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RBNZ holds Official Cash Rate at 2.5%, as expected; plans to keep OCR unchanged through to end of 2013; warns again on house prices, NZ$

RBNZ holds Official Cash Rate at 2.5%, as expected; plans to keep OCR unchanged through to end of 2013; warns again on house prices, NZ$
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By Bernard Hickey

The Reserve Bank of New Zealand has held the Official Cash Rate (OCR) at its record low 2.5% as anticipated and has repeated its expectation it plans to keep it there through 'the end of the year'.

But the bank also re-issued warnings about a surge in house prices and the stronger-than-forecast New Zealand dollar, but gave no indication about what it would do about them.

The New Zealand dollar spiked half a cent immediately after the announcement as traders viewed the statement as more relaxed about the high currency, allowing it to rise.

"The only surprise in the statement came regarding the RBNZ’s comments on the exchange rate," said ASB economist Daniel Smith.

"The NZD has appreciated further since the March MPS and was well above the RBNZ’s forecast going into today’s announcement. Market participants were therefore anticipating another attempt to ‘jawbone’ the NZD lower through aggressive language. There was little of that on display, though, with the RBNZ reiterating once again that the NZD is “overvalued” but offering no warnings on policy responses should that remain the case," Smith said. "Following the March statement’s much-discussed ‘scenario’ discussing possible rate cuts in response to a continually strong NZD, today’s statement seemed fairly sanguine by comparison."

The currency's strength and the surge in Auckland's housing market have highlighted how the Reserve Bank is struggling to deal with these twin pressures while focusing on keeping consumer price inflation within the bank's 1-3% target band with a single tool of the OCR. The bank is preparing a set of macro-prudential tools to cool a surge of high loan to value ratio lending in the hot Auckland housing market. It made no comment about these tools in its statement.

The statement from the Reserve Bank stopped short of suggesting the bank would hike the OCR to slow the housing market, which it has hinted at in previous statements, speeches and news conferences.  Its risk is that a hike in the OCR to slow the housing market would lift the currency even higher, pushing inflation and the export sector further down.

"House price inflation is high in some regions, despite prices already being elevated. The Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of supply," Reserve Bank Governor Graeme Wheeler said in the short statement. The bank's next full monetary policy statement is not due until June 13.

“The New Zealand dollar remains overvalued and is higher than projected in March. Further appreciation has occurred partly in response to the announcement of a substantial quantitative easing programme in Japan. The high New Zealand dollar continues to be a significant headwind for the tradables sector, restricting export earnings and encouraging demand for imports," the bank said.

“The CPI increased 0.9 percent in the year to the March quarter and is expected to remain close to the bottom of the target range this year. Weak near-term inflation prospects need to be balanced against our projection for inflation to gradually rise towards the 2 percent target midpoint." “At this point, we expect to keep the OCR unchanged through the end of the year.”

Market and economist reaction

Economists and the markets interpreted the comments as more neutral than expected and relatively relaxed about the high New Zealand dollar.

"The fact that the statement did not attempt to ‘jawbone’ the NZD down, as has been done on previous occasions, saw the currency jump about half a cent higher against the USD. It appears many in the market were anticipating more opinionated comments on the NZD," said ASB Senior Economist Jane Turner.

The Reserve Bank appears stuck on the horns of a dilemma, economists said. It cannot hike the OCR to slow the housing market because that would push up the currency more and push down inflation. It can't cut the OCR to drag down the currency because that would add more fire to the Auckland housing market. 

"Rising housing market pressures remain a key concern, with the RBNZ continuing to highlight the financial and inflation risks given further strengthening in the housing market," Turner said.

"The strong housing market and high NZD remain a key tension for the RBNZ," she said.

Westpac Chief Economist Dominick Stephens said the statement was neutral as expected, although currency markets interpreted it as the Reserve Bank dropping its attempt to jawbone the currency lower.

"The RBNZ is still sitting on the fence between two diametrically opposed risks," Stephens said.

