Did the RBNZ get it wrong?
The Reserve Bank's recent OCR rate cut caught the market by surprise, raising the question: "Did the bank get it wrong?" Jenny Ruth investigates.
Tuesday, May 13th 2003, 7:03AM
by Jenny Ruth
The sales figures come out the day before the Reserve Bank reviewed its Official Cash Rate (OCR) and were seen by some economists as putting paid to any chance of an OCR cut. But then the central bank took them by surprise and cut it by 25 basis points to 5.5%.
Through the mid-1990s, some thought former Reserve Bank governor Don Brash paid too much attention to the housing market. So is current governor Alan Bollard paying the housing market too little attention?
Most economists don’t think so. ASB Bank chief economist Anthony Byett, doesn’t think Brash got it so wrong either.
Back then, Brash was still fighting relatively high inflation expectations and had a much narrower zero to 2% inflation target. "Put Alan Bollard in the same circumstances in the early 1990s and he might have done the same," Byett says.
While the last thing the housing market needs right now is lower rates, "that’s only one part of the equation of the whole economy. The export sector in particular is suffering," he says.
A big reason the housing market is so strong is the high level of immigration coupled with a shortage of housing stock. The high level of housing consents shows supply is starting to catch up with demand. He also thinks that immigration will slow. "I can’t see us taking in 1% of our population year in, year out," he says.
Deutsche Bank senior economist Darren Gibbs says that if the immigration numbers dried up suddenly, the economy , and the housing market, could very quickly look very sick.
He doesn’t think current house price inflation, which peaked at about 10%, isn’t much to worry about, particularly given the very low rate of house price inflation in the years before the current boom.
Gibbs also notes that other central banks are ignoring far higher rates of house price inflation. The Bank of England, for example, is easing rates even in the face of a 25% jump in house prices.
Stephen Toplis at Bank of New Zealand agrees current pricing isn’t much of a worry. Back in the mid-1990s house price inflation was running at double-digit figures for several years in a row and was threatening to go higher, he says.
"You shouldn’t look at the housing market in isolation. The bank saw activity levels across the whole economy look like they’re going to be suppressed. By providing a low interest rate environment, they may be able to support particular sectors so that overall growth doesn’t suffer," Toplis says.
In any case, given that any change in monetary policy takes between 12 and 18 months to work its way through the economy, it’s way too early to be making any judgment about Bollard’s effectiveness, Toplis says.
Cameron Bagrie at National Bank doesn’t think Bollard’s method of conducting policy is materially different to Brash’s.
Brash had already moved away from fighting inflation expectations towards trying to keep the economy stable, he says. "Inflation is just not the threat that it was Bollard’s using monetary policy as a shock absorber. Bollard’s basically extended the framework and the interpretation that Brash had been following in the last 18 months of his tenure," Bagrie says.
If Bollard has picked it wrong and the housing market overheats, that may add a small amount to overall inflation but not enough to cause major concerns.
But if he was too slow off the mark to ease interest rates in the face of a slowing economy, the political consequences would be much greater, Bagrie says.
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