Reserve Bank leaves Official Cash Rate unchanged at 1.75%; surprisingly, no change seen to future interest rate path, with first OCR hike not projected till late 2019; dollar drops sharply

By David Hargreaves and Alex Tarrant

The Reserve Bank now sees the recent softening in house prices continuing and is projecting house price inflation in low single digit figures over the next couple of years.

Additionally, the RBNZ - while not commenting on what it sees happening with mortgage rates over the next year - believes that the pressure on banks to increase deposit rates in order to attract funds will continue.

Interest.co.nz figures would suggest that the recent increases that have been seen in New Zealand in deposit rates have generally been more than matched by mortgage rate rises.

In leaving the Official Cash Rate unchanged at 1.75% on Thursday, the RBNZ noted that "house price inflation has moderated further, especially in Auckland".

"The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions," Governor Graeme Wheeler said.

"This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand."

The comments from the Governor are significant, and the first real acknowledgement that the slower housing market conditions - especially in Auckland - since late last year are here for a while.

In the face of continued rampant upward movement in house prices last year, the RBNZ slammed on a 40% deposit rule for housing investors. The move officially took effect on October 1, but in effect was applied by banks from when it was announced in July.

Till now, while acknowledging that conditions in the housing market had softened, the RBNZ had stopped short of claiming anything like victory over rising prices.

Wheeler 'encouraged'

In the news media conference following release of the RBNZ's latest OCR decision, Wheeler said the central bank had "been encouraged" by what it had seen in the house market during the past eight months. National house price inflation in the last eight months increased by about 1.5%. In the eight months prior to that house price inflation had been running at about 13%.

“Now if you look at Auckland, over the last eight months, house price inflation has actually fallen by about 1.5% - the eight months before that it had increased by about 14%.

"We don’t know that the moderation we’ve been seeing is going to continue – we think there may be some increase in house price inflation - but nothing like what we’ve seen in the past."

A significant factor affecting the house market recently on top of the 40% deposit rule has been the fact that the banks themselves have been tightening up their lending and implementing 'credit rationing'.

Wheeler acknowledged this.

“You’ve seen the banks tighten up their credit policies in terms of lending. You’ve seen an increase in mortgage rates as the banks have had to compete for deposits in order to get their funding – so there are some favourable dynamics out there, if you like, but it remains a significant uncertainty for the forecasts.”

Wheeler would not be drawn on what might happen with bank interest rates over the next year.

'Some banks approaching their limits'

But he said that what the RBNZ was seeing was that some of the banks were approaching their limits, in terms of their own treasury policies, in the amount of offshore wholesale borrowing they can do.

"They are able to access that pretty easily. You’ve seen the cost of that financing rise over the last six months or so, but they can still access it reasonably easily, but they are getting up against – some of the banks – against their limits.

“So that means they have to look at domestic market for their financing and that’s leading to an increase in competition for deposits and we are seeing an increase in deposit rates. So the banks have essentially been faced with higher costs of funding and that’s been reflected in the adjustment or the increase in mortgage rates that we’ve been seeing so far.

“And I would expect that competition for deposits to continue quite significantly in coming months.”

The RBNZ's now more benign view of future conditions in the housing market is matched with a 'dovish' all-round view of the economy and monetary conditions.

No change to OCR projections

The decision to leave the Official Cash Rate unchanged at 1.75% was expected, but more unexpectedly, the RBNZ is still not forecasting any upward moves in the OCR till late 2019. Based on this 'dovish' outlook the Kiwi dollar immediately dropped sharply, down by about US1c to under US68.3c.

The RBNZ has kept its expected OCR track exactly the same as in its February Monetary Policy Statement, with the forecast at 1.8% through to September 2019, before rising to 2.0% in March 2020, where it now remains through June 2020.

Before Thursday's release, market expectations had been for a rate rise in early 2018, with several local economists in recent weeks bringing their late 2018/early 2019 projections forward closer to the start of next year and suggesting that the Reserve Bank could bring forward the projected track.