"One risk is that the strong housing market and the Canterbury rebuild provoke greater economic growth than anticipated, requiring earlier or more aggressive OCR hikes. The opposing risk is that the exchange rate remains high or goes higher, thus suppressing inflation and delaying the need for OCR hikes for a long while," he said.

"There is no need for the RBNZ to decide between these risks at present. We expect it will continue to sit on the fence until we have greater clarity around which risk is more poignant."

Stephens changed his pick for when the Reserve Bank would hike the OCR from December to March.

"The RBNZ has time on its side. Consequently, we now expect the OCR will remain on hold at 2.5% until March 2014 (previously we were forecasting a hike in December 2013). This change in call is a consequence of ongoing low near-term inflation, and brings us broadly into line with financial market pricing. The OCR hiking cycle that we envisage is modest by historical standards, but is far greater in extent than financial markets are currently prepared for."

Here is the full Reserve Bank statement:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent. Reserve Bank Governor Graeme Wheeler said: “The outlook for monetary policy remains consistent with that described in the March Monetary Policy Statement.

“Despite continued strains in Europe and disappointing data in some countries most recently, global financial market sentiment remains buoyant and the medium-term outlook for New Zealand’s overall trading partner GDP growth remains firm.

“Growth in the New Zealand economy has picked up. Consumer spending has increased and rebuild activity in Canterbury is gaining momentum. House price inflation is high in some regions, despite prices already being elevated. The Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of supply.

“Fiscal consolidation is constraining aggregate demand. In addition, drought has lowered agricultural production and will likely also negatively affect farm output in the coming season. International dairy prices have spiked higher in response to the drought, but these price gains could prove temporary.

“The New Zealand dollar remains overvalued and is higher than projected in March. Further appreciation has occurred partly in response to the announcement of a substantial quantitative easing programme in Japan. The high New Zealand dollar continues to be a significant headwind for the tradables sector, restricting export earnings and encouraging demand for imports.

“The CPI increased 0.9 percent in the year to the March quarter and is expected to remain close to the bottom of the target range this year. Weak near-term inflation prospects need to be balanced against our projection for inflation to gradually rise towards the 2 percent target midpoint.

“At this point, we expect to keep the OCR unchanged through the end of the year.”

Reaction from ASB's economists:

The RBNZ’s comments on the NZD were slightly more neutral than expected. The statement notes that the NZD is still overvalued, and at 77.8 (pre-announcement) the TWI is currently well above the RBNZ’s March forecast of 75.6.The RBNZ does offer an explanation for much of the increased strength in the currency, though; Japan’s announcement of an aggressive programme of quantitative easing and further subsequent weakening in the JPY.

That explanation could be interpreted as partial justification for recent appreciation and perhaps as an acknowledgement that there is little that can be done to lean against the high NZD. The fact that the statement did not attempt to ‘jawbone’ the NZD down, as has been done on previous occasions, saw the currency jump about half a cent higher against the USD. It appears many in the market were anticipating more opinionated comments on the NZD.

Growth and inflation In line with our expectations, the RBNZ notes that its outlook is broadly unchanged from its March MPS. Whilst noting the recent pick-up in the NZ economy, the central bank also highlights the constraining effects of fiscal policy, the drought and the NZ dollar over the coming year.

Nonetheless, rising housing market pressures remain a key concern, with the RBNZ continuing to highlight the financial and inflation risks given further strengthening in the housing market.

The strong housing market and high NZD remain a key tension for the RBNZ. Given the RBNZ’s growth outlook appears to have changed little since the March MPS and the Q1 CPI was in line with RBNZ expectations, the RBNZ’s inflation forecast is likely to remain broadly unchanged from March.

The existing tensions between housing market pressures and the elevated NZD have intensified since March. Although there was potential for a slightly more dovish tone given the recent appreciation of the NZD, the tone of today’s statement was similar to March. The RBNZ’s view on the OCR was unchanged, as it expects to keep the OCR unchanged through to the end of the year. 

We continue to expect the RBNZ to leave to the OCR unchanged at 2.5% until March 2014. Market reaction Reflecting the cautiously optimistic tone of the statement, domestic interest rates have ticked up slightly in the wake of the OCR Review. 

