'Power to the consumers'

The Reserve Bank this morning left the OCR at 3.5%.

Reserve Bank governor Graeme Wheeler noted CPI inflation remained modest, influenced by the high dollar and drops in international oil prices.

He pointed out that New Zealand’s growth was expected to remain at or above trend through 2016, with unemployment rates dropping.

ANZ chief economist Cameron Bagrie said New Zealand had a “goldilocks economy”, with solid growth and low inflation. “The OCR is on hold for the time being… the outlook is a box of fluffies.”

He said if unemployment tracked down over time, that could boost inflation which could lead to a higher OCR, “but not a lot”.

Bagrie expected a move up in the OCR in the later part of next year. “But there’s a pretty symmetric risk profile for that at the moment.”

Mortgage rates were likely to stay low, he said, and borrowers would benefit from an aggressive market. “It’s all power to the consumer.”

ASB chief economist Nick Tuffley said it seemed that the housing market was getting a second wind. “The Reserve Bank may be surprised by how resilient the Auckland market is.”

Fixed rates for people with more than 20% LVR are lower now than they were earlier in the year. “There’s a fair amount of pressure keeping rates low.”

He expected rates to creep up slowly but he did not expect movement in the near term. “Fixed rates are giving very cheap certainty but it’s  case of how much value you put on that certainty when short term rates are likely to remain low for the time being.”

Westpac’s economists said the release accompanying the announcement was more hawkish than had been expected. It reintroduced an explicit hiking bias, saying some further increase in the OCR was expected at a later stage.

But they said they would be surprised to see the Reserve Bank move at all next year. “Events have moved very rapidly over the past few weeks. The RBNZ's forecasts were finalised on November 26, and are therefore already quite out of date. Oil prices have plunged since that time. Whereas the RBNZ is forecasting 1.5% inflation for the year to September 2015, we think lower oil prices will take inflation down to 0.9%. Under those conditions, the RBNZ will not be hiking. Therefore, we expect the first OCR hike will occur in March 2016, not December 2015 as the RBNZ's current forecast implies.”

Westpac chief economist Dominick Stephens said he expected a drop in fixed interest rates to fuel 7% house price inflation next year, which would worry the Reserve Bank.

But he said it was more likely to respond with a macroprudential tool – either a tightening of the LVR restrictions or another form of restriction with a similar effect.