By David Hargreaves
It will probably go down as the interest rate cut that wasn't needed, delivered to avoid disappointing and confusing the market place.
The Reserve Bank had widely telegraphed a cut in the Official Cash Rate to 1.75%, so went ahead, despite recent events suggesting such a cut was possibly not the right thing to do.
However, I won't argue with the RBNZ's call because it has at least been consistent. Late last year and early this we saw some volatility largely because the central bank appeared at times fairly contrary - with statements strongly suggesting no more rate cuts then being followed by cuts.
That said, we now again have a situation in which the RBNZ is indicating there will be no more cuts.
This time it is a bit different though because this indication comes from the fact that the central bank is now explicitly forecasting the future expected level of the OCR. Previously it forecast the 90-day bank bill rate (which is heavily influenced by the OCR). But by not directly publicly forecasting the OCR itself, the bank could leave itself a little more wiggle room.
It's attempted some wiggle space with its first set of OCR forecasts, by setting the future level at 1.7%, so, indicating a 20% chance of another cut. But clearly, that's not the intention at the moment.
The perils of forecasting
The RBNZ's forecasts suggest in fact there will be no movements at all in the OCR before the end of 2019. Frankly, I'll believe that outcome when I see it.
If you go back to the RBNZ's forecasts in December last year (which were then of the 90-day bill rate), these suggested that the OCR would be over 2.5% now, as opposed to 1.75%.
Go back to December 2014 and the RBNZ was indicating an OCR of over 4% now.
This is not to denigrate the RBNZ's forecasts, it is more in a way of saying that things change very quickly and attempting to say where interest rates will be in future is an inexact science.
Barring some very significant global upheavals (extremely possible, of course), I'm happy to bet that the next interest rate move will be up - and I'm going to say it will be next year. I think signs of inflation are now emerging and these will start to crystalise more clearly in probably about the second quarter of next year.
A rising house market again?
Given that by that stage I reckon the RBNZ is going to be again struggling with a rising house market, then presumably the central bank would welcome such a thing.
And that is particularly the case if it doesn't get its wished for debt-to-income ratios cleared by the Government and added to the macro-prudential toolkit.
The Government is definitely showing signs of pushing back against DTIs. This must be frustrating for the RBNZ, which has now clearly decided that these are actually the weapon of choice to deploy against the housing market. The decision not to include DTIs in the macro-pru toolkit when it was created in 2013 is looking a bigger and bigger oversight.
As you would imagine RBNZ Governor Graeme Wheeler is being coy about the degree of push-back coming from the Government. But it was most interesting that he was prepared to indicate in his post-OCR media comments that the RBNZ didn't intend to use the DTIs at the moment.
This is an interesting view to express and it would suggest that the RBNZ has probably said that to the Government as well - probably in the hope of reducing the resistance to the move.
A weapon to fear
No doubt from the Government perspective though, it would fear that once the RBNZ had the DTI weapon it might in any case unholster it at a time very inappropriate for National's re-election prospects.
The RBNZ for its part is still showing (I think rightly) a lack of confidence that the current easing in the housing market as a result of the 40% investor deposit rule will continue for long.
If we get to the middle of next year and the housing market is igniting again - as I think it will - and there's no DTIs in the macro-pru kit - then the only direct-to-market option available to it might be to hit housing investors with an even bigger deposit rule. Less directly of course, the RBNZ may well consider hitting the country's banks with the need to hold more capital against their mortgages - a move I think should be made anyway.
There's no doubt though that the only Christmas present the RBNZ wants this year is the DTIs. I think it's going to be disappointed.