RBNZ Governor Graeme Wheeler says there's equal probability the next official interest rate movement is either up or down

RBNZ Governor Graeme Wheeler says there's equal probability the next official interest rate movement is either up or down

By David Hargreaves

Reserve Bank Governor Graeme Wheeler says there's an equal probability that the next official interest rate movement is either up or down.

Speaking to Craigs Investment Partners’ Investor Day in Auckland, Wheeler said the RBNZ’s February Monetary Policy Statement included a neutral bias with an unchanged Official Cash Rate (which stands at 1.75%) track until late 2019.

"Risks around future Official Cash Rate movements are equally weighted, reflecting balanced risks around inflation."

The New Zealand dollar moved up very slightly from about US71.4c to US71.6c after the speech was published.

This is the first public on-the-record speech by Wheeler this year and since he revealed he will be standing down later this year when his five-year term ends.

The normally public speaking-shy Wheeler, who made just two on-the-record speeches last year, took the unusual step of pre-advertising some of the content of this speech with an on-the-record interview, which highlighted his concerns about the new Trump Administration's 'America First' policy.

In the actual speech today Wheeler said: "In effect, there is an equal probability that the next OCR adjustment could be up or down.  We consider the balance of risks for the global outlook to be downside.  For the domestic economy, there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced."

'Housing imbalances'

Wheeler said the possibility of worsening imbalances in the housing market remains a major risk with continued low interest rates and strong migration, and rising construction cost inflation reflecting increasing resource pressures. 

"There are upside risks in respect of our migration projections.  Although departures remain low, arrivals have continued to increase with arrivals by migrants on work visas being particularly strong in recent months."

New Zealand house price indicators (such as the growth in real house prices, house price-to-income ratios and house price-to-rent ratios) are "very high internationally and historically".  

"At a time of heightened uncertainty, households are particularly vulnerable to a correction in house prices given the large rise in household debt since 1990.  Household debt is now equivalent to around 165% of household disposable income, up from 100% in 2000 and 60% in 1990.

"Households are also exposed to a normalisation in mortgage rates given the short interest rate duration of the mortgage market (with 89% of mortgage loans re-pricing within two years). In addition, the share of lending at debt-to-income ratios of over 5 and 6 has increased steadily for all borrower groups since September 2014."

If the economy were to develop in line with the RBNZ's economic projections then the OCR would remain at its current level over the next two years, Wheeler said. 

“However, small open economies such as New Zealand are hit by multiple shocks and the Bank assesses whether these, or a combination of them, warrants a change in monetary policy.”

Wheeler said that domestically, there were several uncertainties around the economy, including the future path for commodity prices, the exchange rate, migration, the housing market, and household saving. 

“The greatest source of uncertainty currently lies around the housing market and the possibility that imbalances in the housing market might deteriorate.  Fortunately, house price inflation has moderated substantially in recent months, but it’s too early to say whether this moderation will continue.

“Another risk is that the exchange rate remains higher than projected in the MPS, suppressing tradables inflation and net exports.  As we indicated in the MPS, whether monetary easing would be required to offset this would depend on the factors driving the exchange rate (e.g. weaker global growth, higher commodity prices) and how domestic capacity pressures were changing."

US fiscal stimulus

Wheeler said it was too soon to be specific about the nature and size of fiscal stimulus in the US under the new administration. 

"However, the possibility of a significant US fiscal stimulus represents an upside risk for New Zealand.  A significant stimulus would boost economic demand in the US and spillover to other countries. New Zealand would benefit through higher commodity prices and increased exports to the US and to our other trading partners experiencing higher growth as a result of the US stimulus.

"Modelling within the Bank suggests that a fiscal expansion that boosts US GDP by 1% would increase New Zealand’s GDP by around 0.3% after 18 months. This increase in GDP results from higher commodity prices and expanded trade with the US and other regions benefiting from the US stimulus.

"In the absence of offsetting changes, the Federal Reserve would likely need to tighten monetary policy more quickly than currently expected and the expectation and implementation of increases in the Fed Funds rate would put upward pressure on the US exchange rate.  US long term interest rates would be expected to rise given the increased Government debt issuance.

"In New Zealand, our long-term interest rates would be expected to increase and flow into higher mortgage rates, but the tightening in monetary conditions might be offset by some weakening in the NZ dollar exchange rate."

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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25 Comments

It is in the best interest of the economy to keep the OCR at 1.75%.
A rate hike might catalyze the Auckland housing crash that we have all been warned about and a rate cut would aggravate the property bubble.
I see very less likelihood of a rate cut as the inflation, employment and GDP growth figures paint a healthy picture of the economy.

Mr Trump and the banks have effectively raised the OCR nearly 1% over the last 5 months.

I am having difficulty in determining anything to do with Trump is truthful.

11
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If so.... then he has the makings of a Great Politician..!!

RBNZ governor is in a situation. I think national should act to control some sort of speculation that is happening in housing market - instead of denying and by justifying is rubbing salt to the wound of many.

National may be doing fine but should be open to concern of all and not be rigid in its approach. Many FHB buyers are feeling so left out (feel bad for them) that are going out of the way to enter property market.

