Slight interest rate rise forecast

The Reserve Bank holds rates, worries about house prices and the exchange rate and still considers its new tools.

Thursday, June 13th 2013

The Reserve Bank has made little change to its interest rate forecasts in its monetary policy statement today, but still remains worried about house prices and the exchange rate.

It has left the official cash rate at 2.5% and repeated its previous position that it expects “to keep the OCR unchanged through the end of the year".

Its 90-day interest rate forecast shows rates will be slightly higher from the middle of 2015 than forecast in the March statement.

“This reflects the inflationary effects of the stronger outlook for domestic demand, offset somewhat by a stronger exchange rate forecast.”

While it is worried that house price inflation, particularly in Auckland and Christchurch, gets ahead of the supply response and cause financial or price stability.

Despite this there is no mention in the OCR statement about the bank using its new macro-prudential tools to try and contain the housing market.

This can be explained by the fact that the bank has a framework for its new tools, but it is still consulting on the possible implementation of them.

In its monetary policy statement the bank says that its central projection is that house price inflation will moderate soon.

“House price inflation is projected to rise modestly over the coming half year, before tracking lower thereafter. This projection assumes unchanged prudential policy settings.”

Nationally house prices rose 9% over the year to April. Prices were up 14% and 11% in Auckland and Christchurch respectively and outside these areas rose by around 4%.

The bank says house prices are very high relative to rents and household income.

While the bank’s central projection illustrates its discomfort, it says a key risk is that house price inflation is stronger than forecast and the bubble may burst.

“The bank is concerned that the current escalation in house prices is increasing the probability and potential harm of a significant downward correction in house prices.”

This concern comes from a view that prices can’t keep rising at current rates and debt levels will become unserviceable.

The three main factors behind today’s decision to leave the OCR unchanged are;
- The global outlook remains mixed with disappointing data in Europe and other countries and positive indicators in the United States and Japan.
- Economic growth is picking up, but is uneven across the sectors. Two of the key drivers of growth are the Canterbury rebuild and construction activity in Auckland.
- The dollar remains over-valued, despite falling in recent weeks, and remains a headwind for the tradable sector. It is restricting exports and encouraging demand for imported goods.

Reserve Bank governor Graeme Wheeler forecasts that that annual GDP growth will accelerate to about 3.5% by the second half of 2014 and inflation will rise to towards the midpoint of the 1-3% target band.


No comments yet

Heartland Bank - Online 1.99
HSBC Premier 2.25
Kainga Ora - First Home Buyer Special 2.25
ANZ Special 2.29
Westpac Special 2.29
ICBC 2.45
SBS Bank Special 2.49
The Co-operative Bank - Owner Occ 2.49
BNZ - Classic 2.49
ASB Bank 2.49
TSB Special 2.49
HSBC Premier 2.35
Heartland Bank - Online 2.35
ICBC 2.45
TSB Special 2.49
SBS Bank Special 2.59
ASB Bank 2.59
Kiwibank Special 2.65
China Construction Bank Special 2.65
The Co-operative Bank - Owner Occ 2.69
AIA 2.69
Westpac Special 2.69
HSBC Premier 2.89
SBS Bank Special 2.99
The Co-operative Bank - Owner Occ 2.99
AIA 2.99
Westpac Special 2.99
ICBC 2.99
ASB Bank 2.99
China Construction Bank Special 2.99
BNZ - Classic 2.99
TSB Special 3.19
Kiwibank Special 3.19
Heartland Bank - Online 2.50
Resimac 3.39
Kiwibank 3.40
Kiwibank - Offset 3.40
Kiwibank Special 3.40
Bluestone 3.49
Select Home Loans 3.49
ICBC 3.69
Heartland 3.95
The Co-operative Bank - Owner Occ 4.40
The Co-operative Bank - Standard 4.40

More Stories

ANZ predicts fewer OCR cuts

Thursday, January 14th 2021

ANZ predicts fewer OCR cuts

ANZ has revised its forecast for the official cash rate, predicting only one cut next year to 0.1%.

Mortgage advisers against bright-line test extension

Wednesday, December 09th 2020

Mortgage advisers against bright-line test extension

Mortgage advisers are strongly opposed to any extension of the bright-line test, as speculation mounts that the government will change the law.

Housing market to cool? Yeah Right

Monday, November 30th 2020

Housing market to cool? Yeah Right

While MPs, bureaucrats, and others are calling for the housing market to be cooled, Kiwis don't think anything will happen.

Evidence mounts for NZ property market rebound

Thursday, November 26th 2020

Evidence mounts for NZ property market rebound

There is growing evidence of a strong bounce-back in the residential property market, according to CoreLogic.