Reserve Bank Hold Official Cash Rates

Statement by Reserve Bank Governor Grant Spencer:

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

Global economic growth continues to improve, although inflation and wage outcomes remain subdued. Commodity prices are relatively stable. Bond yields and credit spreads remain low and equity prices are near record levels. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

The exchange rate has eased since the August Statement and, if sustained, will increase tradables inflation and promote more balanced growth.

GDP in the June quarter grew broadly in line with expectations, following relative weakness in the previous two quarters. Employment growth has been strong and GDP growth is projected to strengthen, with a weaker outlook for housing and construction offset by accommodative monetary policy, the continued high terms of trade, and increased fiscal stimulus.

The Bank has incorporated preliminary estimates of the impact of new government policies in four areas: new government spending; the KiwiBuild programme; tighter visa requirements; and increases in the minimum wage. The impact of these policies remains very uncertain.

House price inflation has moderated due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions. Low house price inflation is expected to continue, reinforced by new government policies on housing.

Annual CPI inflation was 1.9 percent in September although underlying inflation remains subdued. Non-tradables inflation is moderate but expected to increase gradually as capacity pressures increase. Tradables inflation has increased due to the lower New Zealand dollar and higher oil prices, but is expected to soften in line with projected low global inflation. Overall, CPI inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2 percent.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

Source

Reserve Bank announces cash rate call

The Reserve Bank of New Zealand (RBNZ) has today held the Official Cash Rate at 1.75%.

In a statement by Reserve Bank Governor Graeme Wheeler:

Global economic growth has increased and become more broad-based.  However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Headline inflation has increased over the past year in several countries, but moderated recently with the fall in energy prices.  Core inflation and long-term bond yields remain low.  Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has increased by around 3 percent since May, partly in response to higher export prices.  A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.

GDP growth in the March quarter was lower than expected, with weaker export volumes and residential construction partially offset by stronger consumption. Nevertheless, the growth outlook remains positive, supported by accommodative monetary policy, strong population growth, and high terms of trade.  Recent changes announced in Budget 2017 should support the outlook for growth.

House price inflation has moderated further, especially in Auckland.  The slowdown in house price inflation partly reflects loan-to-value ratio restrictions, and tighter lending conditions.  This moderation is projected to continue, although there is a risk of resurgence given the on-going imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices.  These effects are temporary and may lead to some variability in headline inflation.  Non-tradables and wage inflation remain moderate but are expected to increase gradually.

This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.

Source

7% mortgage rates could collapse housing market

In its May Financial Stability Report the Reserve Bank of New Zealand reveals the results stress tests designed to assess the vulnerability of households to service their mortgages if rates rise.

It’s findings show a high number of owner-occupier households would be under financial stress if rates jump, which could collapse the housing market as defaults rise as demand weakens further.

The central bank considered a 7% mortgage rate, close to the average for a 2-year loan over the past decade, and a 9% rate which it says is “extreme but still plausible.”

At a 7% rate, the bank estimates that 4% of all borrowers (6% of the total stock of mortgage debt) and 5% of recent borrowers (9% of total) would be unable to manage their essential expenses. A further 9% of all borrowers would have only a small buffer for discretionary spending.

At a 9% mortgage rate, 7% of all borrowers and 19% of recent borrowers would be unable to manage.

“While the LVR restrictions have increased the banks’ resilience to any fall in house prices, a significant share of housing loans are being made at high debt-to-income (DTI) ratios. Such borrowers tend to be more vulnerable to any increase in interest rates or declines in income,” said RBNZ Deputy Governor Grant Spencer.

The report warns that Auckland’s mortgage borrowers are at a higher vulnerability to increased rates with 5% in the city estimated to be unable to meet essential expenses at a mortgage rate of 7% compared to 3% elsewhere.

With high levels of New Zealand’s homeowners vulnerable to mortgage rate rises, the central bank forecasts that a sharp and unexpected hike in rates could see defaults increase, consumption cut, and homes being sold to pay debts.

Source

Why KiwiSaver balances go up… and down

Quick question: what’s the difference between a savings account and a KiwiSaver account?

Short answer: when you put money in, the first always goes up, but the other goes up and down. That’s no small thing.

And while we personal finance folks like to go on about the magic of compounding for both saving and investment, sometimes we’d be better off pointing out how different the two are.

The one caveat to saying that a savings account always goes up is inflation. Savings can actually roll backwards as well, when you bring inflation into the picture. You’re adding money, but its real value and how much it can buy gradually becomes less and less. This is why we need investing.

Which brings us back to KiwiSaver, which is not a savings account as many people think of it, but rather an investment account. And investing is aimed at buying assets that become more valuable over time, despite inflation. It’s the remedy for inflation.

