By Bernard Hickey
The Reserve Bank of New Zealand (RBNZ) has held the Official Cash Rate (OCR) at 2.5%, as expected, but it has again lowered its forecast track for short term interest rates.
The Reserve Bank forecast in its September quarter Monetary Policy Statement (MPS) the 90 day bill rate would start rising from its current 2.7% in the December quarter of 2013 and hit a peak of 3.3% by the March quarter of 2015.
This represents a reduction in its interest rate outlook of around 30-40 basis points through late 2013 and early 2014. Over the last 9 months the Reserve Bank has lowered its forecast for the 90 day bill rate for late 2013 by a combined 130 basis points from around 4% to around 2.7%.
The Reserve Bank doesn’t formally forecast the OCR, but instead forecasts the 90 day bill rate, which is typically around 20-30 basis points higher than the OCR. The 90 day bill rate is the basis for floating mortgage rates.
This outlook for a flat 90 day bill rate suggests floating mortgage rates are likely to be flat well into late 2013, before rising around 60 basis points through the end of 2013 and into 2014.
Reserve Bank Governor Alan Bollard, speaking in his last MPS before his retirement on September 25, said the outlook for growth in New Zealand’s trading partners remained weak.
“Several euro-area economies are in recession and Chinese growth has slowed. The risk of significant deterioration in the euro area persists,” Bollard said.
“Domestically, the Bank continues to expect economic activity to grow modestly over the next few years,” he said.
“Housing market activity continues to increase as forecast, and repairs and reconstruction in Canterbury are expected to further boost the construction sector,” he said.
“Offsetting this, fiscal consolidation is constraining demand growth, and the high New Zealand dollar continues to undermine export earnings and encourage substitution toward imported goods and services,” he said.
“Underlying annual inflation, which recently moved below 2 percent, is expected to settle near the mid-point of the (1-3%) target range over the medium term. It remains appropriate for the OCR to be held at 2.5 percent.”
House prices
Elsewhere, the Reserve Bank noted a divergence in house price inflation across New Zealand, with prices in Auckland and Canterbury rising faster than the rest of the country.
But it said “these divergences are currently not significant relative to history.”
The Reserve Bank sees house price inflation rising to around 5% per annum by early 2013, before easing back to nil by 2015.
25 Comments
Scarfie - I think you might have confused me with the other two candidates for GDP forecasting - I have been known to claim the economy is falling off a cliff in the past due to central plannning mismanagement - but the recent Stats NZ GDP adjustments and new data collection procedures muddied the waters and made inflation adjusted growth look better than Treasury and RBNZ had forecast - a shambles. Nontheless, the falling rate of nominal annual GDP growth (3.09%, latest) was not encouraging and certainly below the cost of term finance costs.
But an awful lot will hinge on whether the management at Fonterra took the mid- August hint that Bernanke was coming to the party and overhedged prospective USD export sales.
The retired of today probably did not keep topping up their mortgage and so kept paying off their original mortgage in a straight line. and so benefitted from a conservative approach. Should they be blamed for that.
Anyone living a frugal lifestyle can buy and pay off a house in NZ. No, you may not be able to do that in Remuera or Takapuna. In fact is easier than ever to get a mortgage. The retired generation had to beg an insurance company or ask a family solicitor for a home loan... no easy money....
It's the new normal.
Banks are avoiding like the plague the reality should reduce their floating rates. Camoflaging that need behind all sorts of offerings of the long term fixed rates. Confusion marketing at its best.
But it's still quite dodgy times with unpredictable futures. So get rid of debt now. Use your increased cash flow from the low interest to drive debt down. It's the only safety you can get.
Sorry Bernard. It's deleveraging. But that's good for debtholders.
I dont think the banks cant reduce as the cost to borrow abroad for them isnt dropping. Indeed when we see a flight to safety the banks might even not be able to borrow again aka 2008...that will be interesting to say the least. Bear in mind last time the OZ big brothers kept NZ banks going....but look how OZ is faltering....got to wonder if they will be there next time.
I agree on clearing debt, the great thing is once paid down you can of course borrow when it looks safe to do so. What I do think is happening is there is a % of ppl who think with interest rates staying low for a long time they can profit short term....the problem is when everyone wants to get out of an illiquid asset at once, the price drops and a lot.
regards
Unfortunately, the so-called Floating rate/s is very much 'Fixed' - it can't/won't move.
Isn't the reason people choose to float is to take more risk and reap the benefits of downwards wholesale rates.
Not so, let's move the fixed rates all over the show thus distracting people from the growing margin within the floating rates....
