Bernard Hickey details the top 10 things he learned from the Reserve Bank's Monetary Policy Statement and picks out 5 key charts

By Bernard Hickey

Sometimes it's useful to pick out a few key moments and learnings from a set piece announcement and the following news conference. So here's my 10 'takeaways' from the Reserve Bank's December Quarter Monetary Policy Statement (MPS) and a 45 minute news conference with new RBNZ Governor Graeme Wheeler and his key officials. I've also updated with the key things from Wheeler's appearance in front of the Finance and Expenditure Select Committee.

1. No worries about LVR action...yet

We quizzed Wheeler and his deputy Grant Spencer in depth on this. The summary is the Reserve Bank is working with Treasury and the Finance Minister on a Memorandum of Understanding about how to use macro-prudential tools including Loan to Value Ratio limits, Counter-Cyclical Capital buffers and capital risk weightings. Wheeler said he had met Finance Minister Bill English and talked about them yesterday.

However, he said he wouldn't be using them with the current national house price growth of 5% and lending growth of 2-3%. "At present we don't see we would need to use macro-prudential instruments," he said, adding however that could change if the housing market doesn't moderate as expected. Deputy Governor Grant Spencer ruled out using regional LVRs, saying they would be too easy to fiddle.

2. No worries with housing...yet.

The Reserve Bank has noticed the pickup in the housing market in Auckland, but expects house price inflation to moderate as the 'supply response' of more house building added to stocks. It also said the current pickup in house price inflation was not likely (corrects from would in earlier version) flow on into household spending as it did during the mid 2000s, and it didn't expect it to create generalised inflationary pressures.

Wheeler later said New Zealand house prices appeared expensive relative to the rest of the world, but when prodded also told us he had just bought a house in Wellinton after returning from overseas.

3. No worries about unemployment

The Reserve Bank is forecasting economic growth will rebound to 2.5-3% over the next couple of years and that a current output gap of minus 1.4% (ie surplus capacity in the economy) will be eaten away over the next couple of years and drive the unemployment rate down to 4.9% by 2015 from 7.1% in 2013. The RBNZ expects the growth to come from the Christchurch rebuild and a recovery in residential construction elsewhere.

4. New Zealand's own fiscal cliff

The Reserve Bank estimates the 'cumulative negative fiscal impulse' from the government's fiscal tightening to get to a surplus in 2014/15 will be around 4% of GDP. That's the same 'negative fiscal impulse', albeit over a longer period, as the US 'Fiscal Cliff' tightening that would be triggered without a deal between the Democrats and Republicans by January 1.

Essentially, the Reserve Bank is expecting the construction sector to pick up the pace as the government steps back. There's little mention of a pickup in the export sector. The Reserve Bank actually increased its forecast for the Trade Weighted Index.

5. Retail interest rates are forecast to fall

The Reserve Bank didn't make a song and dance about it, but it forecast retail mortgage rates would fall over the next year despite there being no implied cut in the Official Cash Rate. Then it expected them to rising slowly through 2014. This is because it's noted the more intense competition between the banks and because the weighted average marginal funding costs have fallen around 30 basis points over recent months.

6. The Reserve Bank is sceptical about the jobless figures

The Reserve Bank spent a lot of time in the MPS pulling apart the sharp rise in the unemployment rate to 7.3% in the September quarter. It says the Household Labour Force survey overstates the degree of deterioration in the economy in the second half of this year.

7. Tourism and manufacturing are tanking

The Reserve Bank included a useful discussion and chart showing just how much some parts of the internationally exposed parts of the economy are struggling. Manufacturing, both for export and for import substitution has been weak to flat for a decade, with the import substituting part taking the biggest hit.

"While prolonged weakness in the New Zealand construction sector substantially accounts for the decline in domestic sales, the fall and subsequent downtrend also coincide with a higher exchange rate," it said.

8. This is now the weakest recovery since at least the 1960s.

The Reserve Bank didn't make any comments around this, but I found the chart fascinating.

9. Wheeler would use macro-prudential tools before the OCR

The Reserve Bank included a discussion about asset bubbles, house prices and the risks of such bubbles spilling over into inflation and creating problems within the banking system. Box D on page 20 was non-committal about how the Reserve Bank might use macroprudential tools and whether it would use them as well as or instead of using the Official Cash Rate. Box D suggests it might simply hike the Official Cash Rate to cool down an economy inflated by a housing bubble.

But in the questions in the news conference afterwards, Wheeler said the bank would use macro-prudential tools 'in the first instance' to lean against an asset bubble that threatened prudential stability and inflation. See the video above for more detail on that. He did include some caveats that if an asset bubble was more dangerous for the banking sector then macro-prudential tools would be appropriate, while an asset bubble threatening higher inflation may cause the bank to use the OCR.

10. The RBNZ is quietly querying the banks about their high LVR lending

Wheeler said during the news conference the banks officials were regularly talking to bank executives and boards about their higher levels of high loan to value ratio lending.

But when pushed, Spencer said he was not concerned about the 80-90% plus LVR lending...yet.

Later in the Finance and Expenditure select committee Spencer said annualised credit growth in recent months had been running at around 5%, which was also not a concern yet. If the growth continued to accelerate in tandem with significant growth in high LVR lending, then the Reserve Bank would become concerned, he said.

(Updated with charts and detail from the FEC meeting)

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So manufacturing and tourism are in trouble but the economy is fine? Really? 
As far as the weakest recovery since 1960. The gold exchange standard was abandoned in 1971, so stats before then are not as relevant. The US can and will create credit with no limit or cost.
These are very difficult times for savers (as opposed to gamblers), those looking to put a few bucks away for a rainy day. We are witnessing a slow default of sovereign debt, other side of that balance sheet is pension plans.