But what could make a KiwiSaver account balance lose ground?

Why your KiwiSaver account can go down

Okay, so I won’t bore everyone with too technical a discussion on unitisation, but the key thing to know is that when you put money into KiwiSaver, you’re buying units.

Units are a way of keeping track of what we own in KiwiSaver.

These units are linked to the assets our fund has invested in, such as shares, commercial property or bonds. Think of the investments like a big fat orange – and our units as a segment of that. When the orange rises or falls in value, so does the value of our segment.

Unlike a savings account, where we’re setting money aside, in KiwiSaver we are buying things that have value. That orange can be priced higher on the market at some times, lower in others. It’s a very normal state of affairs.

When we look at a savings account balance, we rightly think about how much we have. Not so with our KiwiSaver balance. When we look at that, what we’re really seeing is how much our fund’s investments and our corresponding units are worth – what their value is right now. Again, no small thing.

So perhaps instead of asking ourselves how much we have in KiwiSaver, we should be asking, “How much is my KiwiSaver worth at the moment?” Might be higher, might be lower.

Of course, the idea is for our units to increase in value over time. Either because someone else will pay more for them on the market or because they earn income like rent or dividends, the overall trend should be up. That’s why we do this! Without the aim of a return, there would be no point.

But there is such a thing as a negative return.

Why your KiwiSaver account will go down

Since the GFC in 2008, we’ve had good times of growth in KiwiSaver. Long may that continue!

But this also means that most of us have only seen things move in one direction, with KiwiSaver balances almost never heading down. Things did dip a bit last August, but because most of us contribute small amounts regularly to our KiwiSaver, we probably only saw things flatten out a bit. Our balances would not have gone down at all.

At some stage they will. If you remember the GFC or are a veteran of the dot com bubble, you’ll remember how quickly markets can turn, and how assets can suddenly be worth less. When something like that happens again, we will see our KiwiSaver balances tumble.

Again, this is because our balances do not measure the money we have, but what our units are worth.

And because people feel losses so much more acutely than gains, typically there will be thousands of people calling up their KiwiSaver providers trying to understand how on earth they have lost money when they have been putting in cash all this time! We’ll need to be ready.

Much of this is about the right mindset to have when there is a downturn. Ideally, we’ll say something like:

• “Yep, saw that one coming.”
• “Bound to occur from time to time.”
• “Must be that point in the cycle.”
• “I wonder what it’ll be worth in 10 years?”

The worst action would to be to act rashly and run for cover. “Sell! Sell!” is the classic scene of a moneybags barking into a phone to his broker. If we suddenly sell our units and buy others that seem far safer in another fund, we effectively lock in our losses and miss out when values rebound. We lose money permanently.

It’s all about perspective. Because we are typically drip-feeding into our funds, when unit prices plunge, they actually become a bargain. Someone might say, for instance, “I’m putting even more money in now because I know I’ll reap rewards in the future.” When oranges are on sale, it can be a good time to buy.

Now if any of this talk about balances moving up and down makes you anxious, you should contact us to make sure you’re in the fund that suits you best. After all, you should be relaxed about your KiwiSaver and not losing sleep.

So what’s the difference between a savings account and a KiwiSaver account? One only goes up. The other goes up and down, but should always be worth much more in the long run.

Source

KiwiSaver hits $40b, but balances stay low

Strong investment growth has boosted the value of KiwiSaver to over $40 billion but individual balances remain low for many despite the scheme running for nearly 10 years.

Figures from Australian research firm Strategic Insight show total KiwiSaver funds hit $40.651 billion at the end of March, up from $38.416b as of December 31.

Daniel Morris, senior manager data and systems support at Strategic Insight, said KiwiSaver had seen 5.8 per cent growth over the quarter, bouncing back after a period of lower growth in the December quarter.

“It was probably a bit larger than expected,” he said

But while the total amount looks impressive, individual saving are still relatively small.

Based on Inland Revenue figures 2,727,675 people were signed up to KiwiSaver in March, putting the average balance at $14,903.

David Boyle, group manager education at the Commission for Financial Capability, said that on the surface KiwiSaver looked as if it were going well.

“But scratch the surface and there are some significant concerns and issues that need to be addressed to really get KiwiSaver delivering to its true potential.”

Boyle said the average balance was affected by the number of under 18-year-olds in the scheme who did not have much in their accounts.

“Most were signed up when the $1k kickstart was available and talking to a number of providers very few of these members are making any regular contributions until they reach the age of 18. So this affects the average balance.”

About 360,000 members are under 18.

