RBNZ shows Australia the way

By Leith van Onselen

The Reserve Bank of New Zealand (RBNZ) conducted its Official Cash Rate (OCR) review this morning, which left the official interest rate at 3.5% as expected. However, RBNZ Governor, Graeme Wheeler, did drop talk of future interest rate rises saying “a period of assessment” is warranted, and also warned once again on the overvalued Kiwi dollar:

The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.

The global economy is growing at a moderate rate although recent data suggests some softening in the major economies, apart from the United States. Monetary policy is expected to remain supportive for longer in all the major economies.

Growth in the New Zealand economy has been faster than trend over 2014, reducing unemployment and adding to demands on productive capacity. Strong construction sector activity, high net immigration, and interest rates, which remain low by historic standards, continue to support the expansion. Output growth is expected to moderate over coming years, towards a more sustainable rate.

Lower commodity prices and increased global financial market volatility have taken some pressure off the New Zealand dollar. However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation.

CPI inflation remains modest, and was 1 percent in the year to September. Contributing factors are subdued wage inflation, well-anchored inflation expectations, weak global inflation, falls in oil prices, and the high New Zealand dollar. House price inflation has fallen significantly since late-2013, in part due to interest rate increases and the LVR restrictions.

The economy appears to be adjusting to the policy measures undertaken by the Bank over the past year. CPI inflation is currently at a low level despite above-trend growth. However, inflation is expected to increase as the expansion continues. A period of assessment remains appropriate before considering further policy adjustment.

Following the lower than expected inflation figures, which came in at just 1% in the year to September, the RBNZ has clearly reduced its forward guidance on rate rises. Gone is last month’s “some further policy tightening” statement, replaced by the dovish statements: “inflation is expected to increase as the expansion continues” and “a period of assessment remains appropriate before considering further policy adjustment”.

The previous warning about the high Kiwi dollar rate was also repeated with: “its current level remains unjustified and unsustainable and continues to constrain growth in the tradables sector. We expect a further significant depreciation”.

The RBNZ is done, with house prices and inflation contained through policy innovation (and a little use of the cash rate) and the dollar tumbling on consistent and pointed jawboning. The lessons for Australia are twofold. First, the RBA should have embarked upon the macroprudential course when the RBNZ did, albeit in its own way. Second, the neutral cash rate is now much lower than most in the market think. The New Zealand economy is booming yet 3.5% interest rates have been enough to blow the froth into the Pacific Ocean.

With its relatively weaker economic prospects, macroprudential should be even more effective in Australia and the cash rate not need to go up at all (and probably fall).

[email protected]



Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. Here’s some froth blowing for ya!

    “A luxury apartment at Auckland’s Viaduct harbour failed to sell at auction (yesterday)…The two bedroom waterfront apartment in The Quays complex had spectacular views looking over the marina towards the harbour bridge….(it last) resold for $405,000 in 2007….In an unusual move, the reserve price of just $195,000 was declared to potential buyers prior to the auction, in the hope that this would generate additional interest….one brave soul offered $150,000, which was accepted by the auctioneer….That prompted another bidder to enter the fray which eventually pushed the top bid up to $165,000, at which point the auctioneer paused proceedings to take instructions from the vendor in private….and it was passed in for sale by negotiation.”

    Now sure, it is on leasehold land, ( that Kiwi investors are wary of) but that was part of the price back in 2007 as well..(NB: You could argue that all strata title apartments are leasehold, as all the ‘owner’ get to do is be the proprietor of the space of the unit from the internal coat of paint, inwards. The rest is communal property)
    Should the OCR have gone higher? I reckon…but I’m satisfied that at least we made an attempt to tame the property mayhem….and it appears to be working!

  2. “….(and a little use of the cash rate)”

    4 rate rises in 4 months.

    The lessons for Australia are manifest. Glenn Stevens grand experiment in extreme financial repression has failed dismally.

    Sack Stevens (and Ellis). Hire Wheeler.

    • +1 He’d be worth the million!

      GW happy with a 1% annual inflation read, legend.

      House price inflation has fallen significantly since late-2013, in part due to interest rate increases and the LVR restrictions.
      And he mentions the “i” word about house prices and comfort in the fact there are falls. Nobel prize material this guy is.

      • Mining BoganMEMBER

        Yep, he’s prepared to sit back and wait to see what happens. Not like our numpties who panic and jump at the first phone call from a billionaire.

