RBNZ holds OCR at 2.5%, but raises forecast rate hike track by 10 bps; indicating OCR at 4.75% by early 2016

RBNZ holds OCR at 2.5%, but raises forecast rate hike track by 10 bps; indicating OCR at 4.75% by early 2016
RBNZ Governor Graeme Wheeler.

By Bernard Hickey

The Reserve Bank of New Zealand has held the Official Cash Rate at 2.5% as expected, but has increased its forecast for short term interest rates over the next two and a half years by a further 10 basis points.

Governor Graeme Wheeler said he expected the OCR to rise 2.25% over the next two and a quarter years.

The bank forecast in its December quarter Monetary Policy Statement the 90 day bank bill rate, which is a proxy for the Official Cash Rate and variable mortgage rates, would rise from 2.7% now to 4.8% by the beginning of 2016.

The rate track implies hikes will start near the end of the March quarter of next year and that rates would rise by around 100 basis points by the end of 2014. This expecation for 2014 was slightly less than market expectations before the statement, but the slight rise in the forecast for 2015 and 2016 saw the currency rise around half a cent. Wholesale interest rates didn't move much.

"The 90 day interest rate is projected to rise over the next few years by slightly more than we envisaged in the September quarter Monetary Policy Statement. This reflects the view that the terms of trade and domestic demand are somewhat stronger than foreseen in September. The effect of these factors is partially offset by a higher exchange rate than was assumed at the time of the September statement," the bank said in its full statement.

This is slightly more hawkish than Reserve Bank Governor Graeme Wheeler's comments in recent months that the bank expected mortgage interest rates to rise from under 6% now to as high as 8% by early 2016.

The bank said the expansion in the New Zealand economy was gaining "considerable momentum" as its terms of trade hit a 40 year high, household spending was rising and construction activity was lifting in Canterbury and Auckland.

The bank said continued government spending restraint and a high New Zealand dollar were partly offsetting the strength in domestic demand.

"The high exchange rate is a particular head wind for the tradeables sector and the bank does not believe it is sustainable in the long run," Governor Graeme Wheeler said.

He noted high house price inflation in Auckland because of low interest rates and rising net inward migration. The bank said its high Loan to Value Ratio (LVR) speed limit should help slow house price inflation, but the data seen to date was limited.

"We will continue to monitor outcomes in the housing market closely," Wheeler said.

The bank forecast inflation to increase to around 2%, the middle of its 1-3% target band, by early 2015.

"The extent and timing of such (inflation) pressures will depend largely on movements in the exchange rate, changes in commodity prices, and the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures," Wheeler said.

"The bank will increase the OCR as needed in order to keep future average inflation near the 2% target midpoint."

Here's is the bank's full summary statement issued with the decision.

The Reserve Bank today left the Official Cash Rate unchanged at 2.5 percent.

Reserve Bank Governor Graeme Wheeler said: “Growth remains moderate but mixed for New Zealand’s main trading partners.  Nevertheless, export prices for New Zealand’s main commodities, and especially dairy produce, have continued to increase.

“New Zealand’s GDP is estimated to have grown at over 3 percent in the year to the September quarter and the expansion in the economy has considerable momentum.  New Zealand’s terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by the Canterbury rebuild and the response to the housing shortage in Auckland.

“Continued fiscal consolidation and the high exchange rate will partly offset the strength in domestic demand.  The high exchange rate is a particular head wind for the tradables sector and the Bank does not believe it is sustainable in the long run.

“House price inflation is high in Auckland and other regions due to the housing shortage, and demand pressures associated with low interest rates and rising net inward migration.  Restrictions on high loan-to-value mortgage lending, introduced in October, should help slow house price inflation.  Data to date are limited on the effects of these restrictions.  We will continue to monitor outcomes in the housing market closely.

“Annual CPI inflation increased to 1.4 percent in the September quarter and inflation pressures are projected to increase.  The extent and timing of such pressures will depend largely on movements in the exchange rate, changes in commodity prices, and the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures.

“The Bank will increase the OCR as needed in order to keep future average inflation near the 2 percent target midpoint”.

