Westpac's chief economist says the RBNZ is unlikely to announce any changes to the OCR at Thursday's review, but sluggish housing and construction markets could weigh on its mind down the track

"The RBNZ is highly unlikely to alter the stance of monetary policy next week, due to election uncertainty," according to Westpac's chief economist, Dominick Stephens.

In a preview of the Reserve Bank's review of the Official Cash Rate on Thursday (September 28), Stephens said he didn't expect any change in the OCR and that the Reserve Bank would probably repeat it's previous monetary policy guidance. The OCR is currently set at 1.75%, a record low where it has been since November last year.

"Fortunately the economic situation is such that the Reserve Bank can afford to sit on its hands," he said.

"The RBNZ has run a very consistent line on monetary policy over the past six months and it seems highly likely that it will play a straight bat again next week."

However Stephens pointed to several recent developments that may cause the RBNZ to cut rates further down the track:

  • The global economy had strengthened and the US Federal Reserve has moved closer to tightening monetary policy.
  • The Trade Weighted Index was about 1.5% lower than the RBNZ's forecast.
  • Construction activity was weaker than the Reserve Bank has been expecting and residential building consent figures were also weak.
  • The housing market had also been much weaker than the RBNZ had forecast. It had expected house prices to rise 3.2% over the six months to September, but they had fallen by around 1.5%.

"In our view, the weak housing market and stalled construction sector are important developments," Stephens said.

"We expect that the housing market is set to stay subdued and that construction activity will expand more slowly than we had previously forecast.

"In acknowledgement of these developments, we have been reducing our GDP forecasts for the coming year.

"By contrast, the Reserve Bank is forecasting a rapid recovery in construction activity and has consistently said that there is a risk of a resurgence in house prices.

"To date, the evidence has probably been insufficient for the Reserve Bank to change its view.

"But in time, if our views on construction and housing prove correct, the Reserve Bank will have to lower its GDP and house price forecasts.

"The overall stance of monetary policy would then hinge on what happens to the exchange rate.

"If the TWI [Trade Weighted Index] continues to trend downwards, as we expect, then the RBNZ would continue to forecast no change in the OCR.

But if the exchange rate failed to fall, the RBNZ might have to adopt an easing bias."

ANZ's economists also expect the OCR to be left alone at Thursday's review.

"We expect the RBNZ to once again leave the OCR at 1.75% and reinforce an ultra-neutral stance," they said in an OCR preview newsletter.

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Not so rock star economy anymore! Redeker at Morgan Stanley is shorting the NZ economy;
"Redeker believes two scenarios could play out within these leveraged economies;
1) Leverage may reach its natural limits, slowing economic activity.
2) Rising global funding costs may increase debt maintenance costs, causing outperforming economies to underperform.
“Over the course of the coming quarters, these economies' growth may slow,” says Redeker.
While the recent decline in business confidence may been related to election uncertainties, Morgan Stanley note that immigration has not been growing, the highly valued housing market seems to be topping out with sales volumes falling rapidly, “and household debt might soon cripple spending”.
New Zealand house prices have been rising at break-neck speeds: in 2016 the country’s QV house price index found that the typical Auckland home overtook the value of a London home following an increase of 15.9% over the year.
Importantly, Morgan Stanley warns foreign exchange markets have not considered the likely outcome of New Zealand’s debt problem, therefore the risks of a sizeable adjustment lower in the New Zealand Dollar might occur should Redeker be right."

Doesn't sound very rock and roll does it?