RBNZ cuts cash rate for last time


By Leith van Onselen

As widely expected, the Reserve Bank of New Zealand (RBNZ) has cut the official cash rate (OCR) by 0.25% to 1.75%, the first rate cut since August.

According to the release accompanying the cut, RBNZ governor, Graeme Wheeler, slated the cause primarily on a weakening global environment, a strong Kiwi dollar, and well-contained inflationary pressures, but noted the strength of the New Zealand economy and “excessive” housing price inflation:

Significant surplus capacity exists across the global economy despite improved economic indicators in some countries. Global inflation remains weak even though commodity prices have come off their lows. Political uncertainty remains heightened and market volatility is elevated.

Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand dollar exchange rate. The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.

Domestic growth is being supported by strong population growth, construction activity, tourism, and accommodative monetary policy. Recent dairy auctions have been positive, but uncertainty remains around future outcomes. High net immigration is supporting growth in labour supply and limiting wage pressure.

House price inflation remains excessive and is posing concerns for financial stability. Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.

Headline inflation continues to be held below the target range by ongoing negative tradables inflation. Annual CPI inflation was weak in the September quarter, in part due to lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, and reduced drag from tradables inflation.

Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

In the accompanying Monetary Policy Statement, the RBNZ forecasts that the OCR would not fall further than 1.7% in its forecast horizon out to the December quarter of 2019:

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However, the RBNZ is seeing some early success in its latest round of macroprudential curbs, which were announced in July:

The combination of high population growth, low mortgage rates, and a shortage of housing in Auckland has continued to exert upward pressure on house prices. While the average house price in Auckland remains close to its historical peak, annual house price inflation has moderated recently (figure 4.10). This follows the announcement of further tightening of loan-to-value ratio restrictions in July 2016. Outside of Auckland and Canterbury, house price inflation reached a 10-year high in July, but has fallen slightly since.

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Meanwhile, BNZ has confirmed that it will not pass on the OCR cuts to mortgage holders, citing rising offshore funding costs:

“We are not making any changes to interest rates today and it’s a good time to remind people that interest rates aren’t directly or solely linked to the OCR.

“Banks get their ability to lend from a few sources, most of which are getting more expensive and putting pressure on margins.

“One source is local deposits, and at the moment there are more people wanting home loans than there are people saving. So to encourage and attract more deposits (people’s savings and terms deposits) we need to pay a sharper return to savers.

“And we still need overseas funds to fill the gap – and the cost of these remains volatile.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.