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Economist Cameron Bagrie explains the recent Monetary Policy Statement from the Reserve Bank of New Zealand, using key take-outs to look at developments ahead.


At its last announcement on Wednesday November 13, the Reserve Bank of New Zealand (RBNZ) decided to keep the Official Cash Rate (OCR) unchanged at 1 percent - again, taking markets by surprise following the dramatic cut of 50 basis points in August.

Explaining that economic developments since the August statement have not warranted a change to the already stimulatory monetary setting, RBNZ Governor Adrian Orr revealed that while employment remains around the maximum sustainable level; and inflation is within the target range of one and three percent; the RBNZ will continue to monitor economic developments closely and are prepared to act if and when required.

Despite slow trade-partner growth, weaker business sentiment and soft household spending dampening economic growth across 2019, New Zealand’s commodity prices have been robust, showing that in spite of a sluggish global economy, we’re not seeing the impact hit New Zealand.

While careful to note that the rest of 2019 is expected to remain lackadaisical, the RBNZ predicts domestic activity will pick up in the new year; driven by record low interest rates, higher wage growth and increased government spending in areas such as infrastructure.

Explaining that the RBNZ was in strong consensus; declining risk premiums, low inflation and short-term interest expectations all support the idea that interest rates will stay low for longer in order to keep employment and inflation at satisfactory levels.

Where some in the market have picked housing inflation to rise upwards of six percent over the first half of 2020, the RBNZ projects residential values to lift by 5.7 percent come June next year. This is in line with my own forecasts as I expect to see a modest resurgence, but nothing akin to the top of the cycle.

In terms of borrowing rates, the initial 15 basis point movement in the two-year swap following the November 13 announcement pressured two-year mortgage rates to rise. As bank margins have been under pressure, we expect they will be keen to recover some allowances here.

It is important here to consider the interaction between monetary policy and financial stability as the two share a close relationship. Lower interest rates, while needed to support the economy, can inflame financial stability risks - meaning that should house prices rise too far, people can borrow too much and banks can become exposed triggering the use of fiscal tools such as loan-to-value restrictions. This is something the RBNZ will be very aware of.

Internationally, 2020 looks to be another year of fragility. While in New Zealand we haven’t felt the effects of this much more than weaker tourism numbers (Chinese New Year) and falling forestry exports; the global scene is looking wobbly – which is a key factor in the RBNZ’s decision to get the New Zealand dollar moving down.

While we are currently in the midst of the pre-Christmas seasonal lift, credit conditions for the residential sector look to be more favourable when compared to commercial property, corporates and agriculture, largely owing to the fact that less capital is required against a mortgage.

Looking ahead, we will be watching the imminent release of the RBNZ’s Financial Stability Report (FSR) as well as its decision on the amount of capital banks are required to hold (more on this here).

These announcements, pertaining to the financial sector’s stability, are aimed at lessening the likelihood of a correction and the chance that macro-prudential tools like LVRs will be tightened again.

For more useful information from the month of November click on the links below.

 

In-depth reports:

• The latest Monthly Property Report from the Real Estate Institute of New Zealand (REINZ)reveals values and volumes for residential property across the country have rebounded, with the REINZ’s Housing Price Index (HPI) increasing to a record new high of 3.6 percent year-on-year.

• Using construction industry index figures to measure the rate of change within New Zealand’s residential housing market, the Cordell Housing Price Index shows that construction costs are rising at three times the rate of general inflation, putting pressure on the ability to produce new housing.

• In its tenth annual Global Wealth Report, international wealth manager Credit Suisse has found that 185,000 New Zealanders are thought to be millionaires on paper, with household assets comprising 47 percent of that wealth.

Topical articles:

• Property commentator Ashley Church summarises the latest round of changes proposed to the Residential Tenancies Act which could shift the balance of power, giving tenants more flexibility to negotiate tenancy terms and alter structures within the home.

Auckland’s Tamaki Regeneration Shared Home Ownership scheme is helping first home buyers get onto the property ladder by using Government sanctioned investors as shareholders in private homes.

• An infrastructure financing model pioneered in northern Auckland which has seen homeowners contribute to the cost of infrastructure by paying a levy over 30 years, is proving difficult to replicate elsewhere in New Zealand.

TradeMe’s latest rental market data suggests an earlier-than-expected rise as both tenant enquiries and rental values increase across the country.

• Having recently injected new life into the Ruapehu area, the Provincial Growth Fund has already committed $2.5 billion in funding in order to give New Zealand’s regional communities more appeal.

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