Will OCR change next week?

The Reserve Bank is expected to leave the official cash rate at 1.75% next week and continue projecting very little increase for the next three years because inflation has slowed in an economy that’s has been on a faster than expected track, BusinessDesk reports.

The Monetary Policy Statement next Thursday will provide a new set of forecasts and adjusted are expected because both the currency and inflation aren’t where the central bank was expecting back in November and Stats NZ has recalculated its measure of gross domestic product for the 2016 and 2017 March years.

The Reserve Bank will also have to consider the deflationary impact of free first-year tertiary education.

Fourth-quarter inflation of 0.1% was a third of the pace the bank forecast in November and the annual rate slipped back to 1.6%, a bigger drop than it expected.

The November MPS didn’t price in a 25 basis point hike until March 2020 and on that basis the RBNZ could be overtaken by the Federal Reserve this year after chair Janet Yellen repeated there would be gradual increases in the federal funds rate, currently in a target range of 1.25% to 1.50%.

The trade-weighted index was recently at 75.02, above the 73.5 level that the RBNZprojected for the first quarter.

Weaker inflation, the higher kiwi and the impact of the government’s tertiary education policies “are likely to see headline inflation retreat towards the lower end of the target band once again,” said ANZ New Zealand senior economist Phil Borkin in a note.

“The RBNZ will be mindful of the potential implications of this for the formation of inflation expectations.”

The ANZ Roy Morgan consumer confidence survey published today shows Kiwis wound back their expectations for inflation in the next two years.

The survey showed a net 3.2% general increase in prices is expected, down from a 3.5% rise seen in the previous month’s survey.

National house price expectations rose to 2.9% from 2.4%.

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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.

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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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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.

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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.

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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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Homebuyers ‘slightly less pessimistic’: report

House price expectations have cooled as the market cools but people expect interest rates to rise over the coming year, a new report has revealed.

According to ASB’s Housing Confidence Survey for the January quarter, buyer sentiment has edged higher but is still hovering around record lows with New Zealanders still saying it’s a bad time to buy a house.

A net 17% of people think it’s a bad time to buy a house, up from a net 26% (a historical low) in October.

Forty-six per cent of respondents believe house prices will rise (compared to 58% three months ago), the second lowest level for price expectations since 2012.

ASB chief economist Nick Tuffley says the survey findings correspond with the slow-down in housing market activity following the Reserve Bank’s latest investor-focussed loan-to-value ratio (LVR) restrictions.

“Not only has housing market data shown a fall in sales activity recently, it has also suggested house price growth has slowed in a number of regions,” Tuffley says.

“It is likely that the weaker market activity has impacted on respondents’ house price expectations this quarter.

“Elevated house prices are likely to still be weighing on sentiment, as are the higher deposit requirements now facing investors in particular,” he said.

“On balance, respondents see it as a bad time to buy, but are slightly less pessimistic than three months ago.”

Tuffley also said Kiwis seem to believe the days of super low interest rate days are over.

“Recent lifts in mortgage rates appear to have respondents bracing themselves for more. While we expect the RBNZ to leave the OCR on hold until late 2018, funding pressures and higher offshore interest rates could see mortgage rates creep higher,” Tuffley said.

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