By David Hargreaves
The Reserve Bank people were doing their best impressions of swans today; all serene up top but paddling away furiously underneath.
They are paddling with grave urgency toward the sign in the boating pond that says: "Macro-prudential tools". And reading between the lines and deciphering the raised eyebrows, further tightening of lending controls as a means of pouring cold water on the housing market cannot come fast enough for a central bank that has been badly caught out by the ineffectiveness of the Auckland investor lending controls it put in place in November.
Let's not be coy. The reason the RBNZ did not cut interest rates today was because of the housing market. Plain and simple. The RBNZ has been so far away from meeting its inflation targets for so long now that a few months of being off the track won't make much difference.
There were two choices: Continue to be miles away from your inflation target, or pour petrol on the house market. The RBNZ took the 'safer' path. But our central bank will nevertheless now be hoping like hell that between now and when it makes its next interest rate call on August 11 that the US Federal Reserve has raised interest rates in America and knocked some of the stuffing out of the New Zealand dollar. Without a lower dollar the RBNZ's not going to see much inflation materialise.
The RBNZ is though in the curiously luxurious (perhaps seductively and dangerously so) position of having TWO US Fed reviews of interest rates before it next has to make its own call. And because it is changing timetables, as a one-off the next interest rate review here will also (as today's was) be accompanied by the full production number Monetary Policy Statement, enabling full explanation of the decision and what led to it. Given such a scenario the option to play wait and see was too good to resist.
The surprisingly awful jobs figures in the US over the weekend very probably stopped the Fed in its tracks from raising rates next week. But when next month's US job figures come out and, I imagine, reveal the last ones to have been a rogue, then a July Fed hike I think becomes a near certainty. Of course, and we have to consider the possibility - if the jobs figures prove NOT to have been a rogue then all bets are off. In such a situation the Fed would not be able to hike and our RBNZ would undoubtedly be forced kicking and screaming into another rate cut here (with possibly more to follow) in an attempt to bring the Kiwi dollar down from orbit (which is where it would no doubt be by then if such a scenario played out).
Sitting on hands time
I don't think that will happen though. I still think the US Fed will be able to raise rates in July, which may mean that the RBNZ will be able to sit on its hands again in August, should it feel it needs to.
It could be, however, that by then the RBNZ has at least signalled the next round in lending restrictions. As I say, I think the RBNZ's swans are paddling away rather more frenetically than they are trying to let on.
It may or may not have meant anything at all but I thought it interesting that in the press conference today Governor Graeme Wheeler, when asked about frequency of of public speeches by RBNZ top brass mentioned that Deputy Governor Grant Spencer had one coming up soon and that he (Wheeler) was giving one some time after that. It may just be coincidence, but in 2013 there was a bit of a one-two approach from the RBNZ with Spencer (who is the bank's Mr Financial Stability) giving a broad-brush indication of likely introduction of the use of controls on high loan to value lending in a speech in late June, while Wheeler in late August then announced the official launch of an LVR 'speed limit'.
As I say, may be coincidence, but it might not as well.
Fairly swift
Any changes to the LVR rules can in theory be done fairly swiftly because the LVR measures are already included in the macro-prudential toolkit that the RBNZ Governor and Finance Minister Bill English agreed to. There is a requirement that the RBNZ 'consult' with English and the Treasury if it is looking to make tweaks to the rules - but this would appear a formality. Much more is going to be involved in the proposal to introduce debt-to-income ratios, because they are not at this stage included in the range of macro-prudential weapons. Reading between the lines in what was said at today's RBNZ press conference gave the clear impression that debt-to-income rules will not be a starter till next year. But have not doubt - we are going to get them and they will likely end up being permanent in the way the the 'temporary' (yes, that's really what they said!) LVR rules are.
Which brings us back then to planned tweaks to those LVR rules. Again reading heavily between the lines, don't be surprised to see something announced or at least clearly signalled within say four weeks. What will it be?
At the moment Auckland investors have to raise deposits of a minimum of 30%. I think we can confidently expect that figure will be raised to at least 40%. Would they even try 50%?
But what about the rest of the country? The RBNZ's at pains to point out that while yes, the investors are on the rampage in Auckland, currently accounting for about 46% of house buying, they are pretty active - at about the 40% level - in the rest of the country too. Therefore its probably reasonable to expect that investors elsewhere will also be hit with minimum deposit requirements. But maybe they'll just cop for the 30% currently seen in Auckland just to keep some difference.
If I'm right about timing then there is no reason why these new limits might not be put in place by the start of October or November at the latest.
Was there something else?
I do wonder if something else is planned here though as well.
It's been reasonably clear for a couple of months now that the Auckland-specific rules introduced last November haven't worked. So, why no action thus far, given the clear urgency the RBNZ sees to tackle the rising house market?
Are there in fact indications behind the scenes that our ever-reluctant Government is close to being dragged to the party? The Government did show last year when it hastily brought some new tax rules in that it can after all be embarrassed into action on this issue. That's what a constant barrage of news stories about housing affordability will do.
Is the RBNZ's delay on this matter in part because it thinks or knows that the Government can be forced into some action again? And if so, what?
If we are talking about investors as flavour of the month for attention, would the Government finally be considering doing something about the tax deductibility rules that make investing in houses such a no-brainer in this country? Don't know. It is speculation on my part. But such a change would certainly have an impact - and it would have an influence on how far the RBNZ has to go.
Anyway, I suspect we won't have long to wait.
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