The risk ahead for our rate

The RBNZ held the rates steady but are we approaching a cross road? There could be a future where a rate cut will be needed as much as a rate hike.

House prices and our exchange rate were identified as two possible rogues which could step out of line with the RBNZ’s central projection.

If the tempo of the house market remained upbeat for longer it could lead to more households hitting party mood with their spending. This could warrant a tighter grip on the interest rate lever and maybe even a pull up response.

As our farmers make the chilly morning track, carrying the burden of lower diary prices, the pesky strong NZD makes the movement towards break even harder still. If the love for our NZD gets even more passionate, a lowering of our interest rate would seem appropriate to cool down the romance.

Which future will play out for longer is anyones guess but if both played out, the interest rate mechanism alone would be impossible to use as a steering mechanism.

A few things that you might have to do along with dropping or increasing the rate:

1. Make it a bit more restrictive for home owners to use their houses like credit cards

2. Create a different rate for lending on farms

3. Skew banking funding away from houses and towards business activity (trickier said than done as there is a lot of small business owners already using their house as security for business lending)

RBNZ Monetary Policy Statement