Taranaki Property Investors' Association

022 6583 798

taranaki@nzpif.org.nz

News & Updates

Recent updates

09-12-2010

Rates left unchanged over stimulus effect concerns

Landlords.co.nz

The Reserve Bank left the OCR rate unchanged at 3% and forecast limited rises over the next two years, citing concerns the low rate was failing to provide a boost to the economy with below average corporate investment intentions and a weak housing market.

"While interest rates are likely to increase over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust," said Bank Governor Alan Bollard.

ASB economist Jane Turner said that while the rate decision was unsurprising, "the tone of the statement was more dovish than we had expected."

She said the big change in the statement "was less in the forecasts, but more in how the RBNZ is viewing the effectiveness of interest rates on activity."

"In observing the weakness in activity, the RBNZ has concluded that monetary policy settings are providing less stimulus to the economy that previously assumed, and hence the substantial change in view on the interest rate outlook despite the relatively unchanged view on medium-term growth," she said.

On the housing market Bollard said prices may decline further, which allied to business caution "suggests current low interest rates are having a less stimulatory effect than in the past."

JP Morgan economist Helen Kevans also highlighted the weak housing market.

"Thanks to a more cautious approach having been adopted by households, household spending remains soft, household credit flat, and housing market activity has eased, making it likely that house prices will fall further," she said.

Westpac markets economist Geoff Wilson said the RBNZ has responded to the weaker-than-expected economic activity, and while forecasting a reasonable economic recovery (3.4% growth in the year to March 2012), "wants to see hard evidence before acting."

Kevans said she believes the Bank will leave the OCR rate unchanged "until at least March next year" as "the poor run of economic data issues no sense of urgency to step away from current accommodative settings."

Turner believes the rate will remain unchanged until June and then only expects to see rises every three months in 2011 to coincide with Monetary Policy Statements. However, in 2012 "when the RBNZ becomes more confident about the recovery and wary of rising inflation pressures, we expect that rate hikes will become more frequent."

"We expect the OCR will reach 4.5% (where we assess neutral is) by April 2012."

On the positive side the Bank said New Zealand's trade activity continues to expand with strong growth in the Asia-Pacific region and better-than-forecast growth in the US and UK.

Kevan also highlighted reconstruction work in Canterbury after the earthquake (which the Bank said caused approximately $5 billion worth of damage to infrastructure, residential and commercial property), higher export volumes and commodity prices, and the Rugby World Cup as factors that would boost growth in 2011.

However, at present "there have been few bright spots in the economic space in New Zealand of late," she said.

Source: Landlords.co.nz

comments powered by Disqus