Economist reaction

ASB Chief Economist Nick Tuffley said he continued to expect a March start to rate hikes and that the Reserve Bank's forecasts suggested a March/April start.

"The end point for the 90-day outlook is marginally, but not significantly, higher (4.8% vs. 4.7%).  The added emphasis the RBNZ has put on achieving the 2% target band mid-point, which led to the lower inflation forecasts, likely contributed to this upward revision at the margin given the extra wiggle room the higher TWI outlook gives the RBNZ," Tuffley said.

"The RBNZ has already incorporated into its forecasts two factors we saw that could delay the start of the OCR cycle: a later pick-up in residential constructions and a lower peak in house price growth.  We continue to expect the OCR to reach 4% by December 2015," he said.

ANZ Chief Economist Cameron Bagrie said the Reserve Bank had upgraded its interest rate outlook, but not as much as the market had priced in. He said he was not convinced the inflaiton outlook was as demure as the Reserve Bank had forecast through 2014.

"Despite our expectations there is some upside risk surrounding the near-term outlook for inflation we believe we’ll see an OCR profile that is milder over time given the global backdrop of low rates for an extended period," Bagrie said. "Our central scenario is still for the OCR to nudge up with three 25bps moves in the first half of 2014 and more in 2015," he said.

Bagrie noted the Reserve Bank had made no attempt to talk the New Zealand dollar down. "While the Bank do see justifications for exchange rate strength, the simple fact that the MPS was less upbeat than market expectations does, in our view, pose downside risks to the NZD," he said.

Westpac Chief Economist Dominick Stephens said markets had gone in to the statement pricing in the chance of a January hike, but the tone of the statement made that unlikely. He said the Reserve Bank's view looked similar to Westpac's own view of 100 bps of hikes over 2014.

"The remaining risk is the timing of the RBNZ's hikes. Our own call at present is that the first OCR hike will occur in April. However, we will adjust this call according to the risks outlined above, particularly next week's GDP figures," Stephens said.

TD Securities Economist Annette Beacher said the New Zealand had initially risen on the slight increase in the 90 bill forecast.

"However, as the Bank already expects cash rates to rise by +100bp next year, there is little room for pricing more aggressive hikes given the sticky exchange rate, and hence the scope for further NZD appreciation is limited in our view," Beacher said.

" Further, with a few hints at “wait and see” in the document, we encourage pricing out of any January hikes in the bill strip. Our OCR base case is +100bp to 3.5% by end-2014, starting March, and +100bp to 4.5% by end-2015, a return to the new neutral cash rate.  The risks in our view are towards reaching the neutral rate sooner, not that rates need to go higher," she said.

Political reaction

Green Party Co-leader Russel Norman said the Reserve Bank's warning about interest rate hikes next year meant New Zealand would be the first OECD country to hike rates, putting pressure on the exchange rate.

“Higher interest and exchange rates will effectively cost jobs, exports, and raise the cost of living for all those with mortgages," Norman said.

“Once again, New Zealand’s economic recovery is betraying the same underlying structural weaknesses of the last one; National has materially failed to rebalance our economy away from borrowing and consumption towards savings, investment, and exports," he said.

“National’s failure to address the Auckland housing shortage with a mixture of demand and supply-side measures are forcing the Reserve Bank to hike rates, hurting the real economy," he said.

“National’s failure to introduce a comprehensive capital gains tax (excluding the family home) has meant property speculators will continue to be rewarded at the cost of the productive economy and all those seeking to buy their own home."

(Updated with currency rise, economist reaction, political reaction)

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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NZ is not an independant entity. Next year there may be more severe global financial problems which will constrain the RBNZ from hiking even if they want to.
Our 'recovery' and inflation pressures are all at the big end of business not in the local internal economy. 
Perhaps cuts will be more in order next year?

That's right! Who needs information processing, complex modeling, etc. - just suck on your finger, then put it up in the air and post the result as a comment on this site! 

The clever complex models have been wrong for the last 4 years, so alternatives may not be so bad.  Maybe an environmental scan of the worlds economies may help.

"Maybe an environmental scan of the worlds economies may help."
You should email that idea to Wheeler, i'm sure the economists at the RBNZ have never thought of considering the state of our trading partners in their modelling.

