The OCR was introduced in 1999 and the latest move by the RBNZ brings it to its lowest point ever. 2.25% after a drop of .25%. This is following a drop of 1% last year. Here is my brief rendition of some of the things mentioned in the latest “Monetary Policy Statement”.
What was said?
Graeme Wheeler pointed to the following factors which were factors to the .25% drop.
– Trade weighted exchange rate a little too high given the weakness in export prices.
– Material decline in a range of inflation expectation measures. “This is a concern because it increases the risk that the decline in expectations becomes self-fulfilling and subdues future inflation outcomes” This is possibly due to low headline inflation (mainly fall in petrol prices).
– Weakness in the growth prospects of our trading partners despite very stimulatory monetary policy settings (low or negative interest rates).
What could be next?
“Further policy easing may be required to ensure that future average inflation settles near the middle of the target range” said Graeme Wheeler as he re confirmed that emerging flow of economic data will be watched closely.
What about the house prices?
The RBNZ Governor acknowledged that the inflation in Auckland had moderated and pressures have been building in some other regions. But also mentioned “(Auckland)..house prices remain at high levels”
But house prices could lead to more consumption which could lead to non-tradable inflation (prices for things which we can’t really import)due to capacity pressure. This could mean that interest rates may not need be so low or go lower.
NZ growth still looking good
The RBNZ mentioned that the “Momentum in the New Zealand economy picked up over the second half of 2015, after slowing through the first half of the year” this was possible helped by “..falls in exchange rates and low interest rates”.
“Recent indicators suggest the strength continued over the December quarter, suggesting annual GDP growth of 2.1 percent over 2015”
High nett migration is contributing to supply capacity (bigger labour force) and is supporting the domestic economy through consumption and the housing market. Interestingly “The younger composition of migrants also implied a smaller boost to domestic demand than in the past cycles..”
Construction activity looks set to pick in 2016 although the Canterbury rebuild looks past its peak.
The clear message seems to be one of the same or a little lower in terms of the OCR, however there are factors mentioned in the Monetary Policy Statement which could change this.
– Global economic conditions being subdued leads to less imported inflationary pressure
This could mean a bigger rate cut is needed in the future
– Higher mortgage rate spreads due to a reduced risk appetite from investors (international developments affecting banks funding costs)
This could also lead to a bigger rate cut
– House prices keep growing and then leads to stronger domestic demand
This could start pointing to a rate increase
This article has been written by Hamish Patel – mortgage broker. Ph: 09 625 4693, Mobile: 021 625 693, hamish@monline.co.nz