Reaction from Westpac economists:

The RBNZ issued a very neutral OCR review, as we expected. Markets were evidently expecting the RBNZ to express deeper concern about the high level of the NZ dollar. When this wasn't forthcoming, the NZD rose nearly half a cent and the two-year swap rate rose by 3 basis points.

The bottom line of the OCR review was a verbatim repeat from March: "At this point we expect to keep the OCR unchanged through the end of the year." However, the RBNZ opted to drop the preceding sentence, which referred to risks on both sides of the outlook. Instead, the body of the OCR review was a lengthy and factual summary of the various forces shaping the economy at present.

The RBNZ repeated its assessment that the exchange rate is overvalued. However, the degree of concern that it expressed about the high exchange rate was no different to previous statements. The latest appreciation in the TWI was blamed on Japanese quantitative easing. The RBNZ acknowledged that inflation is currently low, and is expected to remain "close to the bottom of the target range this year." However, the RBNZ is not too fazed by near-term inflation. Instead it emphasised its forecast that inflation will "gradually rise towards the 2 percent target midpoint."

Our interpretation is there has been no change in the RBNZ's stance. The RBNZ is still sitting on the fence between two diametrically opposed risks. One risk is that the strong housing market and the Canterbury rebuild provoke greater economic growth than anticipated, requiring earlier or more aggressive OCR hikes. The opposing risk is that the exchange rate remains high or goes higher, thus suppressing inflation and delaying the need for OCR hikes for a long while.

But the evolution from construction boom and rising house prices to widespread inflation pressures will be slow. For now, inflation is below the RBNZ’s target. And the latest rise in the exchange rate, combined with falling petrol prices, could cause inflation to drop even further in the short run. We agree with the RBNZ’s assessment that inflation will remain close to 1% for the whole of this year. And therefore we agree that the best course of action this year is to keep the OCR on hold while waiting and seeing what happens to domestic inflation.

Westpac’s OCR forecast 
The RBNZ has time on its side. Consequently, we now expect the OCR will remain on hold at 2.5% until March 2014 (previously we were forecasting a hike in December 2013). This change in call is a consequence of ongoing low near-term inflation, and brings us broadly into line with financial market pricing. The OCR hiking cycle that we envisage is modest by historical standards, but is far greater in extent than financial markets are currently prepared for.

(Updated with statement, market reaction, ASB economist reaction, Westpac economist reaction)

Official cash rates

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29 Comments

This is a good thing ... for now .....and Kiwis had better use this time of low rates to pay down their debts, because it cannot last forever  

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Boatman..if the historicals are anything to go buy , Kiwi's will use the breathing space to borrow more against the increased bubble value of the asset , so they can have and enjoy it all.................................................................................for now.

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Boatman,

...and Kiwis had better use this time of low rates to pay down their debts, "

Buaaahahahagahagaggggg...

Yeah right!

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And we pay Wheeler more than $500k for doing stuff all.

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So we pay firemen to do "nothing" most of the time, army? police?  ambulances? kind of critical when we do need them though.

So what should he do?  

He has no crystal ball, so he sits there until he can see which way he has to go and hopefully move quickly and firmly.  So I agree with doing "nothing"

regards

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So what should he do?

 

Keep managing perceptions that he is independent and knows what he is doing.

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At least that .!..ColinR... your seeing it....even the bean counters have become spin doctors, just that much more ...pizzzaz to it I suppose. 

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.

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Speaking of the N.Z. military Stevo , I see a large percentage of them are disatisfied with their jobs....and a good percentage of those are actively seeking unrelated employment.......or maybe Fiji where they can at least be a bit more hands on.

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That's cheap. Five hundred grand for F' All, that's all...? Some CEO make multiples of that...

All for F'All, and we pay it all y'all.

HGW

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I'm sure he'd say he's doing stuff all day...

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NZ maintains their high interest rate regime (Relative to all other developed countries).   There was no GFC, no major problems anywhere.  We're (sort of) booming with fixing a $25 billion hole in the SI.

