Did the rebounding housing market sway Reserve Bank’s cash rate call?
A re-energised housing market prompted some economists and commentators to correctly pick that the Reserve Bank would leave interest rates on hold this week.
Just a day after the surprise call to keep the official cash rate on hold (at 1 per cent) new house price data showed the market heading back into record territory.
Latest Real Estate Institute data for October showed New Zealand house prices hitting a new annual record, up 8.2 per cent from a median $561,500 to $607,500.
Auckland house prices rose to their highest median price in 19 months.
Westpac chief economist Dominick Stephens has warned that record low interest rates are likely to pour further fuel on the housing market, which he expects to keep surging next year.
But while house prices were “in the mix” as part of the monetary policy committee’s broader economic assessment they were not directly targeted in the rate decision, said Reserve Bank assistant governor Christian Hawkesby.
Notes from the monetary policy committee meeting show there was a discussion on the impact that low interest rates were having on financial stability — the other key area of the economy monitored by the Reserve Bank.
Financial stability relates to the housing market by proxy in that it is about assessing the rate of credit growth, including the level of mortgage debt.
“We’re aware that there is a strong relationship between consumption growth and housing wealth,” Hawkesby said.
“Those two work well in tandem. House price inflation coming down from where it was in 2016 to where it is now has been one of the things that has made growth more moderate and subdued over the recent period.”
But, ultimately the monetary policy committee was focused on the primary objectives of inflation and employment, he said.
“We’re conscious that if we take our eye off the ball and try and set interest rates for financial stability considerations, the danger is that we miss our inflation target and inflation expectations start drifting away. Then it’s a really hard job to bring those back on track again.”
There was evidence of that risk internationally, he said.
“Sweden is a really great case study of this where they tried to use interest rates to address a financial stability issue in their market.
“Then they got way behind the game on their inflation target so we are wary of that.
“What we do is take some comfort from the fact that we have financial stability committee at the bank as well.”
Effectively, Governor Adrian Orr and Deputy Governor Geoff Bascand and Hawkesby will now take off their monetary policy hats and put on their financial stability ones as they assess the nation’s debt levels for report due on November 27.
That report will include a review of the bank’s macro prudential tools including the Loan to Value Ratio restrictions on mortgage lending.