Decent environment for investors: Tuffley

The Reserve Bank has today left the OCR unchanged at 3.5%, but has shifted to an explicitly neutral stance that is likely to keep interest rates low for some time yet.

Thursday, January 29th 2015, 12:12PM

RBNZ governor Graeme Wheeler said current economic circumstances including the high exchange rate, low global inflation, and falling oil prices meant traded goods inflation was very weak.

Non-tradables inflation remains moderate, despite buoyant domestic demand and an improving labour market, while headline annual inflation is expected to be below the target band in 2015.

This combination of factors mean that the RBNZ expects to keep the OCR on hold for some time.

Wheeler said that future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.

ASB chief economist Nick Tuffley said that RBNZ’s move to an explicitly neutral stance was notable.

He said the RBNZ was likely to keep interest rates on hold for the foreseeable future (2015/16), but the shift to the neutral bias would fuel the market's tendency to price in the prospect of OCR cuts.

“Arguments for a hike in interest rates have evaporated a lot, but we wouldn’t rule it out in the distant future in a more normal global environment,” he said.

“We see the risks still skewed to the next move being a hike rather than a cut, given the New Zealand economy is expected to continue growing at an above-trend pace and the Auckland housing market has been lifting recently.”

However, the inflationary environment would have to warrant a rise in interest rates.

Tuffley said the RBNZ was not inclined to put interest rates up when headline inflation was low and had been for a while.

The fact the RBNZ has lowered its inflationary outlook showed it was more cautious about putting up interest rates than it had been for some time.

A cut in increase rates would have to be prompted by adverse overseas developments like a deterioration in the Chinese economy or more disruption in the Eurozone.

Tuffley said that, in the shortterm, the potential is for fixed rates to remain low and, possibly, get even lower.

“Overall, it is currently a decent environment for investors.”

*The RBNZ hasn’t cut the OCR since March 2011 when it was reduced to a record low 2.5%. In the first half of 2014, it raised the OCR by 100 bias points before a pause in July to assess theimpact.

Tags: Mortgage Rates RBNZ