RBNZ lowers cash rate forecast on macroprudential

ScreenHunter_4126 Sep. 11 07.57

By Leith van Onselen

The Reserve Bank of New Zealand (RBNZ) this morning released its monetary policy statement for September, which has left the official cash rate (OCR) unchanged at 3.50%, but also lowered its forward guidance for rate rises. The RBNZ also warned on the New Zealand dollar “remains unjustified and unsustainable” and faces “further significant depreciation”.

From the Statement:

The economy appears to be adjusting to the policy measures taken by the Bank over the past year. House price inflation continues to ease, despite strong net immigration. CPI inflation remains moderate, reflecting subdued wage increases, well-anchored inflation expectations, weak global inflation, and the high New Zealand dollar. However, spare capacity is being absorbed, and annual non-tradables inflation is expected to increase. Risks also remain around how strongly net immigration will affect housing demand, and the extent to which pressures in the construction sector will impact broader inflation.

In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment. Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained.

Specifically on housing, the RBNZ notes that price growth is weaker than would normally be expected given interest rates and migration flows, suggesting its macro-prudential limits on mortgage lending are working:

Annual house price inflation is projected to moderate over the medium term from current rates of around 6 percent (figure 5.6), as mortgage interest rates increase, migration flows normalise and increased dwelling construction alleviates supply shortages. As chapter 2 notes, house price inflation is weak compared with what past relationships with net immigration, interest rates and other factors would suggest, and the projection assumes that this weakness continues.

ScreenHunter_4127 Sep. 11 08.14

The RBNZ also lowered its forward interest rate guidance by 0.5% and now expects the OCR to peak at 4.8% by 2017.

Unconventional Economist
Latest posts by Unconventional Economist (see all)


    • No, sack Glen and make Graham an offer he can’t refuse.

      If Graham does in Australia what he did in NZ, he would be worth every dollar of a 10 figure salary.

      And shutdown APRA effective immediately, they are a total waste of space. I wouldn’t even bother spending time reallocating their “responsibilities”.

      • make that Graeme…

        I guess if we are going to offer him a 10 figure salary we should at least spell his name right.

        And no, I am not going to bother with the current governor of the RBA.

  1. Okay. So what’s the upshot of today non-announcement! Firstly, we knew that given the national elections next weekend that the Cash Rate wasn’t going to move – for fear of political bias etc. We also now know that…interest rates are going to higher- it’s in the presentation. Maybe not as high as planned formally if the Governor is taken at face value; but who really knows! We have known interest rates were going to rise, and keep rising for over 6 months now. 6 months during which residential property speculative borrowing has been curtailed and the NZ$ has fallen. Yep. Fallen into the face of higher % rate, and today it has fallen again, also into the teeth of predicted higher % rates.
    Interest rates will go far higher that those that Graeme Wheeler has outlined in today’s speech if you ask me, simply because those ‘animal spoitirts’ that everyone assumes will re-emerge, actually will! But, again, in the wrong place – property speculation. And with that will come the Big Stick and a reinstatement of the higher % rate target – and probably much, much higher, given the parlous state of the global scene.

    • Must be great to have a reserve bank that actually looks at the data, refers to house price inflation as “house price inflation” and is capable of doing their job per charter.

    • Oh dear Janet. You are sooo naïve. The RBNZ follows the dollar not the other way round. The NZD is falling and like Mary’s little lamb, the RBNZ will surely follow, it downhill. Happy to help.

      • Naive? Really? I called this action as it has unfolded in November 2012. Ask Greg McKenna on here. He like you, suggested that raising interest rates would force up the value of the NZ$. It hasn’t. Or Peter Fraser, to whom I advised to ‘borrow all you can when % rates have bottomed, and wait” as I did back then. Naive is believing that weak economies have low interest rates and low exchange rates. They don’t! They have low exchange rates and high interest rates to compensate for the currency risk inherent in the weakness of their economy. It’s only been the last handful of years that QE etc has perverted that norm. Naive is believing that low interest rates can cure all economic ill. They can’t…..and as we shall all painfully see…they won’t.

      • The RBNZ raised interest rates as it followed the NZD going up, just as they will drop interest rates as it follows the NZD down. Watch and learn.

      • The NZ$ rose as interest rates were cut; the OCR falling from 8.25% to 2.5%, Dear Deity. Have a gander at the charts, and fell as the OCR was raised from 2.5% to 3.5% from this March onward. Especially so versus the A$. ( which if it was solely US$ counter-related should have behaved as you believe?)

      • So tell me this then – right here, right now.
        If the RBA raises interest rates at the next move, where will the A$ go? Up or down? There can’t be a lag in that expectation can there? Or if they are stupid enough to, cut interest rates. What will happen?
        My view?
        The A$ will….fall……if rates are raised, and rise if rates are cut, as the NZ$ has done. What’s your call?

      • Well, seeing as you ask, if the RBA raises rates (haha – yes they are silly enough too for sure) there might be a short term retracement of the AUD as the market is gamed, but it will then proceed it’s march downwards and the RBA will follow with lowering interest rates further.

        The RBNZ has dopely raised rates AFTER the NZD has risen. But now the NZD has finally started it’s big fall they will, soon or later, start dropping interest rates (but yes they might be stupid enough to raise it one more time.) Simples.