Is the margin significantly growing? its always been there....
http://www.interest.co.nz/charts/interest-rates/mortgage-rates
No numbers there but it looks to me like the differences are getting smaller....
regards
An excellent Comment on Stuff:
No one asks the hard question as to why NZ interest rates are so high compared to our major trading partners...asia, usa and UK/Ec All who have official cash rates under 1%..I know in singapore mortgages are readily avalaible at under 2 %, everyone knows the NZ dollar is overvalued, and its major use is in currency speculation. I think the reserve bank should be held more accountable..drop the interest rates to what everyone else has, the mortgages will come down to below 2% where they should be, the dollar will drop, exports will rise, less dead money lost in interest repayments and guess what...an economic recovery! Simple!
Its an interesting point....one Ive not yet seen a good defence to. I'd love to see some rational explanation of why its to be kept so high.
At the moment though foreigners can borrow cheaply and are therefore willing to lnd to us in a carry trade so maybe if thats stopped the foreign money leaves and we drop into a mega-recession...........
Though the other comments Ive seen from the banks are the OCR rate is disconnected in which case would it have an effect if its dropped.
regards
Scarfie, The Mormons obviously dont have a problem with the Carry Trade or the zillion other conspired usuary opportunities created. So no change coming either way in the USA .
Maybe only Islam runs a tad true to their ongoing condemnation of such practices. We can see what pressure is being thrown to run that down... but it ain't working... no matter how many trillions of dollars or lives the west throw at it.
I am no Moslem, so I must be missing some important facts in this argument? Or maybe they have a point.
Oh the Muslims have a point alright, but I have read material in the last year that shows how they get around the rule. I don't recall the detail but it might in fact be the carry trade that they utilise. What I find interesting is that the concept of usury is certainly thousands of years old but no one on these forums really wants to discuss it. I mean interest is the root cause behind the GFC, all other discussion is just deck chairs. It is interest that makes all the financial trickery possible.
I think it is quite appropriate to include the carry trade under the usury umbrella, as I do all forms of unearned income.
Perhaps the reason why Bank economists are always predicting "Rate Hikes" is to disguise the fact that rates will be falling.
And to take the pressure off the banks from dropping their floating rates.
"Oh.. watch out.... there's a rate rise coming, soon, maybe not next month but definitely next year....... maybe not next year but definitely the year after that...... maybe not for 2 years but man you just wait until 2014, rates will be 8% and rising hard"
MortgageBelt: Here's how hard it is. I'm NOT a bank economist. Dont know where they get their training from. Dont consider myself a slouch in the field of economics. But, back in 2007-2009 when the GFC was in full swing I entered into a contest with a young 25 yo client who has no formal training in the field. Both looking at the same economic data. Once a month just before the RBA meeting we would take a bet on the outcome of the meeting. Rise, Hold or Cut. At the end of 2 years and 22 meetings the score was 22 to 0 to him. I would evaluate what "should happen" and it doesnt work.
Icon: That's what happens over the longhaul in History - every so often all the predictable rules change (radically). Probably since 2008, conventional economics has stopped following the rules. In fact the 'old system' is a ghost ship still heading away ..... meanwhile the 'new system' is being planned for rollout. Therefore noone cares about the old system anymore as it's doomed for destruction.
No, the real economy stopped following what some thought it should do, if it ever did. Keynes zero bound model/thesis has stood up well, just that one side of economics has ignored that Keynes side, the result is the all too predictable mess we see.
Some of course continue to believe that they and their non-models are right...even in the face for failure.
regards
I take that he said stay where it is which is what Ive been agreeing with for 4 years just by following keynesian and minski/keen economics. It was fairly obvious that fundimentally being at the zero bound and growing un-employment meant that rates shouldnt rise and the OCR should drop aka the USA. Same with Paul Krugman and the WSJ....if you believed the WSJ you would be well down.
What I have watched is 4 or 5 years of the inflationistas promising significant inflation and deflationistas predicting flat or lowering inflation. Its been pretyty clear who's won that battle, pretty much a condemnation of the right's voodoo economics if ever there was one.
regards
automatic earth on the (latest) demands on greece,
"fire 150.000 civil servants, raise the retirement age to 67 years immediately, cut "lay-off compensation" by 50%, and, wait for it, introduce a 6-day working week, and stretch the working day to 13 hours. In theory, that could lead to a 78-hour working week.
As my writing partner Nicole Foss remarked in true Monty Pythonesque Four Yorkshiremen spirit: "I wonder when we'll see the 8 day working week at 25 hours per day". Not surprisingly, the Greek government isn't thrilled at the demands; they can already see their heads end up on top of pointed sticks alongside the winding streets of Athens.
Want to take a guess at how many European countries will voluntarily sign up for similar treatment?" (say spain?)
http://theautomaticearth.com/Finance/those-dutch-tulips-aint-looking-al…
Also further down, interesting comment on the dutch housing scene.
regards
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.