This followed stronger-than-expected CPI inflation and employment data and a jump in the RBNZ-led inflation expectations survey. Electronic card spending figures earlier this week also came in ahead of economist expectations.

Economists perplexed

BNZ head of research Stephen Toplis said that recently the country had witnessed rising inflation, rising inflation expectations, falling unemployment, a weakening currency and a strengthening global economy.

"We had thought this would rattle the Reserve Bank. As it turns out, it all seemed to have counted for little as the Bank left its stance unchanged from both its February and March missives," he said.

"We are not at all surprised that the Reserve Bank left its cash rate at 1.75%; we are not at all surprised that it ruled out a rate increase in 2017; we are not at all surprised that it focused on the transitory nature of some of the price shocks that we have recently experienced. But we are perplexed that the overall stance of policy remains neutral and that there doesn’t appear to be even the slightest nod to a tightening bias."

ANZ chief economist Cameron Bagrie and senior economist Philip Borkin described the RBNZ's latest statement as "aggressively neutral".

"We’re scratching our heads regarding some aspects – the inflation forecasts seem to be testing the realms of credibility, given an economy that is forecast to continue to grow above trend. However, the message from the RBNZ is clear: policy is set to remain on hold for a considerable period and it has no interest whatsoever in pre-empting a policy tightening. We also suspect it is quietly smug about the tightening in policy being applied by the banking sector; a factor underappreciated by the market," Bagrie and Borkin said.  

ASB chief economist Nick Tuffley said the central bank's view was "slightly more dovish than expected".  The RBNZ is projecting a bigger dip in inflation, to 1.1% in 2018, than ASB expects, and the RBNZ’s view of domestic inflation pressures is weaker than in its last forecast.

"We had expected some bringing forward of the implied tightening to the first half of 2019.

"...We continue to expect the RBNZ to lift the OCR in late 2018, earlier than the RBNZ’s current stance," Tuffley said.

This is the statement from the RBNZ:

Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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50 Comments

NZD has been smashed

Not good.
NZD too weak, inflation too high.
This starts to make an impact on many aspects of the economy.
RBNZ is not reacting quickly enough to world economy changes.
OCR should be closer to 2% earlier than 2018.

Absolutely disagree, the RBNZ is spot on by not buying into "rampant inflation" forecast

expect mortgage rates to rise very shortly, the big 4 need to claw back the new australia tax so the parents companies will spread the love this side of the ditch

Agree, this seems likely to be the main driver of interest rate rises. With new business constrained, lenders will be looking to extract more revenue from their existing customers...and interest rates can provide that lever.

I wonder whether a complicating factor might be less exposed banks, potentially such as HSBC and ICBC(?), who may be able to keep their interest rates lower to try to attract more customers to move their mortgages across?

If the Ozzy and Kiwi bank keep raising rates there's be a lot more negative equity which will mean far more people forced to loose their homes, so you'll see a big increase in mortgagee sales. That's not going to be good for National come election time.

Your wrong this is reason for rates rising.

"They are able to access that pretty easily. You’ve seen the cost of that financing rise over the last six months or so, but they can still access it reasonably easily, but they are getting up against – some of the banks – against their limits.

“So that means they have to look at domestic market for their financing and that’s leading to an increase in competition for deposits and we are seeing an increase in deposit rates. So the banks have essentially been faced with higher costs of funding and that’s been reflected in the adjustment or the increase in mortgage rates that we’ve been seeing so far.

“And I would expect that competition for deposits to continue quite significantly in coming months.”

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"The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions," Governor Graeme Wheeler said.

Forgot to mention the Capital Controls from China !

They would like to take some credit, lets not complain, while the outcome is positive :)

Capital Controls from China?? Naive

"Capital Controls from China?? Naïve"... Naive

“"Capital Controls from China?? Naïve"... Naive”

too simple, sometimes naive...lol

Does anyone read the C30/ 31 data

Sometimes, but I've been too busy lately to have time. I'm still getting used to these new statistics which means I have to take a bit more time to interpret them.

