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Economists expect RBNZ to hold OCR at 3.5% again, and target high NZ dollar, largely leaving the housing crisis in the Govt's hands

Economists expect RBNZ to hold OCR at 3.5% again, and target high NZ dollar, largely leaving the housing crisis in the Govt's hands

The Governor of the Reserve Bank of New Zealand (RBNZ) is expected to leave the Official Cash Rate (OCR) at 3.50%, when it's reviewed on Thursday (April 30).

This will make it the sixth straight review where the OCR has been left unchanged following four straight increases, that added a combined 100 basis points, before the RBNZ's much heralded tightening cycle came to an abrupt end in July last year.

While the tone of the RBNZ’s March Monetary Policy Statement (MPS) was neutral, with Governor Graeme Wheeler firm on his ‘the OCR could go up or could go down’ stance, bank economists say the RBNZ’s now indicating the OCR's more likely to drop than rise, when it finally moves. 

“The conditions are ripe for the RBNZ to soften its tone… a further softening in tone is not just warranted, it is likely”, says ANZ chief economist Cameron Bagrie.

Westpac chief economist, Dominick Stephens, says the speech RBNZ Assistant Governor John McDermott delivered on inflation indicates the tone of the comments in this OCR review will be “more dovish” than those that accompanied the March MPS.

“The cat is already out of the bag. Next week’s OCR review can only serve to affirm this change of stance”, Stephens says.

“We ascribe a 40% chance to OCR cuts this year.”

BNZ senior economist Craig Ebert says; “The more we delved into the speech, the more it offered up some soft touches, at the edges. These suggested that if there was a bias for the OCR between now and the end of the year, it is more likely down than up.”

ASB chief economist Nick Tuffley says; “We still think there is a 25% chance the RBNZ cuts the OCR this year”.

A rock and a hard place 

The RBNZ is essentially between a rock and a hard place.

Stephens says; “Near-zero inflation, dimming prospects for primary exporters, and an extremely high trade-weighted exchange rate all argue for OCR cuts."

“But cutting the OCR would risk turbo-charging the already-hot domestic economy, thus generating a future inflation issue. Auckland house prices are roaring higher, construction activity is booming, net immigration is running at all-time highs, and consumers are on a spending spree.”

Statistics NZ figures out earlier this month showed inflation for the year to the March quarter at a 16-year low of 0.1%, and consumer prices down 0.3% in the March quarter. The RBNZ is tasked with maintaining annual increases in the Consumers Price Index of between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.

Hot housing

However, the Auckland housing market is running red hot. The latest Real Estate Institute of New Zealand (REINZ) monthly sales figures, for March, showed fresh national and Auckland median price records, and the strongest sales volumes in any month since May 2007.

In the red hot Auckland market the March median sales price of $720,000 smashed the previous record high by $42,000, or 6.2%. The Auckland median price rose 13% in the year to March, and 11% in the three months to March. And the REINZ Stratified Housing Price Index, which adjusts for some of the variations in the mix that can affect the median price, showed a 20% annual rise in its Auckland Index.

Meanwhile, with New Zealand's relative economic strength compared to many other countries, and higher interest rates, the Kiwi dollar remains strong against the likes of the Aussie dollar, green back and euro. As of Friday afternoon, the Trade Weighted Index (TWI) was at 80.2, about 4.5% above the RBNZ’s MPS second quarter assumption.

Economists expect the RBNZ to prioritise the eye-wateringly high dollar above Auckland’s housing crisis, and leave the latter to the Government to deal to, to some extent.  

Tuffley says the speech Deputy Governor Grant Spencer delivered earlier this month “revealed the RBNZ sees limited scope for any of its toolkit to influence the housing market much and has put the onus on local and central government."

“Importantly, we don’t think the strength of the housing market would stop the RBNZ from cutting the OCR if the inflation outlook warrants further stimulus.”

Tuffley explains; “If the inflation outlook weakened and a return to the target bank came under question, we don’t see housing as an impediment to the RBNZ dropping interest rates."

“Monetary policy objectives will dominate when it comes to the OCR. But there would be some gritting of teeth as a lower OCR would increase the RBNZ’s concerns about financial stability.”

At March's MPS press conference Wheeler himself ruled out the strong Auckland housing market as a reason why the RBNZ didn't cut the OCR. Wheeler said the RBNZ wasn't seeing the same wealth effects on consumer spending and CPI inflation as was seen during the 2002 to 2007 housing boom when households used their surging home equity as an ATM for a spending spree that pushed up consumer prices.

Fed rate hikes distant?

