More OCR cuts likely – despite housing concerns

In a speech to the Institute of Finance Professionals conference today, Reserve Bank Governor Graeme Wheeler said central banks were operating in a turbulent and uncertain world.

Global economic growth is the weakest since 2009 and inflation has also been below target over the past few years in the economies that target inflation.

Despite a significant slowdown in China’s economy, recent economic indicators [for New Zealand] have been more encouraging, Wheeler said.

“Some further easing in the OCR seems likely, but this will continue to depend on the emerging flow of economic data.”

However, with annual house price inflation in Auckland reaching 26% and house-price-to-income ratios double those in the rest of New Zealand, the RBNZ was concerned about how an OCR cut could affect the housing market.

“We remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation,” said Wheeler.

“It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly.”

The RBNZ has already cut the OCR three times since June this year and it is currently sitting at 2.75%.

While the RBNZ has previously indicated it is likely to cut the OCR again, economists are divided over when that will happen.

ASB economist Kim Mundy said an October OCR remains a close call, but the RBNZ risks missing its inflation target for even longer if it doesn’t cut the OCR and the NZD stays high.

But Westpac chief economist Dominick Stephens said the RBNZ is likely to hold the OCR at its current rate at the October call and cut it in its December announcement.

“Looking beyond the next interest rate decision, we are still comfortable with our view that the RBNZ will need to cut the OCR by more than markets currently anticipate, and are forecasting a 2% low point for the cash rate.”

ANZ chief economist Cameron Bagrie said the stabilising domestic outlook suggests the RBNZ is likely to resist delivering further OCR cuts over the remainder of this year.

Meanwhile, the latest house price data shows that Auckland house prices continue to rise – although price growth is now spreading to nearby regions.

In his speech, Wheeler said housing market considerations do influence the RBNZ’s thinking on the OCR.

But he noted the RBNZ has used macro-prudential policy instruments to help reduce the broader economic risks associated with a potential correction in Auckland house prices.

The RBNZ’s new LVR restrictions for Auckland investors come into force on 1 November.