would be.

"As the RBNZ reviews the OCR outlook for this Thursday’s announcement, the key change to the outlook will be the materially lower [New Zealand dollar]," Tuffley said.

"This will mean an upward revision to the RBNZ’s medium-term inflation outlook, which will likely lift the RBNZ’s 90-day interest rate projection and implicit timing of the first OCR hike – possibly to March 2014 (from June 2014) in line with our own view," he said.

Nonetheless, Tuffley said the current weak inflation would remain a key reason the RBNZ would be reluctant to lift the OCR yet.

"Interest rates will eventually have to rise, with growing evidence of a broadening economic recovery and accelerating domestically-generated inflation pressures. On top of these influences will be increasing concerns of spillovers from the rapid lift in house prices," he said

"We expect inflation to be back over the mid-point of the target [1% to 3%] band within one year."

Tuffley said that to address financial stability concerns, the RBNZ was likely to introduce limits on high loan-to-value lending growth as soon as technically feasible - though this was unlikely to happen before Thursday's OCR review.

"The RBNZ may see these tools as easing some pressure on the housing market at the margin. However, in our view, these will have very limited impact given the broad strength in housing demand and ability of some borrowers to get round restrictions through other credit sources. Even with the introduction of these measures, we would still expect the RBNZ to lift the OCR in March next year."

It is seen as unlikely the RBNZ will say much, if anything at all, about the possible introduction of LVR "speed limits" in its Thursday announcement or on any other of its recently developed "macro-prudential tools".

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2 Comments

yeah right

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Interpretation: Rate cuts needed.
CPI lowest ever & declining.
House prices declining in provincial areas.
NZDollar still high.

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