Their rhetoric doesn't seem to include a global recession

I think there is a clear difference between the RB economists and the bank economists. The former I think now has an eye abroad, hence is slow to rise. The big 4 banks here, frankly  have been wrong for 4 years while screaming inflation! inflation!, recovery! recovery!

Keynesian and Minsky modeling pretty much says the economy is going nowhere as we are in a zero bound trap with huge debt and thats been the case for 4~5 years.
Everyone else it seems has been screaming mega-inflation, buy gold etc
Yet we see no inflation and even 2 years out not much and gold is down a lot.

Release the Kracken, plz !!!!!!  8)

FYI I've updated with currency reaction (up a bit), wholesale interest rate reaction (not much), economist reaction (on track for March hike) and political reaction (Green criticism)

Hello dtcarter
"Maybe an environmental scan of the worlds economies may help."
This statement is a little more serious than just looking at your trading partners---by the way NZ---- to an accross the ditch Australian you not doing to badly in regard to keeping your end up with your trading partners----
The people who suggest the above statement are thinking more along the lines that  environmental parameters should be inserted into the economic decision process. 
I wonder what your trading partners would think of  that piece of news?

So Bernard, what is a layman to do?.
Besides guess, that is.
The shambles that is an economy, is no where predictable, as the idiots in charge, scheme and rob each others countries, move their ill-gotten gains around and around and plug holes in the damn countries, all or most, leaking like a sieve.
So what do we make of New Zealand. Milk and Honey, or one big building site.
Maybe we should build Holdens.??, or coal skuttles for Solid Energy.
Where does one invest ones money.??...before they lighten then taper.??!!.
Truly, I would really like to know, so I can plan my future.
Not bail out someone bleedin elses.

"Not bail out someone bleedin elses", excellent dont whine and expect a baliout then.
"Where does one invest ones money.??  8><--- so I can plan my future" as a grown up, figure it out for yourself.
hint, not these "Maybe we should build Holdens.??, or coal skuttles for Solid Energy."

What to do indeed!
You might find this of interest, A E.:
"I see the future as completely different than a mere continuation from the 20th century past and the 21st century present. I even see the latter as very different from the former, since all we’ve really done in the new millennium is seek ways to hide our debts instead of restructuring them. You can throw a few thousand people out of their homes, but if you label the by far biggest debtors, the banks, as too big to fail, and hence untouchable, nothing significant is restructured. But that doesn’t mean it’s going to go away by itself, the by far biggest debt in the history of mankind. At some point it must hit us in the form of a massive steamroller of dissolving and disappearing credit. In a world that can’t function without it.
And if we refuse to consider even the possibility that the debt will crush us under its immense weight, and profoundly change our societies when it does, then we will be left unprepared. And lost. That should perhaps scare us into action, not denial. Denial simply doesn’t seem very useful. Is there a risk that business as usual will no longer be available? Yes, and that risk is considerable. But we plan our futures as if it’s non-existent. That is a huge gamble. Not to mention the worst possible kind of risk assessment."

Yep...."Not to mention the worst possible kind of risk assessment." and yet most  in here just carry on, business as usual.
I can but assume at some stage that we as a Nation will simply default on all the foreign debt and then just carry on.  What I think the creditors (USA and EU) dont get is that they have nothing real we want so we dont need to trade with them.  

Once again, New Zealand’s economic recovery is betraying the same underlying structural weaknesses of the last one; National has materially failed to rebalance our economy away from borrowing and consumption towards savings, investment, and exports," he said.
Russell Norman seems to be talking  in  circles....   He wants low interest rates... but he wants high savings 
He wants growth... but he wants us to move away from borrowing and consumption...
Sounds like his only tangible solution for high house prices is a Capital Gains tax....And maybe wave a majic wand to sort out the Auckland housing shortage...
Maybe Russell is the man to let us have our cake and eat it  too.

Yes, interesting.....if he understands peak oil then he must understand that doing something different to National yet  still growth orientated isnt going to work....
yet opens his mouth and says it anyway.  To busy buying votes it seems, sad.

FYI updated with comments from Bagrie and Beacher.

