Reserve Bank Governor says 'some further easing' in OCR still likely, but conscious of impact low rates have on housing demand and higher price inflation

Reserve Bank Governor says 'some further easing' in OCR still likely, but conscious of impact low rates have on housing demand and higher price inflation

Reserve Bank Governor Graeme Wheeler says the central bank's still likely to further reduce official interest rates, but is conscious of the potential impact on the housing market.

The RBNZ last month lowered the Official Cash Rate to 2.75% and indicated that it may reduce rates further, though the markets are finely balanced in their opinion of whether such a reduction will come when the next OCR decision is made on October 29, or if the RBNZ will "pause" at least till its December review.

The latest comments from Wheeler are being taken as a clear sign that the RBNZ will hold off on moving rates at the next OCR decision. Westpac chief economist Dominick Stephens said the comments "firmed up our expectation that the October OCR Review will return an on hold decision".

Wheeler told the Institute of Finance Professionals New Zealand (INFINZ) annual conference in Auckland that while there has been a great deal of economic uncertainty and turbulence around the world, recent economic indicators have been more encouraging.

"Some further easing in the OCR seems likely, but this will continue to depend on the emerging flow of economic data. At the same time, however, we remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation. It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly.”

The RBNZ is charged with maintaining inflation between 1-3%, with more recently an explicit target of 2%. However, it has for some time now fallen well short of the target. New inflation figures out on Friday are expected to show annual inflation still only around 0.4%.

Wheeler said the Policy Targets Agreement the RBNZ has with the Government explicitly recognises "as has been the case", that annual headline inflation may fall outside the target band because of exceptional movements in commodity prices.

"The medium-term focus of policy means that the Bank does not try to immediately correct deviations of inflation from its target range, but aims to do so steadily over time.”

Wheeler said the PTA also requires the Bank to have regard to the potential impact of its monetary policy decisions on financial imbalances in the economy.

“We have used macro-prudential policy instruments and some prudential management interventions to help reduce the risks to the financial system and broader economy associated with a potential correction in Auckland house prices. Although financial stability considerations are secondary to the price stability objective in the PTA, housing market considerations do influence our thinking on the OCR.”

Latest housing sales figures out this week show that the Auckland housing market has continued to roar ahead, but also that other parts of the country - particularly those adjacent to Auckland - are now picking up too.

The RBNZ has new measures targeting Auckland investors taking effect from next month in an effort to rein in Auckland prices.

The RBNZ's next official statement on financial stability comes with its six-monthly Financial Stability Report to be released on November 11.

COMMENT BY DAVID HARGREAVES:

While at first reading the Governor's latest speech backs up the sentiments expressed in the September Monetary Policy Statement there appear two clear, though subtle, changes of emphasis. Firstly, Wheeler talks about more "encouraging" recent economic data - which I would take to allude to the sharp rebound in diary prices.

Secondly, and intriguingly, is the increased emphasis again on house prices.

Taken together these two things would suggest that the RBNZ's still seeing only one further cut to the OCR at the most and that it's probably going to pause for breath at the OCR announcement on October 29.

In general terms the RBNZ has backed off on house prices since announcing the moves on Auckland investors back in May. In general terms also, the house prices have been referred to as a 'financial stability' issue. Remember, the setting of the OCR is a 'monetary policy' issue - dealing specifically with inflation.

Well, now here we've got the Governor talking about house prices in terms of potential inflationary impact - but at a time when there's no inflation in sight - other than through the RBNZ's windscreen! House prices as such are not included in inflation - they only become an inflationary issue when they feed into 'secondary' inflation such as costs of building supplies, consumer durables etc.

To me, these latest comments from Wheeler demonstrate the increasing conflict between the monetary policy role of the our central bank and it's financial stability role. The two roles are getting in each other's way.

It will be of great interest in the marketplace if the RBNZ does hold off on further rate reductions because of the state of the house market, which is now clearly showing signs of heating more generally around the country. I think if it becomes widely perceived and understood that the RBNZ's holding up interest rates because of the housing market, then the Kiwi dollar is likely to rise again - which would likely reduce inflationary pressures.

The Government's been showing increasing signs of impatience at how far from the inflation target the RBNZ has veered. If the inflation the RBNZ's expecting to come through strongly in the New Year doesn't emerge (and I've already said I can't see it) then something is going to have to give.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

18 Comments

Comment Filter

Highlight new comments in the last hr(s).

Just jawboning. Nothing to see here.

Jawboning ? I doubt it very much , I reckon we are actually at risk of deflation

Just go into the provincial capitals and surrounding towns and see what is not happening. You can park anywhere you like and shops are closing. People are worried about their employment if they are employed at all and are just not spending unless it is necessary. Talk to the local retailers, hairdressers and takeaway businesses. Takings are down. Interest rate reductions are necessary to give oxygen to the economy otherwise it will get worse. Being involved in retail I know. We are about to make staff redundant for the first time ever and it is not a nice prospect to think about. But we need to do it otherwise the shop will close. Funny how the landlord is not asking us how it is going.

If he sees the need to drop interest rates further the economy must be in worse shape than many believe.This means more unemployment and less money put into businesses to grow them. Anyone who wants interest rates to drop should really think about what they are wishing for. Reserves Banks only drop interest rates to stimulate struggling economies. They are not doing it because they are fine fellows.