The Reserve Bank is sceptical about the jobless figures.
As I said before, the unemployment figures would be revised downward. Here it is straight from the horses' mouth, so to speak.
However, a New Zealand Fiscal Cliff. My, my, aren't we just like big brother, only smaller!
We have the mettle to not be, only we choose not to use it. Must be a legacy of the Clown, I mean Crown, dominance and our peasent, I mean pleasent, disposition.
Wake up people!

they must be joking - 4.9% unemployment by 2015????
The Christchurch rebuild will be no where enough to exert that kind of change given ChCh's small proportion of the country's population, and despite what he says there will be minimal construction rebound outside Christchurch. The only chance for a decent rebound in Auckland is "if" (and its a big "If") the Council gets its new Unitary Plan right. The earliest that its likely to be operative is from 2016.

Maybe we should ask for his resignation if its 7%+? because holding the OCR where it is is one sure way of making 4.9% a joke IMHO.
Strikes me that for the last 4 or 5 years such ppl as this have been predicting that 2 or 3 years down the line all will be getting better...just hang on in there....we know its going to get better, trust us.
The long term and indeed medium terms trends say very much no.

How accountable are these mugs with their predictions? Gareth do you know? It seems all too easy for them to fall back on excuses like "unexpected global volatility"

It's encouraging that the RBNZ is developing macro-prudential tools...hopefully Bill English is pushing this along ASAP, because if another 2000's style bubble develops National will be in trouble at the next election...a supply side response to the Auckland housing market is several years away which gives plenty of time for credit growth to take off.
Also, it looks a bit silly how Wheeler balances his glasses on his nose...not great body language.

Wasn't just the glasses. Head down, rocking from side to side, folding and unfolding arms. Either nervous about public speaking or no authority/confidence in what he was saying. Grant Spencer tugging his ear too while speaking. Made Bollard look like a Pit Bull. Hard to see him striking fear into the alpha bank CEO's.
I used to think English got it and was ready to act against a property bubble. He seems to have stepped back into line of late.

This government is due to be out on its ear in a couple of years. Labour isn't and won't be a credible alternative..... but there's beginning to exist a significant vacuum for pissed-off right-of-centre voters. This will either be filled by someone horrid like Winston, or perhaps someone new. where for them to lemmings they will vote and vote National IMHO.
The p*ssed off to watch are the swing voters at the centre...

The only trend I can see right now is the desertion of Labour for the Green's......7 to 11%, 14seats, now the suggestion is 17seats....the million dollar Q is, why?
Green issues?  "socialist?" what %?  Sue Bradford etc and Locke went bye byes. (good riddence) the former is suggested....
Meanwhile National"s % is declining....

3. So 2% off un-employment is 2 years, sorry but this sounds more like a party political broadcast on behalf of the National party...
This suggests a robust recovery........Lets see, exchange rate exporting manufacturers? cant see it.....Wage increases to get ppl confident and spending? cant see it
That leaves only one way, housing boom in an already overly  represented  sector of our economy.
or maybe an ocr of <1%.
Lets be more realistic and say the present global mess doesnt imploded things, the RB nails 2.5% to a everything flat.......
I should make a date in my callender every 6months to remind myself just how well this is going.
Personally I think under 6% is a big ask and 8% more likely.....but then gamblers r us seems to be the name of the game....

yes it an interesting forcast, how could you get that unemployment number down,  more them to aussie, chk, spend all the EQ money in Canterbury before the election, chk.. and what do we really need...following our mates in the US... lets play with the definition, move them over to other benefits and what about the collection of stats.... and don't forget to count those discourage workers real quick.

4.9% would be described as the "normal" or structural un-employment rate, or at least close to it.  That means inside 2 year the RB expects to see a significant recovery well underway.  That means inside 12 months we have to exit this recession and be showing lots of good signals that is the case.  It also has to be a global exit....NZ cant exit on its own.
Right now we see diddly improvement.  The best indicator is tax take is 6%? below expectations, another inflation is 0.9%....that should be telling the RB that we are not out of the woods.
So to get a significant chnage in direction ie first stop the deterioration and then point us up needs a big jolt, that sthe OCR to <1% nothing else is left....meanwhile they intend to sit and do nothing.
I cant for the life of me do anything but conclude this is the wrong man for the job, though to be fair not that Im sure there is a right man.

Another 2 cents.  Recoveries after a financial recession are always slow and always are almost jobless. Meanwhile the RB see's a 40~50% cut in unemployment in a very short time frame.
So, yes unless you throw them into useless make work to fudge the stats, it appears to fly in the face of previous events.
That leaves, delusion....

I agree cant see how this could be achieved in reality...I work with clients across the country.. some bright spots however overall things are flat and cashflow worse. I always look at the GST forecast, we are 5% below projected only four month into current Govt. fiscal year..that is telling. 

Why would regional LVR's be easy to fiddle? Far as I know you can't teleport a section or house to another part of the country. You could make LVR's as targeted as you like down to a suburb or street level if you wanted too. Banks do it with 50% LVR's on apartments under a certain size.

So a blast from the past, just how well did the RBNZ do?

4.9% un-employment, well 5.7% and maybe climbing,

Not impressive....especially as I expect the trend was also expected to be declining?

Blast from the past 2012, RBNZ on Housing?

"The Reserve Bank has noticed the pickup in the housing market in Auckland, but expects house price inflation to moderate as the 'supply response' of more house building added to stocks"

I think they got that one way wrong....