100bps for 2014.
We'll see...

Quite possible...
and a foretold outcome.

Hurry up and crank them up! They are artificially low and growth is surging....

If so, why is inflation 1.4%?

Suggested Answer : Inflation is low here due to the strong Kiwi $ masking price increases , and maybe deflation outside NZ  .
The deflation is maybe caused by excess capacity and poor demand in the first world 

How do you know its artificially low?
Where is this growth surge?

Inflation  is different at different income levels .
If you spend most of what you earn on food and rent , you are likely to have a dfferent outlook to someone say  concerned with the cost of a bottle of Moet en Chadon or the airfare for a family of 5 to Honolulu.
All up inflation is  low by historical stanards.
The growth surge idea is one I dont trust , especially the idea that retail is suddenly booming
Retail sales are said to be  up 4% , and I dont belive it .
Retail  sales include Building materials so its distorted by a specific sector .
Building materials sales should be seperated from ordinary retail sales and this will show the real picture in retail

I dont disagree with you, though I;d throw in age as well (as incomes), ie the young spend more on say mobile phones the cost of which has dropped substantial, OAPs hardly at all.
I dont think you really answered, "How do you know its artificially low?"  or is it actually the new normal, take Japan as an example, 3 decades of no inflation. I'd suggest this is the new normal.
Take the RB's prediction 4.5%? in 2 years and I think thats thier peak....hardly shattering to ppls pockets.
"Historically, well for  instance when you say historically really go back pre-industrial revolution and indeed hundreds of years, I'd suggest interest was quite low historically and that the last 70 say years is a "blip".
Retail sales, well blow me its almost xmas so up 4% plus discounting on many goods for months, so Im not surprised someones buying.
Building materials, I also have mates working in Chch as subbies and they are not short of work....so yes you could be right and maybe some areas are doing well.  Like I said I haunt M10, PM and Bunnings around wgtn and there are less staff on the floor and less staff manning the tills and less consumers and discounts, that speaks volumes to me.
Recovery? blah......

All four aces have been played.
The economy played the ace of hearts, its first ace, and we had the Industrial Revolution.
When the industrial revolution peeked, about the 1960's, unemployment started to climb and we needed another ace.
The economy played the ace of clubs, its second ace, and we had the Femanist Revolution. Up to this time the man was the breadwinner and conservative with his wages. But women gained their independace from these men and started shopping, and boy do they like shopping. The boom came mainly in cosmetic and fashion goods but this peeked about twenty years later. The economy needed another ace.
The economy played the ace of diamonds, its third ace, and we had the IT Revolution. Businesses started setting up IT departments and hiring staff to input lots of data into those computers. Then the final boom and bust was the millenium bug. After the bug was sorted another ace was needed.
The economy played the ace of spades, its forth and final ace, and the Credit Revolution was born.
Well we all know what happened next but now there are no more aces left to play
Can anyone seen something, anything, out there that is going to create another 20 year mini boom? I cant.
So, i suspect Wheeler is just trying to frighten people out of buying houses. Perhaps John Key had a whisper in his ear.

"Can anyone seen something, anything, out there that is going to create another 20 year mini boom?"
IT/GLobalisation/Cloud still going -   then
A Unified Global currency after a Reset?  (Euro being a test case / pioneer)
Then that can fixx all the structural problems -  well, mask it anyway.

The Ace in the sleeve - the growth of China, our free trade agreement with them and the fact that we produce things they want most.  Have you read about Fonterra recently, doesn't have the capacity to keep up with raging Chinese demand.  There is more opportunity in NZ today than there has been in the last 30 years. 

Happy123, my comment above was from a global point of view.
In reply to your comment
How long can NZ sit back and rely on dairy farms to save us, 1 year, 5 years, 10 years or even 100 years. As long as we are OK today we don't have to worry about tomorrow, "She'll Be Right"
Intensive farming, as dairy farms are, requires large quantities of antbiotics to keep the animals healthy. Added to this people take antibiotics at every sneeze they get.
The pharmaeutical industry will not invest billions of dollars in new antibiotics because they can become ineffective after a period as short as 6 months. There is no payback for them.
Now we are being warned about the real danger of supperbugs getting out of control. If that happens then goodbye intensive farming as well as the consequenses to people.
Relying on intensive farming for our future is gambling with our future.
We are enjoying some growth due to the Christchurch rebuild. No doubt our next savior will be the government borrowing to buy buildings so they can demolish them enmass and keep growth going. That is about the level of our succesive government vision, and maybe yours.