Spoke to an Auckland rep visiting the shop yesterday. He said many Aucklanders were upgrading their existing properties as they felt it was cheaper to do that than shift to a more expensive home.

I reckon the economy is doing just fine , but what actually happens if inflation falls below ZERO ?

That would almost be an oxymoron, ie the economy overall cannot be doing well when its deflating overall. Also add that the OCR figure is the average, ie at +0.3% but with some areas like rates at 4% there must be other areas that are negative.

Inflation fell below zero (again) here in the U.K. yesterday. The sun will still rise tomorrow.

Beef prices are falling, another problem for rural NZ. This won't be an easy fix.

Bearish on cattle

But Goldman was particularly downbeat on prospects for the livestock complex, foreseeing a drop in prices of 20% over the next year, which would make it the worst performer in the commodities complex on the bank's estimates.

That fall would come on top of a 15.6% decline already in 2015, although livestock investors achieved a positive 27% return last year.

The bank was particularly downbeat over Chicago live cattle futures, for which it cut its price forecasts by up to 25 cents a pound, seeing values in a year's time at 120 cents a pound.

The October 2016 contract was trading on Monday at 131.075 cents a pound.

The bank flagged, over the short term, "competition [for US beef] from foreign and alternative domestic meat supplies, particularly chicken, and weaker seasonal demand", with longer term price falls coming "as the herd rebuilding process exerts ongoing downward pressure".

For lean hogs, the bank forecast prices averaging 65 cents a pound in a year's time, below the 69.475 cents a pound October futures were trading at, citing the threat to US exports from a stronger dollar.

Stupidity comes in overpaid hunches.

A leaked memo....

Dear Leader,

Let us try this next, or maybe that, or possibly OH, I dunno..I am loosing interest.

I ain't got nuffin in Reserve, It is such hard work, this fiddling the books.

I quit.

You have a go...

Signed,

Mr Bernanke, Mr Bollard & Co.

It finally clicked low inflation means stimulation via monetary policy required. That just happens to be the RBNZ mandate it has been ignoring for the last year.

Now with all the xenophobia the best source of income for the NZ economy, being the flow of ill gotten gains from China to the Auckland property market, is now about to dry up. Hunker down people for a tight few years.

On the bright side, my prediction of two OCR cuts this year and sub 4% mortgage rates looks guaranteed now:) Way to screw the pooch Key and Wheeler.

While OCR is a blunt instrument inflation between 0.1-0.4% is very different from the 1-3% range. RBNZ are expecting the NZD to remain low but it's not going to happen. Despite the change with the stronger USD there is still a huge demand for our currency which is pushing the exchange rate up. The amount of foreign money chasing property is still large, and it is making the RBNZ forecast wrong.

More rate cuts are coming. Too bad RBNZ is too slow to decrease the OCR and too fast at increasing it.

as are most all if not all CBs.

What happens if or when these rocket scientists realise that we are experiencing deflation .

There are signs of deflation everywhere other than Auckland houses , car showrooms are full , white goods are not moving

And ,

Monetary stimulation is not working
There is deleveraging everywhere ( even we are trying to run a budget surplus )
There is overcapacity everywhere on earth
There is weak demand
Prices of commodities have halved ( even dairy has been affected )
There are currency wars by countries trying to devalue to get an advantage ( even China )

thats becuase rate cuts have gone into unproductive housing. as more and more are renting the cuts are affecting less and less people so the spend is not increasing.
until they come to grips with that and put measures in place so housing is not attractive except to live in then expect OCR cuts to have less and less effect over time

Looking at what people are doing with personal finances supports deleveraging. A lot of the people I help online (mostly in the US) have debt and spending problems. The majority of the people coming to online communities for help are getting their personal finances turned around with the first thing being addressed is debt repayment. Then second cutting unnecessary expenses and consumerism.

All the people I'm helping are reducing debt and spending.

The OCR affects mortgage rates only and has no impact on personal loans. Most personal loans from banks are 19%+, even P2P lending starts at 9.99%. There's a lack cheap unsecured money that would mostly go to consumer spending. The fact that a large proportion people go to P2P lending for debt consolidation speaks volumes.

The bottom 50% of earners have little or no spending money so there's not going to be any significant demand that would fuel inflation.

As a long-term landlord with infinite patience, I of course have my bases covered.

If the RB cuts interest rates, a result is rising house prices. If the RB increases interest rates, a result is rising yields on assets, property included.

Mr Wheeler, do your best... I will be doing my best too.

Life's good in landlord land.

Sorry mate, interest rates rise and property yields rise implies prices fall and you lose!

That is why the market, particularly Auckland needs to correct now, so that when the cheapest interest rate is 7% (at some point it may be, remember floating is currently 6% and if the RBNZ were to put some sort of levy or restriction on fixed term rates, floating could be the norm).

Hence if someone is buying an investment at a 4% yield just because interest rates are 4% but they move to 6%, then if yields move the same you just lost a third of your asset value. Remember rents seldom move in respect of interest rates.

So if your mortgaged to the hilt, you're screwed.

Right now my mortgage is less than 5% (yes five percent) of my total asset value. Even though interest rates are low, I would only consider absolute bargains at the moment and am being extremely cautious.