In terms of the dollar's strength, Tuffley notes problematically, it's across all key currencies.

“US interest rate increases look slightly more distant. The impact of the ECB’s quantitative easing has weakened the euro markedly," says Tuffley.

“Australia’s economy is still struggling to rebalance with a further cash rate cut possible next month. Even the UK Pound is catching turbulence, with its General Election looming.”

Financial markets expect the US Federal Reserve to increase interest rates sometime this year for the first time in nine years. The Fed Funds Rate, the US OCR equivalent, is currently at 0% to 0.25%.

However the downward influences on the economy are worth noting, according to ANZ's Bagrie.

“Our base case (and most likely the RBNZ’s) is that growth will remain around 3%, which is more or less where we see the trend”, says Bagrie.

“Christchurch’s growth impetus is waning and its housing market is slowing, removing an obvious inflation risk and leaving Auckland as the sole problem."

“The low dairy payout this season is of course well appreciated. However the failure of dairy prices to recover meaningfully is increasing the very real prospects of a second consecutive low payout in 2015/16."

“The implications for farm cash-flow are stark. Other commodity prices are also showing signs of turning," Bagrie says.

Tuffley adds there are also still question marks over the extent of China’s growth deceleration and the Greek Government’s determination to push the threat of default to the brink.

But on the upside, New Zealand migration figures are strong, with net migration surging to a new record high in March. 


In terms of inflation, Tuffley points out that despite the recent CPI inflation result being slightly stronger than the RBNZ had expected, it isn’t out of the low inflation woods yet.

“The RBNZ’s primary concern is that low headline inflation, while temporary, could start to influence inflation expectations and in turn, wage-and-price-setting behaviour”, says Tuffley.

“And so it’ll be important to watch the wage and salary data, and the various business pricing and inflation expectations variables, like a hawk. Or should we say, like a dove?” says Ebert.


“If the Reserve Bank were to cut the OCR, it would most likely occur late in the year, for two reasons”, says Stephens.

“First, compelling evidence of falling inflation expectations won’t really be available until at least the middle of this year."

“Second, macro-prudential tightening is one possible resolution to the monetary policy conundrum."

“The RBNZ has indicated that it will restrict mortgage lending to landlords. However, implementing such restrictions is infeasible until later in the year. The RBNZ may be loath to cut the OCR until it is comfortable that the housing market can be contained another way," Stephens says.

Market reaction

Stephens continues, “Given that the cat is already out of the bag, the scope for a market reaction next week is now limited."

Markets reacted vigorously to the [McDermott’s] speech, sending swap rates five basis points lower, and the New Zealand dollar down by three-quarters of a cent."

“One struggles to imagine how a one-page press release could contain new information over and above a nine-page speech delivered only one week earlier."

“However, the reality of financial markets is such that the exact words that the RBNZ chooses next week could cause some degree of price action," Stephens suggests.

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The OCR cut/s that are on track by the end of year will have little effect on the Auckland housing market.

“But cutting the OCR would risk turbo-charging the already-hot domestic economy, thus generating a future inflation problem"

Do these economists not really understand what is driving the Auckland house prices? And are they still more concerned about inflation than regional economic failure or deflation? Govt spending is still tight so inflation is dead and gone.

They are slowly catching on it seems. You would think they would have noticed that a high exchange rate plus balanced budget, plus dairy collapse, plus forestry collapse, was perhaps, maybe, just a tad deflationary.

Agree. Petrol is down but that will go back up so can be ignored, meanwhile enough of the important parts of NZ, the tradables are not doing that well. For me the fact that dairy is down plus others signals the true state of the World's economy outside of the rampant and crazy finance sector it isnt good IMHO.

I rather like this piece,

"There are no markets left in any meaningful sense of the word—–just a raging casino infected with the madness of the crowds" 8><---- "Needless to say, there is a huge problem when you turn rebar, concrete and wallboard into tulip bulbs. Namely, when the price mania finally stops not only do the speculators who put their savings into empty apartment units get crushed, but, more importantly, demand for new units quickly evaporates, causing an devastating contraction up and down the building supply chain."

sounds Aucklandish to me.

oh and,

"So the collapse in iron ore prices is just the whip-end of a deflationary crisis that is fast overtaking China and the entire world economy for that matter. "

What has amazed me for the last 3~5 years is the ability of the World's economy not to implode. I just didnt understand the ability / impact of the Fed etc to pump billions into the financial sector keeping us all afloat. What I cant see is how much longer they can keep doing it. Like Grandma on life support she can be kept alive like a veggie for months if not years but it isnt alive, the Q is when does and what does flick the off switch.

