Bank may cool house market

The Reserve Bank of New Zealand may reach deep into its economic bag of tricks this year to cool the country’s overheating housing market and leave the Official Cash Rate (OCR) unchanged.

That is according to ASB chief economist Nick Tuffley, who sees potential for Reserve Bank Governor Graeme Wheeler to use ‘‘macroprudential tools’’ to offset the effects soaring property prices and growing levels of credit demand could have on the country’s flagging growth and inflation outlook’’.

‘‘The hottest parts of the inflation outlook – construction and housing – are showing more tangible signs of heating up,’’ Tuffley said.

‘‘The Reserve Bank is now placing more emphasis on these factors, and we expect they will become an increasingly bigger part of the bank’s policy decisions [this] year.’’

He believes slowing growth of the economy as a whole is likely to prevent the central bank from using traditional measures, such as lifting the OCR from its current level of 2.5 per cent, which is a historic low.

Official figures released last month show that the New Zealand economy expanded at 0.2 per cent in the September quarter, and growth figures for the first half of last year were revised downwards by 0.4 percentage points.

As a result, ASB has changed its prediction on when the OCR is likely to rise, believing it will be in December rather than September.

That tips Reserve Bank policy action in favour of non-traditional measures, such as macroprudential tools.

These could entail raising the deposit level home buyers would need before they could qualify for a mortgage loan.

ASB expects the New Zealand dollar to continue to gain in value in the first half of the year, peaking at US84 cents in June, but Tuffley believes the Reserve Bank has already factored it into the current OCR level.

On the positive side, the pace of economic activity is expected to increase this year, thanks to the Canterbury earthquake rebuild finally getting under way.

That should feed into support industries such as transport, wholesaling, consumer spending, manufacturing and professional services.

However, further signs of that progress are unlikely to be seen in this week’s building consents data.

ASB estimates that the number of building permits issued in November fell 1.5 per cent, compared with October, because of slow construction activity in Christchurch.

‘‘The hottest parts of the inflation outlook – construction and housing – are showing more tangible signs of heating up.’’ Nick Tuffley ASB chief economist