The Reserve Bank has kept the official cash rate at 2.5% but clearly signalled an increase is likely next year.
Reserve Bank Governor Graeme Wheeler said: “Growth remains moderate but mixed for New Zealand’s main trading partners. Nevertheless, export prices for New Zealand’s main commodities, and especially dairy produce, have continued to increase.
“New Zealand’s GDP is estimated to have grown at over 3 percent in the year to the September quarter and the expansion in the economy has considerable momentum. New Zealand’s terms of trade are at a 40-year high, household spending is rising and construction activity is being lifted by the Canterbury rebuild and the response to the housing shortage in Auckland.
“Continued fiscal consolidation and the high exchange rate will partly offset the strength in domestic demand. The high exchange rate is a particular headwind for the tradables sector and the Bank does not believe it is sustainable in the long run.
“House price inflation is high in Auckland and other regions due to the housing shortage, and demand pressures associated with low interest rates and rising net inward migration. Restrictions on high loan-to-value mortgage lending, introduced in October, should help slow house price inflation. Data to date are limited on the effects of these restrictions. We will continue to monitor outcomes in the housing market closely.
“Annual CPI inflation increased to 1.4 percent in the September quarter and inflation pressures are projected to increase. The extent and timing of such pressures will depend largely on movements in the exchange rate, changes in commodity prices, and the degree to which momentum in the housing market and construction activity spills over into broader cost and price pressures.
“The Bank will increase the OCR as needed in order to keep future average inflation near the 2 percent target midpoint”.
Yesterday’s announcement by Fonterra that it was holding the forecast milk payout and reducing the dividend might have taken a little heat out of the market, but there are other pressures on inflation, not the least of which is house prices.
The bank removed restrictions on low loan to value ratios for the construction of new homes earlier this week after it became aware that this policy would reduce the housing supply which is one of the factors pushing up prices.
Restrictions remain for loans for existing houses and this is sensible.
If people are stretched to get and service a loan at current historically low interest rates even a small increase could over-stretch their budgets.
With only 10% equity in their properties a small change hey could well end up losing that and if forced to sell would not only lose their homes but still owe money.