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Wheeler speech convinces many economists OCR on hold next week, even as kiwi rebounds

By Jonathan Underhill

Oct. 23 (BusinessDesk) – The Reserve Bank may keep the official cash rate unchanged next week to avoid inflaming Auckland’s housing market and to keep some capacity up its sleeve should global growth stumble, even though the kiwi dollar has gained when the bank had expected a decline.

Governor Graeme Wheeler will keep the OCR at 2.75 percent on Oct. 29, according to the median forecast in a Reuters poll of 15 economists. They expect him to cut the OCR to 2.5 percent at the Dec. 10 monetary policy statement, which may bring the bank’s easing bias to an end.

Wheeler last cut the OCR at the Sept. 10 MPS, which included a lower forecast track for near-term economic growth and for 90-day bank bills out through 2017. It also projected a weaker track for the trade-weighted index, the bank’s preferred currency measure.

But since then the TWI has rebounded to 73.20, well above the 67.9 average level the bank forecast for the fourth quarter, suggesting tradables inflation won’t contribute as much to a rebound in annual inflation projected for 2016. Wheeler has also qualified the bank’s thinking in an Oct. 14 speech that, while reiterating a further interest rate cut is likely, also cited the risk that lower borrowing costs would drive up housing demand, the further risk of a global downturn, and a run of “more encouraging” economic data.

“It is unlikely the RBNZ will cut the OCR at next week’s review, having just delivered such a hawkish speech,” said Dominick Stephens, chief economist at Westpac Banking Corp.

While Stephens doesn’t expect a cut until Dec. 10, Westpac has the most aggressive easing forecast in the market, seeing the OCR at 2 percent in the second quarter next year. Stephens says that’s because he doubts an OCR at 2.5 percent will be enough to return annual inflation to near the mid-point of the central bank’s range by the second half of 2016.

“Our latest analysis is suggesting that inflation will be closer to 1 percent in early 2016 than 2 percent,” he said. “In fact, we doubt that inflation will reach 2 percent before 2017.”

Some other bank economists doubt the wisdom of waiting until Dec. 10 to cut the OCR but expect Wheeler to hold off anyway.

“In a close call we think that it is most likely that the RBNZ will (needlessly) delay that policy easing until the MPS review,” Darren Gibbs, chief economist at Deutsche Bank, said in a note. “Given a starting point of excess economic capacity and low inflation our own view is that monetary policy should err on the side of being pre-emptive rather than reactive.”

The consumers price index rose 0.3 percent in the third quarter, for an annual rate of 0.4 percent. Within the headline number, tradables inflation rose 0.7 percent in the quarter, slowing from a 0.9 percent rate three months earlier, while non-tradables inflation, which covers domestic goods and services, was zero in the quarter, the lowest level since March 2001.

“We are wary of the risks that inflation is more subdued over 2016 and 2017 than the RBNZ anticipates,” said Nick Tuffley, chief economist at ASB Bank. “Underlying pricing pressures are very muted. The New Zealand dollar has also rebounded.”

Wheeler’s speech last month, to the Institute of Finance Professionals annual conference in Auckland, was taken as a signal that the central bank is again concerned about Auckland’s overheated housing market, which had appeared to have fallen down its priority list since the imposition of targeted macro-prudential tools and tax measures aimed at cooling investor activity. House prices in Auckland surged at a 25.4 percent annual rate in the year to September, and the price-to-income ratio for the city is twice that of the rest of the country.

“The speech reinstated house prices as an issue of direct concern for monetary policy, and mentioned the risk of low interest rates inflaming the housing market,” Westpac’s Stephens said. “That’s quite a turnaround. The RBNZ downplayed the housing market when it decided to cut the OCR in June.

“Clearly, the RBNZ has been rattled by the broadening beyond Auckland of the house price boom,” he said.