RBNZ: record immigration may mean rates stay high for longer

Net immigration has surprised the Reserve Bank on the upside “to the tune of tens of thousands,” raising the prospect that interest rates will have to remain high for longer, chief economist Paul Conway told Parliament's finance and expenditure committee (FEC).

Wednesday, December 20th 2023, 10:39AM

by Jenny Ruth

“Clearly, it's taking some of the heat out of the labour market,” Conway said in the central bank's first appearance before the newly reconsituted FEC following the October general election.

But it's still significantly higher than assumed as recently as RBNZ's Nov 29 monetary policy statement.

On Dec 12, Stats NZ said it estimates annual net migration reached a record 128,900 people in the year ended October, about double the pre-covid peak.

RBNZ governor Adrian Orr told the committee the “extremely high” record levels of net migration has meant that although per-capita consumption is declining, overall demand is rising, raising the question of “do we have to maintain more restrictive for longer with monetary policy.”

Orr said RBNZ is also concerned about what it might mean for house and other asset prices.

On the other hand, GDP for the September quarter shrank by 0.3%, well below RBNZ's forecast of positve growth of 0.3%.

“We do talk about house prices as one of the factors we have to consider,” Orr said, noting that while demand for housing is rising, consents to build new houses have been falling, which is “such a large component of total economic activity that we will be paying enormous attention to.”

Orr reiterated that RBNZ's monetary policy committee is comfortable with the new government's decision to pare back its policy targets agreement with RBNZ to just focusing on maintaining price stability after stripping out the requirement to maintain maximum sustainable employment.

Both Orr and Conway reiterated that RBNZ will continue to monitor labour market developments because of its impact on inflation, which Orr said creates “horrible inequities” if allowed to get above target.

Inflation in the year ended September was 5.6%, down from the peak at 7.3% in the year ended June 2022, but still well above RBNZ's 1% to 3% target.

Asked about currently high bank margins, assistant governor Karen Silk noted that NZ wholesale interest rates are “heavily influenced” by US rates and so have fallen significantly recently.

But Silk said that in the last 24 hours, one of the banks had begun to cut its mortgage rates and that wholesale rates are back to where they were in August.

ANZ Bank NZ cut its “special” two and three-year fixed mortagage rates, available to owner-occupiers with at least a 20% deposit, by 20 basis points and 14bp respectively to 6.89% and 6.75%.

Tags: RBNZ