      • There’s a big difference to seeing what happens at NZ rates (with MP) and Aussie rates (with no MP, terrible tax policy and insatiable specufestor culture). RBA should have expected nothing else except the horrible outcome we now have – continued hyperinflation of land/m2.

      • Mining BoganMEMBER

        Yeah, sorry Andy, That’s what I meant. Make the tough decisions and wait for the results to filter through the system.

    • Glenn Stevens grand experiment in extreme financial repression has failed dismally.

      Dear me. If we have “extreme financial repression” what the hell do they have in the rest of the world?

      This one-sided view is incredibly tiresome. We are headed into an income shock and capex cliff, we have a chronically overvalued currency, weak domestic demand, and a government determined to cut back spending. To pretend these issues don’t exist is absurd.

      Essentially its housing vs the rest, because every other economic indicator is saying we need cuts.

      • Perhaps the unrealistic goal posts should be changed then?

        For example, why target 2-3% inflation in the current climate? 0% would be a good result.

      • Its ok Lorax. PF and assorted malinvestment spruikers will be along shortly to back you up.

      • I’m hardly in the Peter Fraser camp, don’t tar me with that brush.

        Again, to pretend these issues don’t exist is ridiculous. All of us understand that housing affordability is a huge problem, and that easy money has gone to precisely the wrong place — housing speculation. We also understand that the 2011-14 housing boom was largely engineered by the RBA and this has been a horrible mistake. It should have been implemented in conjunction with MP, tax reform and regulatory reform.

        But again, to pretend that there are no considerations apart from housing is disingenuous. Do you seriously believe the RBA would have been on hold for this long at ultra-low rates if the only issue was housing?

        I’m sorry but I can’t take any of you seriously until you put forward a coherent argument for ignoring economic considerations outside housing. You’re in same boat as PF and The Claw, just at the other end of the spectrum.

      • Lorax why do you believe further cuts from these levels will help the problems you foresee? All things equal, I can just see house prices being sustained or increasing further, with reduced spending from savers (already low).

      • “I’m sorry but I can’t take any of you seriously until you put forward a coherent argument for ignoring economic considerations outside housing. You’re in same boat as PF and The Claw, just at the other end of the spectrum.”

        Lorax – the argument is simple:
        1. Low interest raise house prices (there we agree)
        2. Businesses don’t care much about cash rate at the moment (reported by a senior banker)
        3. Money not going into real economy because all money goes to housing – as long as it’s appreciating
        4. Repeat

        Only way to break the cycle and get investment in the real economy is to break the cycle. Only way to do that is to raise interest rates.

      • http://www.rbnz.govt.nz/monetary_policy/policy_targets_agreement/

        The current PTA, signed in September 2012, defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.

        At the lower bound doesn’t really mean too low, especially when it’s an average over the medium term rather than a single print or two.

  3. The RBNZ used MP tools like a rank amateur and then it pushed up the rates to hike the Kiwi higher than it should be.

    Its a complete fail in my view. Thankfully the RBA have learnt from the RBNZ mistakes.

    • Peter, You realise that your credibility here is so low that by now almost everyone assumes the opposite of whatever you say is going to be good for economy?

    • So good to have to back Peter. Your BS was so sorely missed.

      Probably why the Kiwi has fallen 10% of it’s highs and on track to hit 2 yr lows.

      Also more importantly, it bottomed out against the AUD just before the first hike….

      • The USD has risen against almost all currencies.

        Do you think that NZ needs a stronger Kiwi?

      • @PF

        The fact that the Kiwi has been falling heavily against the the AUD (~5% since rate rises started) would imply that the rises are not causing a lift in currency. Would the Kiwi be lower? Who knows, yes, no maybe?

        It has certainly stemmed some speculation, both local and foreign.

      • and is it not the call here that the AUD is overvalued?

        What would the Kiwi be worth in AUD if our currency was not overvalued?

        You are looking at the relationship between two currencies but only choosing to examine one of them.

        BS indeed.

      • @PF

        That is why I talked about the AUD/NZD and USD/NZD relationships. You can look at all others an they are similar to the USD/NZD pair or AUD/NZD pair.

        We now have 1% OCR deferential between the AUD and NZD, yet the NZD is falling further against crosses than than AUD.

        If the AUD fell strongly against the USD, I would expect the NZD to fall atleast as much due to the strong correlation between teh two in the past.