Boyle said about 580,000 people, another group, were not getting the full government subsidy which meant they were contributing nothing or less than $1043 a year.

He said KiwiSaver providers needed to do more.

“Providers need to keep working on getting their members connected to their KiwiSaver account, especially those that have not made contributions but are eligible for the member tax credit.”

Claire Matthews, a KiwiSaver expert at Massey University, said it was hard to judge whether the $40b figure was a reason for celebration because people might have saved that money regardless of KiwiSaver.

“We don’t know what people would have saved without that.”

Matthews said an average balance of less than $15k did not sound a lot but it depended on the age of the person.

“For someone aged 60 – if that is all they have saved it’s not great,” she said.

But for someone in their 20s it was a good start which would now benefit from compound interest.

Matthews said the Government needed to increase the minimum contribution rate to help boost balances.

She believed individuals should contribute 10 per cent of what they earned. The current minimum is 3 per cent.

Richard Klipin, chief executive of the Financial Services Council, said the average balance of between $14,000 and $15,000 was a start.

“Like most developing countries we have got to start somewhere.”

But he said it was not enough and it opened up the need for greater advice around how much was enough to live off in retirement.

Susan St John, co-director of Auckland University’s Retirement Policy and Research Centre, said although average balances were growing, those at the low end would likely not have much at retirement.

“Not only have withdrawals for housing accelerated, but many struggling families are having to access funds under hardship claims.

“Many of those under the median will have very small amounts, if any on retirement.”

On top of that issue she said male median balances would outpace female balances.

Source

RBNZ forecasts low rates to stay, sees weaker inflation ahead

(Bloomberg) — New Zealand’s central bank kept interest rates at a record low and forecast they will remain there for an extended period, saying inflation will slow. 

“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Governor Graeme Wheeler said in a statement Thursday in Wellington after holding the official cash rate at 1.75 percent. “Numerous uncertainties remain and policy may need to adjust accordingly.”

Wheeler is wary of stoking expectations of a rate increase for fear of boosting the kiwi dollar and curbing inflation, which returned to the midpoint of the RBNZ’s 1-3 percent target band in the first quarter for the first time in more than five years. The bank projected Thursday that inflation will slow to 1.1 percent in the first quarter of 2018, and said a premature monetary tightening could undermine growth.

The New Zealand dollar fell more than one U.S. cent after Wheeler’s statement. It bought 68.28 cents at 10:34 a.m. in Wellington from 69.37 cents immediately before the release. The currency’s 5 percent decline on a trade-weighted basis over the past three months is “encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector,” Wheeler said.

All 16 economists surveyed by Bloomberg expected Thursday’s decision, and they all forecast the benchmark rate will remain at 1.75 percent throughout this year. Four tip a rate rise in early 2018, and swaps data late Wednesday showed a 69 percent chance of an increase in the first quarter. Those odds fell to 58 percent today.

“The inflation forecasts seem to be testing the realms of credibility, given an economy that is forecast to continue to grow above trend,” said Cameron Bagrie, chief economist at Australia & New Zealand Banking Group Ltd. in Wellington. “However, the message from the RBNZ is clear: policy is set to remain on hold for a considerable period and it has no interest whatsoever in pre-empting a policy tightening.”

On Hold
The central bank projected the average OCR will be 1.8 percent in early 2018, maintaining its previous forecast. Its projections show interest rates won’t start to rise until the third quarter of 2019, also unchanged from its last estimate.

“Premature tightening of policy could undermine growth, causing inflation to persistently undershoot the target midpoint,” the RBNZ said in its Monetary Policy Statement. At the same time, “further policy easing, in an attempt to see non-tradables inflation strengthen more quickly, would risk generating unnecessary volatility in the economy.”

Even though inflation has picked up much faster than the RBNZ expected, climbing to 2.2 percent in the March quarter, Wheeler said that was mainly due to temporary influences such as food and fuel prices. Recent developments “on balance are considered to be neutral for the stance of monetary policy,” he said.

Strong Growth
New Zealand’s economy expanded at a healthy clip through 2016, supported by record immigration and booming tourism and construction. Still, gross domestic product rose 2.7 percent in the fourth quarter from a year earlier — less than the RBNZ and most economists expected.

“The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth and high levels of household spending and construction activity,” Wheeler said.

Growth will accelerate to 3.7 percent in the first quarter of 2018 from a year earlier, the RBNZ forecast today.

Wheeler in October introduced new lending restrictions for property investors in an attempt to cool the nation’s rampant housing market and give himself more room to keep rates low. There are signs the tighter rules may be having an impact, with house-price inflation slowing in largest city Auckland.

“This moderation is expected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand,” Wheeler said.

Source