UPDATE: RBNZ's cost of waiting 'much lower' as strong kiwi, house prices pose risks

Thursday 9th June 2016

The cost of waiting until the next monetary policy statement in August was "much lower" when viewed against the risk of cutting rates too early as the Reserve Bank weighs up a strong kiwi dollar against the threat of house prices soaring further.

The central bank kept the official cash rate at 2.25 percent and retained its projected track for the 90-day bank bill rate which implies one more reduction, meeting traders' expectations who had priced in a 22 percent chance of a cut. Globally low-interest rates have left the bank juggling a strong currency pushing down inflation against stoking a persistently hot housing market by cutting rates further, and the RBNZ effectively pushed out today's decision until the next meeting on Aug. 11.

The kiwi jumped to near a year-high and was recently trading at 71.25 US cents from 70.18 cents immediately before the release.

RBNZ chief economist John McDermott told reporters in Wellington they will have a better handle at the next monetary policy statement, which comes after first-quarter consumers price index and gross domestic product data.

"The picture will be a lot clearer at that point," McDermott said. "Between now and going back to March not that much has changed - we have a situation where the option value of waiting is much higher than normal, and the cost of waiting is much lower because the next monetary policy statement is just a few weeks away."

In deciding against cutting the OCR today, the central bank said the stimulus from such a move "would generate more volatility in non-tradables inflation and output than is necessary". The bank also noted the high level of house prices relative to incomes in Auckland and accelerating house price inflation in other parts of the country was a concern from a financial stability perspective and warranted close attention.

Governor Graeme Wheeler told reporters the economy doesn't need more stimulus with the output gap - where growth isn't inflationary - at zero, and that a rate cut "would have led to further upward pressure on the housing market and that presumably would have had some impact in spilling over into aggregate demand".

The Reserve Bank had two alternative scenarios to the outlook it considers most likely. The first would be if the currency was higher than the central bank's estimate, which, absent any other policy responses, would need a lower OCR than projected. The second would be if house price inflation remained elevated, needing higher interest rates without other policies being imposed, including a government response.

ANZ Bank New Zealand chief economist Cameron Bagrie and economist Phil Borkin said those two scenarios "go to the heart of the tension the RBNZ is grappling with, and it still sees many uncertainties around the outlook'." They put the odds of a cut at the August meeting at "barely above 50 percent".

The Reserve Bank is investigating new macro-prudential tools to quell investor activity in the housing market, which accounts for about 46 percent of transactions in Auckland. Those include new loan-to-value ratio restrictions and debt-to-income ratio restrictions, and Wheeler said he would hope to make a decision on whether to go down that track before the end of the year.

BusinessDesk.co.nz

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