By David Hargreaves
There will be much interest in the view the Reserve Bank takes on future house price inflation when our central bank releases its latest Monetary Policy statement next week.
It is a foregone conclusion that RBNZ Governor Graeme Wheeler will in his September 12 statement leave official interest rates unchanged at the 2.5% in place since March 2011. It is also generally expected that the RBNZ will again reiterate that it sees no change to official interest rates before the end of the year.
But, ever ones to look forward, the country's economists will be scouring the MPS for any new clues as to when the (inevitable) upward rise of interest rates will begin again.
The RBNZ's last MPS released in June implied that the bank would start raising interest rates probably from June 2014. The term "implied" is used because the RBNZ does not make forecasts or projections for the level of the Official Cash Rate (OCR) that it sets.
Instead it forecasts the level it expects for the 90-day bank bill rate - a rate which as it happens is heavily guided by the level of the OCR.
Raised eyebrow
So, through this, you might say, "raised eyebrow" method of forecasting the RBNZ can imply when it thinks it will be moving the OCR based on where it is forecasting the 90-day bill rate to be.
In that last MPS the RBNZ was forecasting a bank bill rate of 2.7% in the March quarter next year, rising to 2.8% in June and 3% in September - suggesting the first OCR hike sometime around or just after June.
The key point to watch out for in next week's MPS then - given that the chance of an actual rate hike now is given as zero - will be that interest rate track for next year and whether it will have changed from the June MPS.
In any event many economists have been picking the first upward move to come earlier than June.
When the RBNZ last made a decision on interest rates on July 25 it took what the market perceived as a more "hawkish" stance on possible future monetary policy, leading to reasonably sharp rises in wholesale interest rates.
Around the houses
The central bank has been concerned about rising house prices. The concern has two main prongs to it. First, any house price bubble that were to "burst" could potentially have an impact on the country's financial stability given the heavy exposure of our banks to mortgage lending. Second, if house prices were to really run away this could lead to the "borrow and spend" behaviour seen in the mid 2000s - which would fuel inflation.
Therefore the RBNZ's tried to bash in two nails with one hammer by applying "speed limits" on high loan-to-value (LVR) lending from October 1. See here for articles on LVRs.
The move is mainly seen as one to shore up the financial stability - but the RBNZ is hoping it might help deal to those pesky house prices.
In the meantime though, there is some potential evidence that the house prices in that troublesome Auckland might be starting to deal to themselves - though given that we are only at the start of spring it would be dangerous to jump to conclusions yet.
Additionally, fixed mortgage rates have been moving up in recent days.
A more benign view
What this all means is that the RBNZ might have a more benign view of where house price inflation is heading than it did in its last MPS in June when it was picking a peak of about 11% for next March.
Westpac chief economist Dominick Stephens reckons the RBNZ will in its forthcoming MPS continue in a similar vein to its July 25 OCR release, "but such hawkish commentary will be tempered by the elephant in the room – the MPS will mention that the outlook for house prices has weakened on two fronts. First, the RBNZ recently restricted bank lending to low-equity borrowers. Second, fixed mortgage rates have risen sharply in recent weeks".
"Either or both of these developments have the potential to slow house price inflation – but it is too soon to discern the magnitude of any impact just yet.
The best response
"We believe the Reserve Bank’s best response to these developments will be to wait and see what happens before committing to a change in monetary policy. The impact of LVR restrictions on the housing market is highly uncertain, but with inflation currently below target and forecast to rise slowly, the RBNZ has time on its side and can afford to take a back seat while the LVR restrictions work through the system."
However, ASB economists believe that the RBNZ is likely to formally incorporate its expectations for the impact of LVR limits into the forecasts in its September MPS.
Chief economist Nick Tuffley, senior economist Jane Turner and economist Christina Leung said in their preview of the MPS that recent economic developments, showing a strengthening economy, would imply - on their own -a higher 90-day bill forecast.
"In particular, the [NZ dollar] has declined since June, Fonterra has revised up its milk price pay-out twice and medium-term inflation expectations have lifted," they said.
Into the mix
"However, the RBNZ has also recently introduced high loan-to-value lending growth limits which take effect from October 1. We expect the RBNZ to incorporate an economic impact of these new rules in the September forecasts, revising its bullish house price inflation forecast lower and reducing domestic inflation pressures.
"Depending on how much impact the RBNZ expects the new rules to have, it could provide the RBNZ with a relatively unchanged interest rate outlook from June. Such an outcome would reduce the risks of the statement from placing any further upward pressure on the NZD and interest rates, as was the case in the less-dovish July OCR review."
The ASB economists said the extent to which the RBNZ's house price inflation forecasts were revised lower "will provide a guide to how much impact the RBNZ believes its new rules will have (RBNZ research suggests 1-4% lower house price inflation over the first year)".
Modest impact
"As it stands, we expect the impact will be modest, and have left our house price forecasts unrevised, with house price inflation peaking at 9% in March 2014 (in the absence of restrictions we may have revised these up given new listings in Auckland remain low)," they said.
The ASB economists still expect the RBNZ will start to lift the OCR from March 2014, gradually reaching a 4% peak in late 2015.
"In the absence of the LVR restrictions, the risk to our view had been creeping to a slightly more aggressive OCR outlook," they said.
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