RBNZ Holds Key Rate as Wheeler Targets Strong Kiwi, Housing
New Zealand’s central bank expects to keep borrowing costs at a record low this year to avoid re-igniting demand for the currency, which it said remains overvalued. The kiwi declined.
“Despite having fallen over the past few weeks, the New Zealand dollar remains overvalued and continues to be a headwind for the tradables sector,” Governor Graeme Wheeler said in a statement in Wellington today after leaving the Official Cash Rate at 2.5 percent. The bank cut its growth forecast for the year through March 2014 to 3 percent from 3.3 percent, and left its projection for the following year at 2.8 percent.
Confronted with a surging housing market that threatens financial stability and an elevated currency that dents exports, Wheeler has kept interest rates steady and turned instead to other policy tools. He reiterated today the RBNZ will seek to intervene in the foreign-exchange market where appropriate.
“If we see the opportunity to try for example to take the tops off any exchange-rate peak, then we may exercise intervention,” he said. “If there were very strong capital flows, we wouldn’t try to become engaged and try to offset those in any substantive way.”
New Zealand’s dollar dropped to 79.54 U.S. cents at 10:55 a.m. in Wellington from 79.90 cents before the decision. Traders pared bets the RBNZ will lift rates in December to a 30 percent chance from 54 percent late yesterday, according to swaps data compiled by Bloomberg.
“The governor was seen as not hawkish enough,” Annette Beacher, Singapore-based head of Asia-Pacific research for TD Securities, said in an e-mailed note. Wheeler today reiterated the Reserve Bank of New Zealand expects to keep the OCR unchanged through the end of the year, and it seems currency traders “wanted this dropped or altered,” she said.
The currency has declined about 6 percent against the greenback since Wheeler first said on May 8 he was intervening to weaken it. He sold a net NZ$256 million ($203 million) in April, according to central bank data. In a May 30 speech, Wheeler said he was prepared to step up his efforts.
“We’ve got an overvalued exchange rate,” Wheeler said today. “Thankfully the exchange rate is starting to weaken and hopefully it will continue to do so.”
The central bank today maintained its forecast that the three-month bank bill yield will rise to 2.8 percent in the second quarter next year from an estimated 2.7 percent in the current quarter. The outlook, which is seen as a guide to the direction of the cash rate, suggests no increase in the benchmark until mid-2014.
The bank raised its projection for the 90-day bank bill yield from the first quarter of 2015, predicting it will climb to 4 percent by the end of that year compared with its previous forecast of 3.8 percent.
The RBNZ lifted its inflation forecast for 2014 to 1.9 percent from 1.7 percent. Inflation isn’t projected to reach 2 percent, the midpoint that Wheeler is focused on, until the second quarter of 2015.
Today’s rate decision was forecast by all 15 economists in a Bloomberg News survey. Four had been predicting a rate rise this year, while 11 saw no change until 2014.
“We expect to keep the OCR unchanged through the end of the year,” the RBNZ said in its statement.
House prices rose 7.1 percent in May from a year earlier, matching the fastest pace since 2008, Quotable Value New Zealand, a government-owned property research company, said this week. The central bank expects annual house-price inflation to peak at 10.8 percent in the first quarter of 2014, it said.
“The bank is concerned that the current escalation in house prices is increasing the probability and potential harm of a significant downward correction in prices,” the RBNZ said in its quarterly Monetary Policy Statement, also released today.
Wheeler last month reached an agreement with Finance Minister Bill English on how to implement new prudential tools to counter a housing-led credit boom that may threaten bank stability. They include restricting the volume of loans banks can make with deposits of less than 20 percent of the purchase price.
Recent increases in housing demand have been supported in part by an easing in credit conditions, the central bank said today. Mortgages with a high loan-to-value ratio have been increasing and household credit growth is picking up, it said.
“The Reserve Bank does not want to see financial or price stability compromised by housing demand getting too far ahead of the supply response,” Wheeler said.
Wheeler indicated that confidence in the economy will rebound, led by stronger global growth, a lift in residential investment and reconstruction of earthquake-devastated Christchurch. The eventual boost to demand may drive up labor costs and other prices, which have been contained by the stronger kiwi.
Growth in the first half of 2013 will be curbed by a drought which affected farm output earlier this year. Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, this week said milk collection for the six months ended May 31 fell 8.9 percent from a year earlier.
The central bank estimated the drought will reduce gross domestic product growth by 0.5 percentage points in the six months ending June 30.
“There is increasing evidence that despite the recent drought the pace of GDP growth has recovered,” the RBNZ said. “Demand will be boosted by reconstruction in Canterbury, strong momentum in the housing market and continued low interest rates.”
New Zealand suffered its deadliest earthquake in 80 years in February 2011 when a temblor struck the city of Christchurch, killing 185 people and wrecking roads, homes and commercial property. The RBNZ estimates the nation faces a NZ$40 billion rebuild.
The central bank has left the cash rate unchanged since March 2011 to allow the economy to recover from the earthquakes, and to revive confidence after Europe’s sovereign debt crisis curbed global demand. Exporters have also been buffeted by near-zero interest rates in the U.S. and Europe, which helped boost the New Zealand dollar.
Sluggish growth and the rising currency slowed inflation to 0.9 percent in the first quarter from a year earlier, beneath the central bank’s 1 percent to 3 percent target range.
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