Yes it's very hard.   Especially when, as soon as some sectors see some growth the RBNZ stomps on it.
Any wonder the "Mom and Pop" of NZ never have any cash to spend on buying back their power companies.

Dr Norman reverting to type
What would a TAX & SPEND (Green&Red) coalition have done differently ?

As a long-term PI (not a speculator or trader or whatever...) I look forward to interest rate rises. Faster and higher will suit me thanks Mr Wheeler. 

you enjoy getting whipped (financially)?

he's long term.  higher interest rates reduces his competition, and he's established so he's in a position to pass his increased costs on to his customers.  He won't be getting the whipping, his poor tenants will be...and remember he's not the one waving the whip around....

Your comment betrays a lack of knowledge about property investing and how money can still be made in a high interest rate environment.
You are not alone however. The conventional view ( certainly on interest.co.nz) is high interest rates are bad for property so everyone thinks when rates rise it will be bad for the property market and hurt property business.
This is nonsense. Money is still to be made. But in a different way.
I wont be whipped by anyone. Nor will I be whipping anyone.

It's reported that closing down of Ford, Holden and soon Toyota could trigger a recession across the ditch.  If that's the case, RBNZ may have to revise their forecasts!

RBNZ will definitely be revising their forecasts downwards.
iPredict has the probablility of 100bps at 35%.  Reduce at 13%.

iPredict, a minnow in the consideration. The whole world view on NZ interest rates, the swaps OIS curve, is pricing in last I looked, closer to 125bps over 2014, and a further 100bps in 2015...The RBNZ itself is indicating that a  4.75% OCR possible within 2 years, not rates cuts, and not two rate cuts as often proported on here by one
Don't shoot the messenger, just know that's what all NZ and global participants in the NZ interest rate market think on average, rather than possibly only a few hundred iPredict players. Doesn't mean theyre right, but if you think "gamblers opinion" is worthy of considertion (and I agree) thats the weight of opinion of the best players in the game who actually beat real money on it rather than just talk.

All good rational pre-2008 economic arguments.
How do you account for the last 4 years of interest rate predictions of rises to be completely wrong? 
Perhaps we could bet $20 on ocr of 3.5 by dec 2014 (not 3.5 in my case) ?! 

Easy, the market got it wrong...whats that got to do with what I responded to. You actually were taking some notice of a forecast, iPredicts, and I was simply telling you that you might be better looking at the correct one, but I appreciate it doesnt suit your argument....e.g. your two cuts forecasts for the past two years...markets as obviously as bad as you in your forecasting right...and you cant get it right MB then surley the market can't ?

"The Market got it wrong"! Heresy...

Various commentators including myself were predicting the need for cuts before the Chch earthquake, when the RBNZ ill-advisedlly started hiking then had to back down.

The world has changed, hiking is not going to help NZ.

Yes guys, the dairy industry has it's backs to the wall, a real struggle, yeah right ? Or is it yes its doing bloody well for the moment but that can change ?  I'm just not sure what makes some people happy but I guess it's all in the personality of the individual . The facts are that anyone who did not fix back late 2012 or early 2013, when you were calling for two rate cuts MB, is at risk of a really big mistake if they are heavily levelered. Truth is, we can all debate to death what we think should happen because anything can in his environment, but I'm only ever concerned about what the RBNZ and market (in the case of long-term mortgage rates) will actually do. Fixed rates have already gone, and floating rates possibly/most likely in early 2014. 
Anyone who has sat and listened to the debate and run with the "two cuts" mentality, almost like they think their posting will influence the RBNZ/market!, is at major risk of having backed the wrong horse, not by a little, but by a lot. Of course it hasn't happened yet, may not, but are you stil betting on the two rate cuts ? P.s. Mb good call on predicting the earthquake but in 2010

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