No increase in the OCR was to be expected. The economy has slowed up. The banks are not wanting to lend out money, more people (of particular note in business) are facing wobbly territory and an increase in mortgagee sales are just a few of the things I have noted.

I'd expect to see more jobs out-sourced to cheaper labour in other countries to increase returns here....shame the bureaucracies don't do that as they are the goose suffocating the golden egg!!

Why are the OCR and short term deposit rates below the recently declared CPI metric?

This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."

To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks.

Policies that continue to be categorized in that fashion while the interest rate fallacy remains are devoted to the economy that "ought to be", not the economy that is. The danger comes as Keynes warned, in repeating mistakes rather than learning from them. The result is a trap of exactly what Bernanke described as never being able to happen here: recession, rising unemployment, and financial stress. Read more

The Reserve Bank has, as expected, left the Official Cash Rate unchanged at 1.75%, but more unexpectedly, the RBNZ is still not forecasting any upward moves in the OCR till late 2019.

The RBNZ is projecting a bigger dip in inflation, to 1.1% in 2018, than ASB expects, and the RBNZ’s view of domestic inflation pressures is weaker than in its last forecast.

How about that?

The US Federal Reserve has implicitly acknowledged the failure of lifting CPI inflation with so called lower interest rate "stmulus" tactics.

Central bankers left unchanged their median projections for three quarter percentage-point increases in 2018, while the median fed funds rate estimate for 2019 rose to 3% from 2.9%. Read more

And yet it freely acknowledges the following: -

The staff’s forecast for consumer price inflation, as measured by changes in the PCE price index, was unchanged for 2017 as a whole and over the next couple of years. The staff continued to project that inflation would increase gradually over this period, as food and energy prices, along with the prices of non-energy imports, were expected to begin steadily rising this year. However, inflation was projected to be slightly below the Committee’s longer-run objective of 2 percent in 2019. [emphasis added] Read more

So limp Wheeler. Get the damn OCR off these emergency settings - the economy doesn't need them.

he has succeeded with the nzd falling... his aim is to get a sustained inflation of over 2% for atleast a couple of quarters,.. then you will see the sudden change in direction...

US import prices jump.. clearly indication that pressure is now on import prices globally which is bound to push up inflation in the near future..

Well done Mr Wheeler for not buying into the runaway inflation forecast some are claiming.

Likely would tollerate some overshoot until 2019 as the inflation rate was under target for auch an extended period. Also the rates bank customers are paying is rising as domestic deposits have dried up and overseas funding is more expensive, RBNZ likely want to avoid the short term economic shock of sudden rate rises.

Haha to all those who thought rate rises were imminent.

The softening NZ housing market will have a negative impact on non-tradeable inflation. Persistent strength in the NZD won't be helping either.

There are a lot of opinions, and myself I wouldn't mind the bubbles being burst but there's things that shouldn't be forgotten.

If the OCR moves too quickly in too short a time we could go not just into recession but a depression. The RBNZ has a history of trigger happy changes based on projections that are complete shit, and their change to reacting to what is actually happening is a bit more down to earth. I would rather that the OCR isn't based on something they saw in a vision while astral travelling.

Banks are also undergoing a credit tightening. It's best to see how this turns out before moving the OCR. I have no doubt that banks are enjoying a high rate of payments in arrears and wondering why they lent so much money in the first place.

It's also ok to let everything run for a while until a trend is clear. If inflation does take off they can start slowly ramping up.

People also need to embrace that our OCR has a limited effect on everything. External OCRs have far more impact on the debt market.

great post. the most sense i've seen in this whole thread.

Agree

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What the RBNZ doesn't want to explicitly say is the Chinese capital controls have also vastly contributed to the slowing growth in property prices.
But that wouldn't​ be wise since the government never accepted foreign speculators have been a problem. It is a supply side problem. Our housing market is a magic well, we should be able to draw as much supply from it as we can despite spiking demand volumes.

So no plan to make house prices great again?
Even Trump seems to have forgotten about it.