      • Why would the RBA follow the A$ down with further % rate cuts? Contemporary thinking goes something like :
        ” The inflationary effect of a lower A$ needs to be offset by lower domestic mortgage rates to keep the economy in tact” Is that it? Well as I said above. It ‘aint gonna work this time!
        What will happen is that your lenders will withdraw their support at ever lower % rates and leave you funding your debt soaked economy with, well, what?
        That’s why the NZ$ is falling as rates rise. We’re broke, in essence, and we need to keep the faith of our lenders to avoid a credit run of huge proportion ( why lend to tiny NZ if large Aussie is next door at comparable rates?)
        What worked in the 80’s ( your thesis) and the 90’s ( again) and ,yes, even the 00″s ( as interest rates were cut time after time after time) isn’t going to work this time.
        This time with rates so low, very soon it’s going to be every debtor for themselves….and that will include the A$ and Australia if you are foolish enough to drive your lenders away with lower % rates to other debtor nations. Then say “Hello” to an A$ of astronomical levels as the currency takes over as the economic stabilizer in ways that it was never designed to be. (ie: there will have to be a capital gain in the exchange rate to justify investment, not the yield on the investment itself as that will be non-existant)

    • Their economy is doing quite well so probably not for a while. Although dairy prices have fallen considerably, they are still a big export earner for NZ and these guys are milking it (pun intended) as they seem to have found a way to produce low cost dairy products.

      When they do, they will have some dry powder left to do so as well.

      • The advantage they have is –

        When you expand your workforce and the market changes, you have an unemployment issue.

        When you expand your dairy herd and the market falls away, you can eat them.

      • The advantage they have is they are the RIO and BHP of the dairy world. The lowest cost producers for the export market. Moreover, people will drive an old car, live in a shack but they still gotta eat.

        And yes, you can eat the herd.

      • Peter,

        I have just been advised by a Real Estate Agent that if things get desperate in Australia you can eat Australian housing.

        He then mumbled something about Tigers if that does’t work out he, something which I didn’t quite pick up.

      • That Real Estate agent has it all wrong nosofast

        Here in Australia we have learnt to eat our young instead……..

        They taste so much better before they grow old and become totally pissed off !

    • Peter,

      Said I’d get back to you. My “Relationship Manager” just called back and either she doesn’t know what’s she’s doing or it’s worse than you thought. This time around they will only borrow to 90% LVR based on income only (no debt) up to 1.4M, with the LMI on top to 93%.

      • ff,

        I suppose that depends, I’m happy with it. My point to Peter was he called me out suggesting I’d made it up on a previous post that the bank would lend 1m on 95%. Basically then it was 6.5 x income, this is even more. His argument is that the banks aren’t lending stupidly, my experience is that they are more than willing to do so. I lose my job and the loan is dead in the water for them. I have cash assets but none of it required to secure the loan, which in my opinion is dangerous.

        However, his comment that she doesn’t know what she’s doing may be correct.

      • @dennis

        I would tend to agree with you although your case seems a bit more extreme than what I have encountered.

      • I’m glad that you got back to me dennis. As you can probably tell I thought initially that you were trying to wind me up, but I see now that you have been led astray by your bank.

        If you take a mortgage insured loan – usually above 80% LVR then your bank is limited to what the mortgage insurers will provide.

        At 95% LVR that is $750,000
        At 90% LVR that is $850,000 not $1.4M as you relationship manger has now advised you.

        Now maybe your a valued corporate client who they would walk over red hot coals to keep happy, but otherwise you will be like the rest of us and be satisfied with what is available.

        My apologies for coming across as a complete prick, but by now you will be seeing the issue from my side.

        As a quick check here are the Genworth maximums – you I presume are a normal PPOR buyer in a major city, so you are in the top product type in a Category 1 area.


        You can read the complete Genworth policy here –
        Look under “Maximum Loan Amount Matrix”

        The other major insurer is QBE who are pretty much identical.

        I think that you need to have another conversation with your relationship manager. Not much use making offers on houses that you can’t buy, and it becomes embarrassing when you can’t get finance.

        There are other banks to talk to by the way.

        Cheers and best of luck with the house buying. Don’t rush into it.

      • Peter,

        I got back to her and mentioned your LMI restriction and so the offer has changed after she reviewed their matrix!

        Max Loan Possible:

        80% LVR 1.4M max available to me, deposit 375K, no LMI.
        80% LVR 1.0M, no LMI.
        90% LVR 1.0M, LMI.

        The last one is still 6.5 x income, which is what the post you took issue with was pointing out. It still appears to contradict your Genworth matrix, maybe they need to consider better training.

        I’m not interested in buying at present prices. The original post came out due to an argy bargy thread on whether or not banks were lending recklessly, so I decided to call up and see for myself.

      • dennis I was really challenging the 95% LVR $1M loan not so much the loan to income ratio, but fair enough let’s look at that.

        I calculate that you earn about $153,000 annually – is that correct?
        And the bank has offered to lend you $1m which is about 6.5 times annual earnings?

        Have I got that right?

      • dennis you did say that you were buying an investment property but you haven’t factored in the $45K to $50K rental income that you will get and that reduces the debt servicing ratio considerably.

        In fact because the interest cost should be below $48K on the loan the actual dollars that you end up with in the hand every pay will hardly change at all.

        You have quite a good income, a lot more than normal. Do you think that you can’t gradually reduce that loan and thus reduce holding costs?

      • Peter,

        I’m not actually looking to buy as per my post to ff above. I just said I was looking at getting an IP and given my circumstances what was the max I could borrow @ 80/90% LVR with and without LMI to get an indication as to how stupidly or otherwise than were lending.

        Anyone else reading this may be confused as this flows on from another thread.