General Finance

RBNZ forecasts low rates to stay, sees weaker inflation ahead

Shai Patel

(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.

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Reserve Bank delivers cash rate call

Shai Patel

The Reserve Bank of New Zealand (RBNZ) has this morning left the official cash rate unchanged at 1.75%. 

Governor Graeme Wheeler said in a statement, “House price inflation has moderated further, especially in Auckland. The slowing 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 continuing imbalance between supply and demand.

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

Canstar general manager Jose George said it is an uncertain environment for home owners and warned on the increasing pressure for mortgage holders.

“As recent statistics show, while house prices have started cooling in  Auckland and other larger cities, mortgage rates are starting to trend upwards,” said George.

“Independent of OCR, the costs of servicing a mortgage are rising. Couple this with rising inflation and the flow-on effect this could have on other living costs, you have a situation where an already stretched household budget will not be able to take the added pressure for most NZers.

“For savers the situation is more positive.  Despite a series of drops in OCR, term deposit rates have remained largely untouched over the last 12 months or so. We are now starting to see increases in deposit rates, reinforcing the belief that banks are keen to grow their existing domestic deposit book.

The full statement by Reserve Bank Governor Graeme Wheeler is below:
Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing 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 continuing 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 over the year ahead. 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.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

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

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New Zealanders unaware of rate rise impacts: survey

Shai Patel

It’s no secret that interest rates are on the rise and most people with a mortgage anticipate the increase, a new BNZ survey shows.

But worryingly, it also found the majority intend to make no changes to their mortgages in response the rate increases.

The BNZ Financial Futures research found that home owners with mortgages were in the dark about how the impact a 1% interest rate rise would have on their household – three out of five people underestimated how much extra people will pay on the average mortgage size.

BNZ’s director of retail and marketing, Paul Carter said, “It’s concerning that despite 70% of people with mortgages anticipating interest rates will rise this year, 67% of mortgagors are not considering making any changes to their mortgage.”

The survey found 24% of people said they regularly monitor interest rates and proactively restructure their mortgage.

A BNZ spokeswoman told NZ Adviser many homeowners tend to have the mentality of ‘setting and forgetting’ their mortgage.

“This probably comes down to people not appreciating how small changes to their mortgage repayment schedule can reduce the lifetime of their mortgage and how much interest they’ll pay,” she said.

“Our main concern is that people will end up paying unnecessary interest over the lifetime of their mortgage.

“For most homeowners interest rate rises will change their household budget and it’s important they consider how they can react – they might want to fix a bigger part of their mortgage or increase their repayments slightly while rates are still near their lowest level in a generation.”

She said the third party channel can help increase awareness on the issue with their clients, having conversations about how their mortgage is set up and what repayments they can manage.

One in five home owners said they were likely to extend the term of their mortgage if their mortgage payment increased by $120 per fortnight, the research found. Nearly one in three said they’d look to reduce utilities like insurance, petrol, heating and power.

Carter said it’s important New Zealanders understand all their budgeting options in a changing mortgage environment.

“New Zealanders will still be enjoying some of the lowest rates in a generation. So it concerns me that too many people are jumping straight into what seems to be the easy option, which is a couple more years on the mortgage – especially when the changes we’re talking about are small.

“BNZ, like most New Zealand banks, stress-tests people with mortgages at an interest rate higher than the current rates, so we know that budgets and incomes can manage rate rises much bigger than this.

“So while we know our customers have room to move within their budgets to absorb any rises, it’s particularly concerning that 20% of people with mortgages would extend the term of their mortgage if their repayments increased by $120 or more, as this is only going to set them back in the long term,” he said.

“It’s a good idea to occasionally have a sobering conversation about the household budget and consider some ‘what ifs’.

The BNZ Financial Futures research was conducted by Colmar Brunton, a New Zealand Market Research Company surveying a total sample size of 2,000.

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