- RBNZ opted to wait for more housing data before tightening existing LVR restrictions at the Financial Stability Report.
- RBNZ fairly relaxed on regional house price lifts, mostly concerned about Auckland housing market imbalances.
- At the margin, RBNZ OCR cuts could be at a slower pace, but we still expect June and August cuts for now.
The RBNZ opted for a watch and wait approach at last week’s Financial Stability Report. At the margin, this means the RBNZ could delay the timing of further rate cuts.
The RBNZ remains concerned about Auckland house price inflation. However, before it makes further tweaks to existing measures, the RBNZ needs more data to be confident in its assessment of housing market imbalances. This is fairly prudent as the usual Christmas/New Year volatility has been exacerbated by a Leap Day and early timing of Easter, increasing the uncertainty around recent housing data. However, the RBNZ shouldn’t need to wait too long – just as the Governor lamented the need for more data at the RBNZ’s press conference, REINZ’s April housing data were released and showed that both Auckland and ex-Auckland demand continues to lift strongly.
In our view, further action will be inevitable and the next few months of housing market data are likely to confirm this. However, what is interesting is that any tightening of loan-to-value ratio (LVR) restrictions is likely to be confined to Auckland, as the RBNZ has a rather sanguine view on the rise in house prices outside of Auckland. The RBNZ is confident that a supply response to increased regional demand would not be as hamstrung as we have seen in Auckland. Indeed – the RBNZ cited Tauranga’s per capita consent issuance is twice that of Auckland’s! By implication, nationwide investor LVR measures may not be on the cards. The RBNZ will also continue exploring loan-to-income (LTI) ratios, but the time frame for implementing theses is much longer.
In the short term, a delay in introducing further housing measures may continue to temper the RBNZ’s willingness to cut the OCR much further. We still expect the RBNZ to cut the OCR in June and August, but the risk remains that OCR cuts come at a slower pace. The weaker NZD has, at the margin, also taken away some of the urgency to cut. This Tuesday’s inflation expectations result will be an important decider for the June Monetary Policy Statement. We expect that inflation expectations will remain steady, at uncomfortably low levels.
Last week’s retail sales report also highlights to us why further rate cuts are needed. At face value, 0.8% quarterly growth in volumes may seem pretty robust. However, once accounting for the strong growth in population, strength in tourism and the building boom which is taking place, it’s a moderate lift. Furthermore, these are the sectors which are supposed to be driving an increase in the rate of economic growth. However, momentum in retail sales has actually slowed from the growth achieved over mid-2014 to mid-2015. Growth is slowing, and per-capita demand remains weak. This will not be sufficient to drive the lift in inflation pressures the RBNZ needs to achieve its target.