RBNZ makes cash rate call

The Reserve Bank of New Zealand has today left the official cash rate unchanged at 1.75%. The result was expected by all 11 economists surveyed by Bloomberg, the majority of whom also forecast the benchmark rate of 1.75% will hold for another year.

The Reserve Bank Governor Graeme Wheeler released the following statement:

Global economic growth has become more broad-based in recent quarters.  However, inflation and wage outcomes remain subdued across the advanced economies, and challenges remain with on-going surplus capacity.  Bond yields are low, credit spreads have narrowed and equity prices are at record levels. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has increased since the May Statement, partly in response to a weaker US dollar.  A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.

GDP in the March quarter was lower than expected, adding to the softening in growth observed at the end of 2016.  Growth is expected to improve going forward, supported by accommodative monetary policy, strong population growth, an elevated terms of trade, and the fiscal stimulus outlined in Budget 2017.

House price inflation continues to moderate due to loan-to-value ratio restrictions, affordability constraints, and a tightening in credit conditions.  This moderation is expected to persist, although there remains a risk of resurgence in prices given continued strong population growth and resource constraints in the construction sector.

Annual CPI inflation eased in the June quarter, but remains within the target range.  Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate.  The outlook for tradables inflation remains weak.  Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range 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.

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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.

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Auckland no longer the most unaffordable region

Central Otago Lakes has now overtaken Auckland as the most unaffordable region in New Zealand, a new report shows.

The latest Massey University Home Affordability Report for the period from December 2016 to February 2017, revealed national affordability had improved over the quarter, due to a fall in house prices in seven regions, including Auckland.

But affordability declined in Central Otago Lakes by 8.2% over the same period.

“This was in contrast to a considerable 7.5% improvement in Auckland’s affordability and, on the Massey index, Central Otago Lakes now ranks as the country’s least affordable region,” says report author associate professor Graham Squires from Massey’s School of Economics and Finance.

“Central Otago also has the largest decline in affordability over the 12-month period, which is a reflection of tourism industry demand in Queenstown, a shortage of housing supply, speculative investment demand, a focus on high-end lifestyle living in the area, and largely stagnant wage increases.”

Auckland’s median house price fell by $51,944 over the last quarter (6.1%).

“These two regions are the least affordable by a clear margin,” Dr Squires said. “Auckland still sits at 55% less affordable than the rest of the country, and Central Otago Lakes is now 68% less affordable than the rest of New Zealand.”

Despite the improvement in affordability in seven regions in both the report’s annual and quarterly figures, Dr Squires said the ratio of median house price to median wage remains very high in Auckland and Central Otago Lakes.

“In our two most expensive regions this will continue to place strain on first home buyers, especially in Central Otago Lakes where the median house price is nearly 14 times the median annual wage.”

Dr Squires noted that slowing house prices and record low interest rates were driving the improvement in affordability but that rates were on the rise.

“It’s important to note that that the quarterly interest rate used to calculate the index is a weighted average of all loans and that is currently at 4.85%. New customers’ rates for January are now much higher – generally between five and six per cent, depending on the type and term of the loan.

“It is possible more stringent deposit and bank lending requirements and interest rate rises could make it more difficult for home buyers in the future.”