WELLINGTON: The New Zealand dollar on Thursday jumped more than 1 per cent after the country’s central bank left interest rates on hold, amid worryingly high growth in house prices. The Reserve Bank of New Zealand (RBNZ), however, left the door open to further easing if inflation failed to pick up. It has already cut the official cash rate (OCR) five times in less than a year.
However, like its Australian counterpart, the bank is also concerned about further stoking already-overheated parts of the country’s property market. “House price inflation in Auckland and other regions is adding to financial stability concerns,” governor Graeme Wheeler said in a statement.
“Auckland house prices in particular are at very high levels, and additional housing supply is needed,” he said. The kiwi dollar rose about US1¢, to US71.05¢, its highest in a year, after the decision was announced. It is currently trading close to one-year highs.
It also surged against the $A, which has been firming recently against its US counterpart. The Aussie dropped about NZ1¢ to $NZ1.055, close to its lowest level this year. Subdued inflation remains a concern in New Zealand, as it is in Australia and across large parts of the world. Low energy prices, flat wages and overcapacity are behind the trend, and a strengthening Kiwi dollar has also added to downward pressure on prices. However, Mr Wheeler on Thursday expressed confidence that price growth would pick up.
“Headline inflation is low, mostly due to low fuel and other import prices,” he said. “Long-term inflation expectations are well-anchored at 2 per cent. “After falling in recent quarters, short-term inflation expectations appear to have stabilised.”
The domestic economy, meanwhile, had benefited from “strong net immigration, construction, tourism and accommodative monetary policy”, although prices for dairy products, a mainstay of the export economy, were now “below break-even levels for most farmers”, Mr Wheeler said.
The high Kiwi dollar was also stymieing exporters, he said. “The exchange rate remains higher than appropriate given New Zealand’s low commodity export prices,” he said. “A lower New Zealand dollar would raise tradables inflation and assist the tradables sector.”
Despite this, Capital Economics said the central bank had “become less worried by the recent strength of the dollar and more worried by the recent strength of the housing market”. “While the bank still expects the dollar to depreciate, the policy statement dropped the suggestion that this would be ‘desirable’,” wrote chief economist for Australia and New Zealand Paul dales.
“And the RBNZ ratcheted up the rhetoric on housing by switching from saying at the previous meeting that ‘house price inflation in Auckland may be picking up’ to highlighting that ‘house price inflation in Auckland and other regions is adding to financial stability concerns’. “Clearly the RBNZ has become less keen to throw more fuel on the housing fire,” he said. Mr Wheeler said further policy easing “may be required” to push inflation back into the middle of the bank’s target band. A range of economists believe the bank will be forced to cut further before the end of the year.