Interest rates on hold for as far as we can see
The Reserve Bank on Thursday left official interest rates on hold at 3.5 per cent, saying there would be a ‘‘period of stability’’, possibly for two years.
Rates could move up or down depending on how the economy goes.
But for now the Reserve Bank has clearly moved to the sidelines and economists said the chance of a rate rise soon were essentially zero, with a small chance of a rate cut in coming months.
Interest rates are set to stay low for much longer than earlier expected, even though annual inflation was expected to fall to ‘‘around zero’’ in the March quarter.
Inflation has been running in the bottom half of the Reserve Bank’s target band for years and is expected to stay there suggesting scope to cut official interest rates, according to Green Party co-leader Russel Norman. A high dollar and a rising current account deficit all weighed on the side of cutting rates, Norman said at Parliament’s Finance and Expenditure Select Committee hearing on Thursday.
‘‘You have a bit of space on the inflation side and a problem with an over-valued dollar. . . there seems to be space for a lower [cash] rate,’’ Norman said.
Reserve Bank governor Graeme Wheeler said that was a ‘‘perfectly fair line of argument and we think about those issues a lot’’.
But Wheeler said the official cash rate was still giving the economy a boost, even though it is one of the highest rates among advanced economies, aside from Iceland and Turkey. ‘‘We don’t believe we are out of line given our economic circumstances,’’ Wheeler said.
But that was because New Zealand’s economic performance was a ‘‘standout’’ Wheeler.
‘‘We are the only country among 35 advanced economies with a positive output gap for two years,’’ Wheeler said, with the economy growing faster than its expected potential at full stretch.
However, about 20 central banks around the world had cut interest rates since early January this year and seven in advanced economies. But most of the countries cutting rates were in quite different situations than New Zealand.
‘‘They have got low growth, lots of excess capacity, rising unemployment. We are in a situation. . . we are growing about 3 per cent and expect to continue that for the next two years. We have strong employment growth, about 3.5 per cent a year and unemployment is projected to fall to 4.5 per cent.’’
The country was also seeing
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to record migration levels.
And interest rates, the cost of capital, was not holding back businesses from growing.
So the official cash rate at 3.5 per cent was still giving the economy a boost, rather than being ‘‘neutral’’ or holding things back.
While annual inflation was expected to fall to zero in the March quarter, that was mainly because of the big drop in oil prices last year.Norman asked if the Reserve Bank was worried that a rate cut would boost the already hot Auckland housing market and that would be ‘‘bad’’.
Wheeler gave the example of the Swedish central bank, which had lifted interest rates because of rising house prices in Stockholm.
‘‘But they overcooked it. They ended up with serious negative inflation and cut rates three times in recent months.’’
Like Auckland, Stockholm has what is seen by some commentators as a ‘‘manic’’ housing market with some people bidding to buy even before seeing a property.
Swedish house prices have risen almost 13 per cent in the past year, the same pace as Auckland’s market.
But Swedish mortgage rates are now close to 2 per cent, compared with New Zealand’s rates of about 5.4 per cent for a two year rate.
Wheeler said the Reserve Bank was ‘‘conscious’’ of the Auckland housing market.
‘‘But we haven’t raised interest rates because of an Auckland housing market concern. We don’t want to make that mistake.’’
This year Auckland prices are up 50 per cent on where they were in 2007.
‘‘We are not seeing the same wealth effects [from higher prices] spilling over into spending and creating inflation pressures like we were in 2006 and 2007,’’ Wheeler said.
The Reserve Bank remained worried about the housing shortage in Auckland, where up to 20,000 extra homes are needed.