Trump is currently too busy removing people who might uncover his dubious tracks.

It's like a Scooby Doo cartoon where the villain sends a note saying 'Stay away from the Old Haunted Amusement Park or else'. Any investigator worth a damn will be heading straight for the Old Haunted Amusement Park.

Trump isnt under investigation by the person fired nor the FBI full stop. Trump was advised he should fire him and made a decision on that recommendation.

Maybe, but Comey had also recently asked for more resources to investigate the Russian election involvement and Comey was also due to testify for a second time to Congress. A mighty coincidence.

Figure 5.5 above still predicts a total increase in house prices of approximately 6% over the next 3 years... given prices are so high this is still quite a rise for a pleb like me!!

All aspiring home owners - Want aspiration to be alive than vote for change.

Even home owner want if roof over the head of future generation than vote for change

Alternatively be prepared to migrate to make way for rich immigration - National Vision and their type of prosperity.

OCR NZ 1.75% 'record lows' - so the spin goes.
Meanwhile France 0%, Germany 0%, USA .5%, Canada .5%, UK .25% etc
NZ still maintains high interest rates

Er, its still a record low mate. Do you want the QE madness of eu, uk and usa?

US 0.5%, please explain ?

Ah, .75 - 1% then for the US
.
I noticed mortgage rates starting at 1.5% while in the U.K. recently
.

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I see the RBNZ are continuing their long standing tradition of believing in as many impossible things at the same time as they can manage.

Let me list the ways:
House price inflation is contained.
Low interest rates lead to enhanced capital investment
Low interest rates are not the driver of high house prices
Foreign money flowing into the country does not push up house prices
Foreign money flowing into the country enhances productivity
Low skilled immigrants from poor countries enhance productivity
Increased bank lending does not push up house prices
The banks are sound financial institutions and resilient to any shocks
The banks are not vulnerable to the stupidity of their overseas head offices
Bank borrowing from overseas is a good thing
Covered bonds are harmless
Retail and hospitality are the way of the future
Tourism is a high value add business
New Zealand needs more people
Inequality is not a problem
Low wages are not a problem
We should all accept our place.

Moodys cut ratings on Canadian banks

The parallels between Canada, Australia and NZ are very apparent. A rating downgrade here, although more consistent with European and US Banks (albeit banks are on the improve there) will only add to funding costs.

check out those graphs,and bank run at home capital. Contagion seems to happen in slow motion. I wonder if that will be the "snow flake" that causes Jim Rickards' avalanche.

“How did you go bankrupt?” Two ways. Gradually, then suddenly.” – Ernest Hemingway

Assuming single digit rise expected by RBNZ and assuming 7% than also the average house price in Auckland if last year was 1 Million so should be appox 1.07million today and next year 1.15Million.

Does it help FHB or does it help national government.

First thing first : Vote and change government.

Publishing a graph of house price inflation projection for the next 3 years (figure 5.5) is brave, very brave, possibly foolish. Give a monkey a pen to scribble on the graph, I think he has an equal chance of getting it right

Exactly. Infact haven't sales in Auckland recently shown that houses are selling for less now than they were, which I presume means negative growth. But that isn't shown on the gragh. So maybe they think that house price inflation in other areas of NZ will continue, to bring up the average?
Do they ever compare their old projections, with reality, so see how well they predicted things?

Ben Bernanke quotes.. just for fun

“House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.” Oct 05

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” Feb 06

“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.” Mar 07

Then what happened? Lol.
.
But then the 2008 crash GFC wasn't really about unsustainable house prices rises. - more about shonky lending practices, toxic CDOs & merchant banking gone wrong, I thought?

The soothing sage words of a central banker ought to be taken with a grain of salt. Any form of hell can lie around the corner. The % increases Bernanke was talking about pale in comparison to recent trends in Auckland.

Didn't Robert Shiller puts some words in his mouth at some point about irrational exuberance? Or was the Dotcom bubble

Method in Reserve Banks madness; 'first OCR hike not projected till late 2019' then dollar drops 3 months before election, fortuitous non?