  4. I was waiting for a land tax post for this comment but eh, it’s about house prices:

    On the efficiency of land tax, the following proof clearly sets out why it would not be efficient to replace stamp duty with it.

    It appears to be on efficient on face value and a naive (and lazy) application of the micro-economic theory. That is, a tax is distortionary if it creates a tax wedge, that means that prices (costs) effectively incurred by consumers (producers) mean that the quantity of consumption is lower than the ‘efficient’ quantity without that tax wedge. Lower consumption leads to a lower total surplus.

    However, to say that this is means stamp duty will be less efficient than a land tax (because it creates a tax wedge) ignores that for the above efficiency effect to hold the condition that needs to be satisfied is that PRICES are what leads to lower consumption than the efficient quantity. In fact, we know that this isn’t true in the case of Australian housing. It is supply-side policies/constraints that lead to lower consumption (or new lower construction) in this case.

    So why would a land tax lead to lower efficiency? Because it would further distort the price of housing, which is an input cost to downstream production. Higher (distorted) input costs lead to lower consumption and production across the whole economy. This effect is very strong and is already crippling Australia.

    And why would it lead to higher prices? Take the following stylised example. X wants to buy a house. We know that Vendors charge as much as X can pay. Let’s say:
    – X has $100,000 in cash
    – The bank will loan a maximum LVR of 90%
    – Stamp duty would be $40,000
    – With stamp duty, X can bid up to ($100,000 – $40,000)/(1 – 90%) = $600,000
    – Without stamp duty, X can bid up to $100,000/(1- 90%) = $1,000,000

    It is dissapointing to see vested interests being able to easily convince the naive public to inadvertently support their agenda. In the case of housing policy where we’ve got a history of unintended consequences it’s a matter of fool me twice, shame on me. It’s because everyone laps up what’s dished out .

    Think for yourselves people – for the sake of the national interest. Stop regurgitating what you’re told and believing what you’re told.

    • I know for a fact, don’t ask me how, but vested interests from the property industry are in favour of a land tax (to replace stamp duty of course ). Read between the lines of HIA’s public views. It’s pretty obvious.

      They know it will boost prices and help their land bankers.

      You think they care about efficiency?

  5. What has happened to the “male identity” … posted by Karen Straughan … Youtube

    Men not marrying ? … How deep does the problem go ? … Karen Straughan


    Karen Straughan post provides an interesting and entertaining perspective.

    This is why issues such as affordable housing (and others) do matter. Making it impossible to access affordable housing does have consequences.

    The self-serving political elites … out of fear … were not prepared to deny affordable housing to young returning serviceman following WW11 … after learning a few lessons following WW1 …

    Levittown: Documents of an Ideal American Suburb


    Is there a growing recognition of these issues … particularly with younger people now ? …

    The shift to (in the broad sense) conservative values … with the young too … | Scoop News


    • Actually, it’s the other way around, Peter! The RBNZ – Graeme Wheeler – is now learning from the Glenn Stevens run RBA, and it could be the New Zealand’s determent.
      What has made a difference is that Graeme Wheeler has been a man of his word, implicitly – right or wrong in a variety of opinions – and today, he broke that. He altered his long term’ word’ that interest rates would go at least 1% higher. If the NZ$ has been influenced at all by his ‘jawboning’ it will be interesting to see if that still holds, now that his trustworthiness has been compromised.
      He could have altered the LVR regime instead – which he always said was temporary . But he didn’t. A possible bad move….

      • Hi Janet, NZ and Oz are in different phases of the cycle so I doubt that either would copy one another.

        Prices for NZ exports are not holding up well the last time that I looked. Wheeler may have to backtrack considerably.

        To an earlier point that you made above, strata title is a form of freehold, it’s not leasehold and nor is it company title. I think that most people accept it quite well. But I think that you know that.

      • Precisely. It’s a form of freehold – not freehold in entirety. My point being that if leasehold owners’ are worried about the escalation of lease payment, so should strata title holders be similarly concerned about Body Corporate obligations etc etc They may be under their direct control, but any costs are market driven and are only ‘controllable’ in the ability to apportion them out.. As you suggest, by and large – they aren’t a worry. So leasehold owners, being fully informed of the lease obligations, should be similarly unconcerned – any concern being reflected in the purchase price.
        (PS: Given my view that higher interest rates would lower the NZ$ – dry up capital flows for speculative purposes – it will be interesting to watch if the reverse now applies, and we do get a higher NZ$ with no further rise in % contemplated)

      • Janet there are so many forms of leasehold – miners homestead perpetual leases, like those found in some rural ex gold towns, limited term leases such as those on offshore islands, etc etc etc.

