The Reserve Bank of New Zealand (RBNZ) has for the first time in nearly three years hiked the official cash rate by 0.25% to 2.75% on the back of growing strength in the New Zealand economy. The RBNZ has also raised its forward guidance on rate hikes, forecasting 1.25% of hikes before the end of this year and a further 1% of interest rate rises in 2015.
The RBNZ Statement notes that GDP is estimated to have grown by 3.3% in the year to March, supported by strong commodity (e.g. dairy) prices, strong growth in construction sector activity, and a rapid increase in net immigration over the past 18 months, which has boosted housing and consumer demand. Confidence is also very high among consumers and businesses, and hiring and investment intentions continue to rise.
According to Interest.co.nz, the RBNZ also noted that its macro-prudential caps on high loan-to-value ratio (LVR) mortgage lending had worked better than it had expected in cooling New Zealand house prices. RBNZ Governor, Graeme Wheeler, reportedly told the news conference the “bank’s modelling estimated house price inflation would have been 11% now without the high LVR limit, implying it reduced house price inflation by about 2.5% to the current 8.4% rate of house price inflation” (see below charts).
It will be interesting observing the New Zealand housing market from here, which is now facing dual headwinds from the LVR caps and rising interest rates.