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So we can take it the Macroeconomics whizzkid they brought in, ( um that's another fat salary BTW ) has not yet reached any conclusions in regard to cork in a storm navigation then.

 Well that's just great...float on Mcduff, steady as she goes..! 

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Yes better analogy there Ostrich, I was harking back to Bolly's repeated reference to the cork syndrome........ but as the S*%t and Fan are about to interface for the RBA, I think you are spot on in regard to externals ........never mind "our new best friends" are begining to squeeze the Aussie's to become a little more compliant , if they wish a little shelter from the advancing tempest.

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This is crazy holding the OCR at 2.5%  - surely he should have slashed it to 1.5% to save our exporters? Maybe next month.

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Because if there's anything this country needs, it's sub 4% mortgage rates.

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Actually sub-4% interest rates would be quite handy - it would give NZers a leg-up to repaying some of that record high level of personal debt a bit faster.

It can't really help house prices because the housing market is quite depressed everywhere except Auckland, and in Auckland there are no more properties left to buy.

Everyone else in the world is either steathily (UK, USA, China) devaluing their currency or just blatantly doing it (Japan) except for a handful of countries (NZ,Aus, South Korea) who are beginning to see a serious erosion of exports.

The RBNZ need to pull their finger out and drop rates to make the $NZ less attractive and make exports more viable before the only economy NZ has left is speculating on the Auckland housing market.

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"The RBNZ need to pull their finger out..."

Will that be their thumb, or their little finger?

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Um nope, not on John Boy's watch he won't  bigblue....tipping point coming for this Administration...nobody rocks the boat !, let the deckchairs slide about if you have to, ...but nobody rock the boat while we rescue those poor financial refugees money. 

 

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Between a rock.......crazy mortgage lending/valuations, and a hard place.....high (relatively) dollar killing exports.

Good luck RBNZ....all that alk of interest rates going up last week......really?

QE is accelerating and will not ease any time soon. Europe goes from woe to more woe.....

Cheers

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Well I'm sure in the spirit of de-coupling the Banks will see it your way Kimy......!  

 Gee Banks are great ..! that's what Bolly used to say.

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I'm sure you are right Christov.  But banks won't see it that way.  But then they are like that other government protected cartel called the electricity industry.  Banks need a shock to the system like the electricity guys just had.  (is that a pun ?  Surely not)

Anyway.  Some bank needs to brake ranks from the cartel.  And lower it's floating interest rate.

My view.  Will never happen under our cosy system.

 

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Awaiting salvation from our finance guru team of English and Key in the May budget?

Whoopee!

 

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"......is preparing a set of macro-prudential tools...." RUBBISH

Nothing will be allowed before the election 014....of course Key could decide his best option is to go early...!

 

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Not a problem!

He'll be out that much quicker.

HGW

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Consider that the OCR is 2.5% and is staying there for what looks like 8 months, despite the housing market over-heating.

That is telling me that if this had not occured the OCR would be under pressure to or actually drop.

So the RB has shown it will continue to clutch to the cliff edge of not dropping as long as it can.

That in turn tells me given the world looks worse every day we'll see pain ie un-employment and closures carry on rising in NZ...looks like an interesting year.

regards

 

 

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Rents are falling because many of those who recently bought, were previously renting.

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Rents in Chch are up about 50% from 2010 for good properties.

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Bank economists:

2009:  We expect rate rises by mid/end of year

2010: Watch out, rate rises will come thick & fast .... Chch rebuild

2011:  Rate rises will really kick in by March ,  no June,   no November    ...Chch rebuild

2012:  Rate rises will be coming:  Fix, fix, fix   remember 2003

2013:  Rate rises by March,   no June,   no Dec,    no now 2014  .... Chch rebuild

2014:   Rates .....   (Hey, somethings broken,  noones spending any disposable income or money,  what GFC?  what issues overseas?)

Come on Rates  -   get up,   we need to provide pressure, upwards, to fix & lockin customers,  ......    

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