        Each is a subject for discussion in itself. If there is a set term then the value isn’t fixed or increasing, it’s diminishing.

        I don’t know what the lease terms are in NZ but if they are perpetual leasehold or can be converted to freehold I don’t see why that would be an issue.

        I don’t agree on your views of freehold, that’s like saying that a woman is a type of person but not a person entirely, when indeed a woman is a person entirely.

        If the holding is “in fee simple” then it’s freehold.

    • Hugh, their is now a recognition and an awareness of the housing affordability travesty. Even within the political complex. That is not the issue.

      The issue is the obfuscation of the causes, the appropriate policy responses etc. And a naive public.

      You may disagree on individual policies but MP in lieu of rate increases, abolishing stamp duty and replacing with a land tax and oh man , Xenophons crazy super idea (although I think the public’s not fooled by that one as much) all good examples of what might prolong the travesty.

    • Comment from reader … h/t PhilipM

      I have been a distant admirer of Ms Straughan for several years. She has begun to attract attention. For instance, she debated Naomi Wolf in a symposium. Naomi Wolf is not as radical in her economics as Naomi Klein of Canada. I comment on Naomi Wolf’s Facebook page, which has nearly 100,000 friends.

      Ms Straughan is raising teen sons, and is apparently authentically North America working class. She knows all too well that working class men work dirty and dangerous jobs to earn a bit more money, in order to enable their wives and daughters to live a bit better. She knows all too well that men die while building all large civil engineering and industrial projects. straughan has declared herself a libertarian, which means that she warmly supports a market economy.

      Straughan is one of several Canadian women who use social media to mount a powerful counterattack against gender feminism in Canadian public policy.

  6. NZ Finance Minister Bill English reminds depositors there is no Government Guarantee

    (New Zealand Finance Minister Bill) English reminds term deposit savers there is no Government Guarantee and fends off Winston Peters’ call for deposit insurance | interest.co.nz


    By Bernard Hickey

    Finance Minister Bill English has reminded term deposit savers that there is no Government guarantee for their deposits and has reiterated his confidence in the system of Open Bank Resolution (OBR) available to the Reserve Bank if a bank were to fail.

    English was speaking in Parliament after New Zealand First Leader Winston Peters asked about the risks of capital flight to Australia’s guaranteed banks in a crisis and after a Financial Markets Authority (FMA) survey showing 52% of depositors believed there was a Government Guarantee.

    New Zealand is the only country in the OECD without a deposit insurance scheme and instead relies on Reserve Bank regulation of a capital levels to keep banks stable and protect depositors. … read more via hyperlink above …

    New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News


  7. Skyscraper boom in Australias second largest city flags glut … Nichola Saminather … Bloomberg … h/t JamesG …


    Australia’s second-largest city is seeing its skyline being transformed at the fastest pace ever by Asian developers building residential towers. Now there are concerns too many are going up. …

    … “The level of building is unprecedented,” said Cameron Kusher, Brisbane-based senior research analyst at property information provider RP Data Pty. “The supply has been sufficient over recent years, and that could turn very quickly into an oversupply.”

    Overseas developers are responding to a shift away from the great Australian dream of a suburban life centered around backyards and swimming pools. They’re also reacting to ever-increasing demand for new, centrally located apartments from Chinese buyers seeking to escape their own faltering housing market and improve their quality of life.

    Melbourne was among the 10 most unaffordable housing markets in the latest report by consultancy Demographia released in January, which compares prices across nine countries.

  8. Can China afford to prop up its opaque LG and SOE sectors … and a housing bubble at the same time ?

    China moves to expand, upgrade consumption – CCTV News – CCTV.com English


    Central government pledges support for property industry | CER


    China Backs Growth in Housing Again as Slowdown Prompts U-Turn – Bloomberg


  9. Britain’s most expensive garage sold for £550,000 – Telegraph


    Half a million pounds seems a lot to pay for a car parking spot in central London – however hard they are to come by.

    But a small garage on a plot of land in Chelsea has been snapped up for around £550,000 before it even got to auction.

    Although the 11ft by 7ft installation off the King’s Road is only large enough to hold one car, its sale price is twice that of the average UK asking price, and at a similar level to the typical asking price of a London home … read more via hyperlink above …