What has amazed me for the last 3~5 years is the ability of the World's economy not to implode. I just didn't understand the ability / impact of the Fed etc to pump billions into the financial sector keeping us all afloat.

How much is that simply due to good luck in that throughout the Fed's QE programme, the USD has remained a reserve currency? Those like the ECB, whose currencies do not enjoy the same status, could be in for a swift, nasty shock as and when they try to do the same.

The Euro is ranked a reserve currency per the IMF.

no they don't.
they read reports and have been institutionalised by the edu-compliance system.

Remember only the top dog gets a real opinion.

Wheeler is paid relatively well to sort out rocks and hard places. It isn't that hard. His targets are clear enough, especially if central government doesn't act where it should. Get on with it. If part of the solution is publicly telling the government where they could or should act, then go there as well.

If I recall correctly Dr Bollard told Helen Clarke and her finance minister, "this needs to be fixed" he was ignored. The new one will see the same result, JK and his finance minister will ignore him. Have to hope they see the payback.

Payback will not be seen from the Hawaiian compound.

Very true, BE of course doesnt have that luxury.

How often do they cut outside of a recession?

Yep, the interesting thing is except for the "gains" due to financial mis-managment just waht is there to say we ever exited the GFC? So just like the USA with Wall st v Main st, I suspect NZ has a similar problem.

Who do you believe?

On 15 April 2015 RBNZ Deputy Governor Spencer said the RB is limited in what it can do and the Govt needs to do more

8 days later

On 23 April 2015 Deputy Prime Minister Bill English effectively "threw in the towel" saying
The Government has effectively left nothing "undone" to tackle sky-rocketing house prices in Auckland, Finance Minister Bill English says

which can be re-stated as
The Government has done everything it can do to tackle sky-rocketing house prices in Auckland

Talk about spin - Mexican stand-off - pistols at 50,000 paces

Who do you believe?

Over 300 comments on the Stuff article

The commercial banks wil not give them permission to cut rates.

heh, not while people can still afford to pay..

The banks would just love them to cut rates - since when has higher OCRs been good for banking ? - naive to say the least

a) Since bank CEOs like to hide behind the OCR because then the RB takes the flak for higher retail rates and not the banks, ie politics.

b) higher interest rates allow / make it easier for financial institutions to make returns for their pension fund commitments.
c) If the wholesale rate the bank gets is higher than the OCR the bank either loses money to continue to hide behind the OCR or steps out into political flak.

Extremely weak Steven - how does a higher retail rate make more money for a bank, perhaps its is making better returns for all investors that fund them that you dont seem to think warrant it? And while we' re on the case of investment returns, youre seriously suggesting that banks wants rates higher just for the sake of financial instiututions investment returns ? The banks have been getting flake from uninformed borrowers because of the funding costs they have had to pay since the GFC right throughout the near 6% fall in the OCR - you seriously think 7yrs later a rise in rates is going to matter one hoot? I'd suggest when someone makes and absurd comment like the one three above yours, best ignore it (I'm embarressed I commented) rather thann trying to find three irrelevant dots to try to justify it for him.

Interesting how we never hear any bank economists calling for an interest rate cut, even when it is clearly warranted.
John Bolton commented recently (which includes critiquing the commentary from bank economists and bank apologists::

"the media we are dished up with a succession of short-term views on the currency, growth, and interest rates. None of which capture the big structural issues lurking ominously in the background.

Early in 2014, NZ economists were forecasting that mortgage rates would hit 8% by the end of 2015. Rates would be fuelled by our rock-star economy, confidence, record commodity prices and full capacity leading to underlying inflation. All of this was based on short-term signals. There was little regard for 2014 being the peak of a commodity cycle, which has since fallen back by around 40%. Inflation sits at 1% and it is now clear that interest rates will remain low."

Since then - inflation now sits at .3% even lower again.

How many economists have admitted that their rhetoric from 2009 until 2015 has been largely incorrect and have misinterpreted global monetary conditions? How much influence does the chorus of bank economists have on the RBNZ decision-making? Interesting also that the banks will never offer advice or predictions to their customers directly.

Does it take an extraordinary event such as the Chch earthquake before rates are cut?

Zero influence, and yes they've got alot been wrong since 2007 along with one or two others we know here right ? But considering that the only move in the OCR over the past 4 years has been a hike, I'd suggest that they that they might have been a bit silly, and indeed wrong like a few other we know, in forecasting a cut ? What do you expect, foreacst something that you don't think's going to happen, seems dumb to me