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Wheeler to leave rates unchanged as inflation stays benign

Reserve Bank governor Graeme Wheeler will probably keep the official cash rate unchanged at a record low this week because there is little sign renewed life in the housing market and Christchurch's rebuild is stoking inflation yet.

Mr Wheeler will leave the OCR unchanged at 2.5% on Thursday, according to all 12 economists in a Reuters survey. Looking out over the next 12 months, the median estimate is for him to begin hiking rates in the third quarter of 2013.

Some economists say he has room to cut rates in his first monetary policy statement since taking the bank's helm.

Recent figures have shown an unexpected decline in third-quarter retail sales, the unemployment rate has reached a 13-year high of 7.3% and inflation has slowed to a 0.8% pace – below the central bank's target band.

Yet traders are betting on just an 18% chance of a cut this week, based on the overnight interest swap curve.

"An environment of weak near-term inflation would ordinarily prompt serious consideration of an OCR cut," says Nick Tuffley, chief economist at ASB, in his preview of this Thursday's monetary policy statement.

But the rebuild of Christchurch and "increasingly heated state of parts of the housing market" suggests that "the medium-term outlook for inflation is not nearly as benign as the current headline rates".

Mr Wheeler may be in no rush to move on interest rates with the New Zealand dollar staying stubbornly high and above the Reserve Bank's forecast track on a trade-weighted basis.

The TWI was recently at 73.41 and is set to close out the fourth quarter at a higher average level than the 72 forecast in the central bank's September MPS, keeping a lid on imported inflation.

He will also be concluding his review with no clear sign that the US Congress will find a way to avoid the fiscal cliff that would start on January 1, stalling the world's biggest economy.

And while there is progress on aid for Greece, the euro region's woes are wider and will take longer to resolve.

"Global economic sentiment has improved slightly, but the RBNZ will probably refer to the fragility of the situation and the dangers of the US fiscal cliff," says Dominick Stephens, chief economist at Westpac Banking Corp.

He expects the forecast track for the 90-day bank bills to be broadly unchanged from the September MPS and "the main messages will be similar to previous missives".

The 90-day bill rate was last at 2.67% and has tracked in a range of 2.63% to 2.74% since the start of June. The September MPS has the 90-day rate averaging 2.7% for the next three quarters.

(BusinessDesk)

Comments and questions

This government has been sitting on their hands doing absolutely nothing about the housing crisis or unemployment.
Because of this we are now in a situation where we need to lower interest rates to reduce the New Zealand dollar.
But if they did that house prices would go ballistic with non-residents and NZ investors all joining in the house buying frenzy.
Now the RB has its hands tied and we are going to be serious trouble in the future.
I believe politicians owning numerous rental properties should not have any say in the housing market. It is a blatant conflict of interests.
Their self-interest in allowing housing prices to increase clouds the greater good of the majority of New Zealanders.
The sad thing about all this is people will be moving more and more to the left of politics and we will get Labour/Green coalition govt.

There's little the RBNZ can do about the housing market, but plenty the RBNZ could do about it with higher interest rates, but rightly won't until it percieves an inflation risk, and that won't be for at least 9-12 months. And on the lower interetsst rate front, that would be pointless anyway if you look at the other "safe haven" example, Australia - it's cutting rates, will again this week, and possibly again in the early new year, but the AUD remains high. Only naive left-wing poiliticans living in the past think interest rates are the driver for currencies at the moment.

Good news. UAS/China post 'cliff' resolution, bad news europe and, in the near term, Italy and further on Germany slowing.
Answer: getting micro-economics right in NZ. I have no faith whatsoever such will happen. Quite frankly, there are no economic heavyweights in parliament with cross-party support. Settings all wrong with tax system. The Hobbit saga is a very good example of this.

It is very naive to suggest nothing could be done to control the housing market. The government / Reserve Bank could regulate the deposit required for a mortgage, bring in a capital gains tax, control non-residents buying rental properties and only allow immigrants that we need into NZ. There are also many other things that could be done. Nothing will be as many MPs own rental propertes.

The capital gains tax is a red herring. The decision to invest in property verses almost all other choices is based upon leverage and the fact that the owner of the property trusts his/her own ability to manage the investment for their benefit (as compared to a director of a listed company or finance company).

If the government wants to make properties less attractive to investors and more attractive to those who want to live in them, legislate so that investors have to have a large deposit (30% or more) and not allow equity in another property to be used to subsidise the lack of cash for a deposit.

But what the government must never do is provide a cash subsidy for first-home buyers other that the Kiwisaver type scheme where the purchaser is actually using their own savings.

The Government could consider a scheme where govt-owned land is released to first-home buyers on the basis that they could build a new home and only pay for the house (25-year mortgage with repayment limited to 25% of income) and after 15 years they then have to start paying for the land.

These types of incentive will help people into a home of their own and remove some of the incentive for building up a property portfolio that only inflates the price of houses for everyone else, and rewards borrowing for non-productive activities.

Seems to me the RBNZ is about backed into a corner whereby it must begin to print money. UK, USA, China and Euro are doing it, so why not? We are in a currency war and we are clearly losing. Get out there and print like a trooper, Mr Wheeler.

He can't lower rates or the incipient housing bubble will take leave of its tenuous anchors completely. Conjure up some kiwis in those Wellington RBNZ databases and start buying up some gold, yuans, dollars, euros, francs ... "Do whatever it takes", as they like to soothingly say.

Printing money will inflate house prices.

Only if the RBNZ spends the new money ends bidding up existing housing stock.

I specifically said "buying up some gold, yuans, dollars, euros, francs" ... none of which will feed back into NZ house prices. Think of it as cashing in on NZ's 'over-bought' goodwill now to save up and spend during a rainy day later.

Make hay while the sun shines.

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