Everyone knows that it is not a one way way street and may be the price will not fall but even if it stabilize and interest goes up - will be hurtful and if the price falls (Which may) than it will be catastrophe.

The only way national can avoid it being burst is by raising the demand to such an extend (Migration and rich overseas investors) that it keeps moving and this is exactly what happens in ponzi scheme.

16
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National need to out on their backsides for having ignored what people have been saying and demanding for years. They do not deserve another go.

"People"? A small minority of left wingers where most of them don't even live in Auckland will be lucky not to be swept aside let alone pushing National off their backsides.

Bollarks. There are plenty of people in Auckland - including among the young - who are realising this government has effectively excluded them from the property market in Auckland through their inaction over the last three terms.

Low wages, high prices, high rents, a government who decries them for being drug-addled and openly says the best solution is to import a replacement workforce and a replacement set of buyers to keep house prices up.

This is the same attitude that most political parties in power have - specially if have won 2 or 3 terms like National (also their supporters) has which is leading to a situation and the result is for everyone to see - what is happening world over. May be this minority is actually a majority which turns up and shows their anger while voting.

So things are balanced, if immigration continues to pressure infrastructure and overseas money continues inflate certain school zones, surely there is no options but to lift. The over leveraged specuvestor will complain but a correction is more than overdue. Investors will already have built a reasonable equity position to ride things out.

Voting for immigration hold while infrastructure gets fixed. If that stops or reverses the Capital gain leverage ponzi so be it.

The banks seem rather nervous about their positions right now. I'm finding that I'm completely indifferent to what happens with the OCR right now.

2 year spread NZ/ US lowest in 16 years overnight. If New Zealand starts cutting interest rates , pull out the popcorn

The reality is that although house prices in Auckland have grown to excess, the migrants are co tribute g to NZs coffers!
Providing the immigrants are working or providing dollars to the NZ society then it must be of benefit to us.
I would much prefer this as we need funds to come into NZ to support all the citizens who do t contribute very much and prefer to whinge and moan about how everything is so bad for them!

Speaking of an entitlement mentality and whinging, surely the biggest bill we could address to get things more manageable and more based on individuals' hard work would be to means test the Pension, perhaps based on the value of an individual's primary residence.

It's crazy that we're using immigrants to prop up the economy at the expense of young Kiwis having hopes of owning their own home, just to continue providing unneeded social welfare to landed millionaires.

13
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i'll reword that for you.

The reality is we need more people to join the Ponzi scheme, because the Ponzi scheme simply wont work as a Ponzi scheme unless we add more people.

There we go.

How is wage stagnation and undercutting the desired salary for hard working Kiwis of benefit to us? Employers maybe, but not New Zealand as a whole. Are you happy with thousands of unskilled immigrants being exploited or working for less than the minimum wage? Are you happy with the health system, schools, roads and water utilities groaning at the seams because of stupidly high population growth?

"Citizens who don't contribute very much." I assume you count yourself and other property speculators and investors in that group?

Things are bad for us now, and the moaning is entirely justified. Wage stagnation, high house prices, low standard of living, high percentages of income going to rent/mortgage payments, low interest rates causing people to stop saving, high cost of living, overworked infrastructure...

I think you are living in the wrong country if you are looking for somewhere with a high population density. Plenty of overpopulated places to choose from around the world, where you could go and be prosperous.

The Man 2,

Would you care to explain why you believe that 'house prices in Auckland have grown to excess'. It wouldn't have anything to do with immigration would it?

Don't live in Auckland and I would never want to as It is very overrated.
However the prices are excessive compared to what an investor is able to achieve in rental returns and effectively the landlords are currently subsidising their tenants.
Nz is a great place to live compared to most other countries and if you don't like it then move to where you will be happier.
Just let us know when you have found this magical place!

"Don't live in Auckland and I would never want to as It is very overrated." Living in a city with available jobs is overrated?

"However the prices are excessive compared to what an investor is able to achieve in rental returns and effectively the landlords are currently subsidising their tenants." Yup, no investors ever negative gear their properties. Not ever. So sir.

Wildcard, are you under the illusion that there is no other place but Auckland?
Auckland has become the immigration city in NZ and if you are happy with all the immigrants coming in there, then I am pleased for you!
Personally don't have negatively geared property as I beleive that rentals should give postive returns rather than wait for capital gains.
You can put yourself in a suspect position if you haven't got positive cashflow,

Sounds like you're saying Auckland is lost to Kiwis, and it's best just to cede it and move out, leave it to the foreign buyers and whoever from around the world will buy it up.

Nice work from this Nat government on that...

No, there are other cities and towns in NZ apart from Auckland. However, no other city or town in NZ has as many available jobs as Auckland does. People move to where jobs exist,; therefore people want to live in Auckland.

I am not pleased with the current level of immigration, just like everyone else in the country who has half a brain. If I was PM I would limit immigration numbers to 5000 for a few years to allow the country to have a more stable population and allow infrastructure to be built to house/support the 150,000+ that have moved here recently.

I never said you did have negatively geared property.

Trouble is 5000 won' t feed the Ponzi!