Since the Reserve Bank surprised markets with its shift towards an easing bias, the outlook for interest rates has been a constant source of speculation. But the timing of the shift in stance was curious – in our view, nothing fundamental had changed, and the Reserve Bank is sending out the entire fire brigade to rescue a kitten from a tree.
The August Monetary Policy Statement was the most influential yet under new Governor Adrian Orr, even though there was no change to the official cash rate (OCR). Mr Orr pushed out expectations for a rates hike until 2020, sending the New Zealand dollar sharply lower.
But it was the Governor’s assertion that rates could and would move lower, if weak indicators persist, that is both his biggest warning and most questionable stance.
Labour market statistics for the June quarter will be released by Statistics NZ next week and are expected to show the job market continuing its good performance. But in spite of low unemployment and capacity pressures spreading more broadly across the labour market, rather than being concentrated in a few select industries (eg construction), there is little sign yet that wage growth has begun to pick up steam. Nevertheless, with inflation back up inside the Reserve Bank’s target band of 1-3%pa during the last three quarters and population growth likely to start tapering off, we expect to see a pick-up in wage growth over the next year.
It has been a bit of an unusual time recently in the banking sector following the Reserve Bank’s cut of the official cash rate by 25 basis points to 2.0%. Instead of playing ball and passing on this cut to mortgage holders and other borrowers, the major retail banks, with the notable exception of Kiwibank, passed on mere crumbs and, intriguingly, lifted the interest rates they offer to term depositors.
The Reserve Bank’s recent announcement of new loan-to-value restrictions that it plans to implement from the start of September caught us a little by surprise – not the idea itself, because that was pretty well telegraphed, but the magnitude of the latest changes. We’ve spent some time analysing the mortgage lending data and believe that these changes could have the biggest effect on housing market activity of any of the Bank’s moves since 2013. This article presents our analysis of the potential effects of the upcoming LVR changes in September, as well as providing our estimates of the effects of the previous two sets of LVR restrictions in 2013 and 2015.
The door remains open for the Reserve Bank to cut the official cash rate (OCR) again in June, with recent data showing that business cost pressures and inflation expectations remain subdued.
Trying to plug the holes in the current goods and service tax system is likely to be an expensive failure that will have the perverse impact of encouraging a culture of tax avoidance. As I have noted previously, there is a fundamental flaw in the design of New Zealand’s GST, which the current review of cross-border transactions ignores. While the current review is aimed at plugging revenue gaps that are developing because of technology and social changes to retail patterns, it ignores the more important economic efficiency consequences of shortcomings in the design of GST.
The Reserve Bank may talk about targeting financial stability, but its implicit policy goals of improving housing affordability and squeezing investors out of the property market smack of a dogmatic approach to setting policy that lies well outside the Bank’s mandate.
It has been nine months since the Reserve Bank’s most recent policy child was brought into the world and, over this period, high loan-to-value residential lending has fallen by almost 80%. The limits for high-LVR mortgage lending were implemented to strengthen the financial system against housing market shocks and ease house price inflation. However, the restrictions have had a far greater effect on low deposit home loan issuances than perhaps initially intended. This article delves into why high-LVR loans, which once made up 25% of residential mortgage lending from banks, have reduced to levels far below that which the Reserve Bank policy allows.
Firstly, credit where credit’s due. In announcing its new monetary policy proposals, Labour has shown an admirable ability to think outside the square. Past criticism of the monetary policy framework has implied that the Reserve Bank’s focus on inflation is too narrow and that it should take more account of other factors such as unemployment or the exchange rate. Although Labour’s policy has pinpointed the current account deficit asan area the Reserve Bank needs to take more notice of, the Party has coupled this assertion with an exploration of alternative tools to interest rates for moderating the economic cycle.