In a speech in Greymouth this morning, Reserve Bank governor Graeme Wheeler said prospects for a continuation of New Zealand’s economic expansion with above-trend growth, strong employment and rising inflationary pressures look promising.
However, this is in the face of considerable political and economic uncertainties – particularly on the international front – and their implications for the global trading environment.
“The greatest threat to the expansion lies in possible international political and economic developments and their implications for the global trading environment,” he said.
“The main domestic risk – and one that could be triggered by developments offshore – is a significant correction in the housing market.”
“Numerous measures indicate that New Zealand house prices are significantly inflated relative to usual valuation indicators.”
Wheeler pointed to IMF and OECD data showing that New Zealand’s world-leading house price increases and deterioration in the median house price to median income ratios.
Several cross-country studies have assessed the economic implications of housing market downturns, he said.
“This research tends to show that almost half of the housing booms end in a bust, with downturns lasting around four to six years.
“In addition, soft landings in the residential investment cycle are rare, with most collapses leading to protracted falls in private consumption and investment, especially construction investment.”
While there are some indications that house price inflation in Auckland and other regions may be moderating, it is too early to be sure, he said.
“This may be a result of the increase in loan-to-value restrictions, higher funding costs being experienced by banks, and tighter credit criteria being applied by banks in connection with financing apartment development and house purchases by offshore residents.”
In the speech, Wheeler also said there is not likely to be any OCR movement on the horizon – barring a significant economic development.
“The central interest rate projections contained in the November Monetary Policy Statement (MPS) indicated that the OCR is likely to remain at its current level for some time.”
Those projections are highly conditional and based on a range of key assumptions.
But, at this stage, nothing has occurred to cause the Reserve Bank to change their view on the direction of monetary policy as outlined in the November MPS.
Wheeler said they expect monetary policy to continue to be accommodative and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range.
Westpac senior economist Satish Ranchhod said the key take-out from the speech was that the Reserve Bank expects to keep the OCR at the current record low for some time.
“The Reserve Bank needs to keep rates low to ensure domestic growth remains firm and domestic inflation picks up.”
ASB chief economist Nick Tuffley said Wheeler’s speech shows the Reserve Bank remains comfortable that interest rates are now low enough to achieve its inflation targets.
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