Housing lift should mean rates pause

This afternoon, the Reserve Bank makes one of its toughest official cash-rate calls in years: should it cut the interest rate to a record low 0.75 per cent or wait to see if the economy has stabilised before cutting again? Either way, it must make a firm statement about how bad it thinks this economy really is.

As little as three weeks ago, a cut looked a near certainty, with the nation in the grip of an extended, wintry gloom.

Topline GDP growth is still slowing but there are signs the OCR cuts already made this year are starting to work.

We've had a late-spring burst of consumer confidence, good labour data, strong export returns and, significantly, a stronger-than-anticipated bounce in Auckland house sales.

The Reserve Bank faces deciding on the lesser of two evils: a slowing economy or an Auckland housing market that appears to be heating up again.

There is a conflict in the bank's mission as it seeks to a maintain a healthy, growing economy and ensure financial stability by keeping a lid on national indebtedness.

A buoyant housing market makes a large homeowning segment of the population feel more wealthy.

It has a huge influence on sentiment. The correlation between low consumer and business confidence in Auckland and falling house prices seems unlikely to be coincidental.

The housing market offers both the Government and Reserve Bank an easy path back to a more confident economy.

But higher house prices means bigger mortgages and more money flowing offshore to foreign banks. After all the problems the post-GFC housing boom caused, we can't pretend it provides a path to real wealth creation. Nobody understands that better than the Reserve Bank itself, with a sharp focus on credit growth and bank lending.

So the Reserve Bank should take a breather, hold the rate and be sure we're not heading back to the false economic growth we've just shaken off.

If we are to believe our economic fundamentals have always been robust, then surely the solid run of domestic data over the past month warrants some recognition.

Reserve Bank Governor Adrian Orr talks about the path of least regret.

He's not swayed by arguments that the OCR should be held simply to preserve firepower for future cuts if things get really ugly.

Cutting sooner — or deeper as the bank did with a double cut in August — is to ensure the economy doesn't stall.

He'd argue the risk of an economy running too hot isn't a serious one right now. It can be solved with a return to rate hikes. But as we've seen over the past decade, that argument doesn't ring so true with housing.

It's taken loan-to-value (LVR) restrictions and government policy changes to finally tame it.

The Auckland residential property market is a genie that isn't easy to get back in the bottle.