N.Z. Housing Surge, Quake Rebuild Limit RBNZ Rate-Cut Scope

N.Z. Housing Surge, Quake Rebuild Limit RBNZ Rate-Cut Scope
Visitors look at a display showing the Christchurch central business district reconstruction plan at the office of the Canterbury Earthquake Recovery Authority (CERA) in Christchurch, New Zealand. Photographer: Mark Coote/Bloomberg

New Zealand’s surging house prices and earthquake rebuilding may narrow the Reserve Bank’s scope to cut interest rates in an economy where joblessness unexpectedly soared and retail sales slumped last quarter.

Weak hiring and consumer spending add to signs of a slowdown in the South Pacific nation as a global slump and the strongest-performing Group of 10 currency curb manufacturing and exports. Investors see less than a one-in-three chance Governor Graeme Wheeler will cut the benchmark rate from a record-low 2.5 percent at his next review Dec. 6, and all 16 economists polled by Bloomberg predict he’ll stand pat.

As countries from Australia to South Korea reduced borrowing costs to counter sluggish growth abroad, Wheeler faces crosscurrents at home that may prevent him from doing the same. He may struggle to meet a 2 percent inflation goal should lower rates exacerbate the fastest house-price gains in five years and pockets of labor shortages emerge after NZ$30 billion ($24 billion) of damage -- about 17 percent of the nation’s economy - - in the South Island city of Christchurch.

“There’s definitely a sense of upside inflation out of Christchurch and that’s what’s holding the RBNZ back,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland and a former central bank analyst. “The market is not prepared to push the Reserve Bank to ease in the very near term.”

Rate-Cut Bets

Investors are pricing in a 31 percent chance Wheeler will cut the key rate to 2.25 percent at his review next month, according to swaps data compiled by Bloomberg as of 2:15 p.m. in Wellington. That’s up from a 12 percent probability on Nov. 7, the day before third-quarter employment figures were released.

The jobless rate jumped to a 13-year high of 7.3 percent, according to the government report. Retail sales unexpectedly dropped 0.4 percent in the three months through September, the statistics agency said Nov. 14.

The reports raised the specter of a contraction in third-quarter gross domestic product, and the question now is “let’s see if the quarter was a pothole and there’s a bounce-back,” said Doug Steel, an economist at Bank of New Zealand Ltd. in Wellington. “The onus is on forward-looking indicators.”

One such gauge, the Performance of Manufacturing Index produced by BNZ and Business New Zealand, yesterday showed an industry expansion in October after three months of contraction.


Driving growth in coming quarters will be rebuilding in Christchurch, the nation’s third-largest city, where earthquakes destroyed homes, roads and pipelines and required the demolition of more than 1,000 commercial buildings. Some 10,800 quakes have been recorded since September 2010, including a Feb. 22, 2011, temblor that killed 185 people.

There are signs of revival in the city and surrounding Canterbury district. Employment in the region rose 2.9 percent last quarter from a year earlier, the Nov. 8 report showed. Even as overall retail spending fell, purchases gained at Canterbury hardware and building-supply stores.

“From a construction-sector perspective, New Zealand appears to be becoming a polarized economy with the Christchurch rebuild offsetting lackluster activities elsewhere,” Dave Taylor, chief executive officer of Steel & Tube Holdings Ltd., which sells roofing iron and reinforcing steel, told an annual meeting in Wellington this week.

Inflation Outlook

The International Monetary Fund predicted last month that consumer prices in New Zealand will rise 2.4 percent next year from 2012 compared with annual inflation this year of 1.9 percent. That would be double the price gains the IMF predicted for advanced economies in Asia.

The Reserve Bank has kept benchmark borrowing costs at 2.5 percent since March last year. Wheeler, a former World Bank official who took over as governor Sept. 26, extended the pause at his first review in late October.

Last week, he told a parliamentary committee the currency, which has gained 4.3 percent this year, is a concern for exporters and manufacturers who compete with cheaper imports. Still, he said using lower borrowing costs to target the exchange rate didn’t work.

The so-called kiwi bought 81.04 U.S. cents at 2:15 p.m. in Wellington.

The currency is higher than the government is comfortable with, Finance Minister Bill English said this week. Opponents including Green Party leader Russel Norman say they want Wheeler to use so-called macro-prudential tools that target bank balance sheets to counter housing price gains, giving him scope to cut interest rates.

Policy Options

The central bank is in talks with the government on ways to deploy such policies and will only use them to tackle risks to the financial system, Wheeler said last week. “It’s not something we would seek to be exercising at the current time,” he told the parliamentary committee.

Wheeler said similar policies are used overseas, citing Bank of Israel Governor Stanley Fischer, who last month cut interest rates while using home loan limits to tackle rising house prices. Canada shortened the maximum period on mortgages it insures to 25 years from 30 years.

In New Zealand, home prices rose 6.9 percent in October from a year earlier, the fastest annual pace since the 12 months through November 2007, according to Real Estate Institute data compiled by Bloomberg. In Auckland, home to a third of the nation’s 4.4 million people, prices have surged 14 percent.

“House prices will keep rising as long as rates stay low,” said Dominick Stephens, chief New Zealand economist at Westpac Banking Corp. “Prices aren’t going crazy but they are a consideration against reducing the cash rate further.”

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