RBNZ Signals End to Record-Low Interest Rate in 2014; Kiwi Gains
New Zealand’s central bank said the pace of future interest-rate increases will depend on the booming housing market’s impact on prices and reiterated it will keep borrowing costs at a record low this year.
The New Zealand dollar climbed after the statement as traders increased bets Governor Graeme Wheeler will raise the Official Cash Rate as early as January. He kept the level at 2.5 percent today, and said the kiwi “remains high.”
“Although removal of monetary stimulus will likely be needed in the future, we expect to keep the OCR unchanged through the end of the year,” Wheeler said in a statement in Wellington today. “The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures.”
Confronted with a surging housing market that threatens financial stability and an elevated currency that dents exports, the Reserve Bank of New Zealand has opted to keep interest rates steady and is turning instead to other policy tools. Officials are developing plans to limit the amount of home lending that banks can undertake at deposits of less than 20 percent of a property’s value.
“You’ve seen a further escalation of housing related concerns,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland, who maintained a forecast of a March increase. “It does reinforce they could lift interest rates earlier.”
New Zealand’s dollar climbed after the statement. It bought 79.75 U.S. cents at 9:33 a.m. in Wellington, from 79.30 cents before the decision. Swaps trades show about a 50 percent chance of a rate rise in January, compared with 17 percent odds seen yesterday.
“Despite having fallen on a trade-weighted basis since May, the New Zealand dollar remains high and continues to be a headwind for the tradables sector, restricting export earnings and encouraging demand for imports,” Wheeler said.
The kiwi has slumped the past three months after reaching a 20-month-high of 86.76 cents on April 11. Expectations that U.S. policy makers may start removing stimulus and concerns that China’s economic growth was slowing hurt the currency, while Wheeler said May 8 he had intervened to weaken it.
The central bank last month forecast that the three-month bank bill yield will rise to 3 percent in the third quarter next year. The outlook, which is seen as a guide to the direction of the cash rate, suggested no increase in the benchmark until mid-2014.
Deputy Governor Grant Spencer said June 27 that the housing market was overheated and a threat to financial stability. Higher interest rates were “not the right policy response at this time,” he said.
“The balance of risks favors lifting the cash rate sooner rather than later to cool housing demand but the RBNZ remains determined to experiment with macro-prudential tools first,” Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities Inc., wrote in a July 23 note. “This is expected to delay the tightening cycle.”
Wheeler signed an agreement with Finance Minister Bill English in May about implementation of the prudential tools. The RBNZ is currently considering submissions on a plan to limit the amount of new lending when a loan exceeds 80 percent of the house value.
House prices rose 7.6 percent in June from a year earlier, the fastest gain since early 2008, according to Quotable Value New Zealand.
“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 today. There was no mention of prudential tools in the statement.
Consumer prices increased 0.7 percent in the second quarter from a year earlier, the slowest annual pace since 1999, according to a government report July 16. Annual inflation was slower than the central bank’s 1 percent to 3 percent target for the fourth straight quarter.
“CPI inflation has been very low over the past year, reflecting the high New Zealand dollar and strong international and domestic competition,” Wheeler said today. “Inflation is expected to trend upwards toward the midpoint of the target band as growth accelerates over the coming year.”
The RBNZ last month forecast annual inflation accelerating to 1.5 percent by mid-2014 and 2.1 percent a year later. It projected annual economic growth will accelerate to 3.6 percent in the second half of 2014, from a 2.4 percent pace in the first quarter this year.
“Growth in the New Zealand economy is picking up and although uneven is becoming more widespread across sectors,” Wheeler said. “Consumption is increasing and reconstruction in Canterbury will be reinforced by a broader national recovery in construction activity, particularly in Auckland. This will support aggregate activity and eventually help to ease the housing shortage.”
The central bank has left the cash rate unchanged since March 2011 to allow the economy to recover from 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.
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