Housing not biggest OCR pressure: Economists

It’s been the hot topic for months but economists say it will not be the hot Auckland housing market that forces the Reserve Bank’s hand when it implements its first rate increase this year.

Tuesday, January 14th 2014, 6:00AM

by Susan Edmunds

Governor Graeme Wheeler will review the rate again at the end of this month.

It is predicted that he will leave the rate on hold at 2.5% for now – but an increase is not being completely ruled out.

Until recently, there was expectation that the rapid increase in Auckland’s house prices would be the biggest inflationary pressure for the bank.

But economists said new data seemed to show it was slowing – and that other pressures were taking its place.

Westpac’s economists said the housing market was swimming against a tide of good economic news.

Higher mortgage rates and loan-to-value restrictions were cooling the market, they said, pointing to drops in sales volume reported by Barfoot and Thompson.

“Given the historical lag between changes in house sales, and house price inflation, that should start to change in early 2014 when we expect to see the first signs of slowing house price inflation. We think it is likely that house prices will undershoot the RBNZ’s forecasts in early 2014.”

This slowing might discourage Wheeler from increasing the rate this month, they said. But they said it would not be enough to hold higher interest rates off for long.

BNZ’s economists said the economic expansion was broadening and deepening. “There is now a growing recognition that a substantial proportion of the economy is well-supported, such as the construction, commodity, manufacturing, retail, services and tourism sectors.”

They expect that the final 2013 quarter’s data will show year-on-year inflation around the 1.4% level recorded in the third quarter. But it wouldn’t stay in the Reserve Bank’s comfort zone for long.

“Above-trend growth in domestic demand will combine with a slowdown in the NZD’s appreciation to see inflation threatening the top end of the Reserve Bank’s target band by early 2015. The Reserve Bank will not be able to stand aside in this environment. Accordingly, we believe that the cash rate will move aggressively higher this year.”

But they said because the OCR was coming off an historic low, the looming cycle is better described as normalisation rather than tightening.

ASB said stronger-than-expected GDP in the third quarter of last year, strong dairy prices and business confidence were all fuelling speculation that the bank might move this month. But they said they still expected March to be the first shift.

BNZ said an increase in the official cash rate this month would be more than justified on economic grounds. “[But] we are going to have to take the Bank at its December MPS word, that it will defer its first cash rate adjustment until the March MPS. After which it’s all on for potential upside.”

They said the bank seemed to be less sensitive to concerns about the exchange rate than it once was.

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