To the surprise of many commentators in the market, the Reserve Bank of New Zealand (RBNZ) has kept the Official Cash Rate (OCR) at 1%, (13 November) for the second time in a row.
Any changes to the economic climate in New Zealand since August – when the Bank last cut the OCR – “do not warrant a change to the already stimulatory monetary setting at this time”, according to a RBNZ media release on the OCR decision.
Despite the markets being surprised by the decision to hold the rate – hot on the tails of the decision to make a 50 basis point cut at RBNZ’s August OCR announcement – Mr Orr says the Bank did not have a “conscious intention” to surprise.
RBNZ predicts economic growth will be “subdued” for the remainder of the year but that domestic spending will pick up in 2020. This is for a number of reasons, including: low interest rates, higher wage growth, increased Government spending and the flow-on effect of monetary policy changes in early 2019.
RBNZ’s Monetary Policy Committee wrestled with conflicting economic developments in this latest OCR decision; the global slowdown on trade has has a negative impact on New Zealand and there has also been a slowdown in domestic GDP growth, but New Zealand’s export commodity prices have been elevated.
When it comes to the national economy, RBNZ says interest rates will need to remain low over a prolonged period, to help inflation meet the mid-point (2%) of the target range (1%-3%). Inflation in New Zealand is currently sitting shy of this, at 1.5%. But the long-term prediction is that inflation will hit the 2% midpoint.
In the media conference following the release of the Monetary Policy Statement, RBNZ Governor Adrian Orr reiterated that the Bank did not make a cut to the OCR, as earlier cuts take time to take effect in the economy. Mr Orr did acknowledge the current climate of “soft” household spending and business investment but, again, predicts this will pick up next year.
What is happening in the New Zealand housing market?
In response to questions from the floor at the media conference, Mr Orr says the housing market has been showing signs of picking up and he expects this will continue.
Over the past 12 months, housing prices have picked up by 4% on average across New Zealand, but by an average of 8% excluding Auckland.
Serviceability of home loans and afordability remain the biggest challenges in the housing market, Mr Orr says.
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Mr Orr says “perceived wealth” continues to be an important factor in stimulating New Zealand’s economy. Perceived wealth is the concept that homeowners see the value of their property rising and because they feel asset rich, they respond by increasing household spending.
Currently, houshold spending is low, which is contributed to by how high household debt – namely mortgage prices – relative to incomes.
In terms of any future OCR movements, The Monetary Policy Committee says any risks to the economy in the near-term are “tilted to the downside” and that it will add further monetary stimulus if economic developments warrant it.
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