Archive | Reserve Bank

6 takeouts from Orr’s ‘nothing much to say’ analysis

Reserve Bank governor Adrian Orr, at today’s monetary policy announcement release.

Reserve Bank governor Adrian Orr’s unsurprising announcement today that the official cashrate would stay at 1.75% told me this:

  • The NZ economy is weak
  • Downturns elsewhere in the world could weaken it further
  • Costs might still increase
  • Businesses could speed the rise in inflation by passing on costs quickly
  • The Reserve Bank needs inflation to get up to 2% to show the bank’s performing properly, and
  • Government spending on hospitals, housing & transport infrastructure will prop up the internal economy.

Migration & banks’ role not discussed

Mr Orr gave migration a one-liner: “Net immigration continues to ease, slightly reducing aggregate demand.” And he didn’t mention one other powerful force: Commercial banks’ performance, which has the power to raise or lower housing expectations & business intentions.

He did say in the monetary policy statement, on housebuilding: “A range of capacity-related constraints mean that many construction firms cannot expand production enough to keep up with demand. Firms report that labour shortages, credit constraints & a lack of land with suitable infrastructure are limiting further growth in the sector. These constraints are expected to limit residential investment growth in the near term.”

He also mentioned in the policy statement there was a risk of economic slowdown, and therefore the chance the bank would cut its cashrate in support: “There is a risk that economic growth could slow down further over the next year if a global slowdown reduces demand for our products. Should that happen, we could lower interest rates to support employment and ensure inflation remains around 2%.”

Since its November statement, the Reserve Bank has lowered its projection for gdp growth in the medium term, based on a lower growth assumption for potential output. Some of this decline is attributed to the fall in residential investment.

Some of the projection figures:

  • The annual rate of gross domestic product (gdp) growth reached its lowest point in 5 years in the September 2018 quarter – 2.6% versus 2 sharp drops to 1.8% in the first & fourth quarters of 2013.
  • The Reserve Bank projects in its latest monetary policy statement that the gdp growth rate will rise to 3.1% through to the September quarter this year, then ease steadily through to the March 2022 quarter, all the way down to 2.1%.
  • The bank does see gdp growing steadily, in small steps. Assuming gdp (production) of $63.6 billion this quarter (in 2009 money terms), the bank projects growth of $5.1 billion through to the March 2022 quarter – an 8.1% rise over 3 years.
  • It expects New Zealand’s net foreign liabilities to hold at around 53-54% of gdp over the next 3 years. And it expects the labour force participation rate, which was at 65.1% (seasonally adjusted) in 2000 and reached 70% in the September 2016 quarter, to have topped out at 71% in the September quarter just gone and to sit at 70.9% for the rest of its projection period. It expects average hourly earnings to have risen by 2.8% in the December quarter, to rise 3.8% in this quarter, and rises then to sit mostly in the low 3%/year range.
  • The bank & CoreLogic project that CoreLogic’s house price index will continue its decline from a peak increase of 15.1%/year in the December 2016 quarter to a rate around 2%. Since that peak, the index rises were 12.8%/year in the March 2017 quarter, dropping to 6.4%/year in the following quarter, to a projected 3.2% in the December 2018 quarter and to 2.6% this quarter. Looking forward, they see 3 bigger rises in the next 3 quarters this year (4.3%, 4.7% then 4%), then index rises mostly around 1.9-2.1%/year through to 2022.

The release statement:

Apart from the possibility of a cashrate cut to combat a decline in international trade, Mr Orr said he expected the rate to stay at 1.75% through this year & next.

In his media release he commented: “Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2% target midpoint, necessitating continued supportive monetary policy.

“Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from. The risk of a sharper downturn in trading-partner growth has also heightened over recent months.

“Despite the weaker global impetus, we expect low interest rates & government spending to support a pick-up in New Zealand’s gdp growth over 2019. Low interest rates, and continued employment growth, should support household spending & business investment. Government spending on infrastructure & housing also supports domestic demand.

“As capacity pressures build, consumer price inflation is expected to rise to around the midpoint of our target range at 2%.

“There are upside & downside risks to this outlook. A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent. 

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Link: Monetary policy statement

Attribution: Bank release, monetary policy statement.

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Reserve Bank sets date to ease LVR restrictions

Reserve Bank governor Adrian Orr said today the bank would ease its loan:value ratio (LVR) restrictions on banks’ new mortgage loans from 1 January.

Reserve Bank loan:value ratio (LVR) restrictions on new mortgage loans from 1 January 2019:

  • Up to 20% (increased from 15%) of new mortgage loans to owner-occupiers can have deposits of less than 20%
  • Up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%).

Mr Orr made the announcement when he released the bank’s November Financial Stability Report. He also put dates on 3 other reviews:

  • A final consultation paper on bank capital requirements in December
  • Jointly, with the Financial Markets Authority, reviewing banks’ responses to that review in March, and following up as required, and
  • An ongoing review of conduct & culture in the insurance sector, also with the Financial Markets Authority, to be released in January.

Mr Orr said in today’s report:

“Risks to New Zealand’s financial system have eased over the past 6 months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

“However, both mortgage credit growth & house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan:value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained, we expect to further ease LVR restrictions over the next few years.

“Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.

“While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt & asset prices, and ongoing geopolitical tensions, overhang financial markets.

“This vulnerability is highlighted by the current elevated price volatility in equity & debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.

“The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

“The banking system remains profitable, reflecting banks’ low operating costs & strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure & risk management systems in New Zealand. This was highlighted in our review of bank’s conduct & culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March, and following up as required. 

“CBL Insurance Ltd was placed into full liquidation by the High Court on 12 November. Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements.

“However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. Our ongoing review of conduct & culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January.”

Link:
Financial Stability Report

Attribution: Bank release.

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Reserve Bank expects to hold cashrate long-term, though numerous factors could change that

The Reserve Bank kept the official cashrate at 1.75% yesterday, and governor Adrian Orr said: “We expect to keep the rate at this level through 2019 & into 2020.”

This is his summary:

“There are both upside & downside risks to our growth & inflation projections. As always, the timing & direction of any future official cashrate move remains data dependent.

“The pick-up in gdp growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term. Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2% target midpoint, necessitating continued supportive monetary policy.

“GDP growth is expected to pick up over 2019. Monetary stimulus & population growth underpin household spending & business investment. Government spending on infrastructure & housing also supports domestic demand. The level of the $NZ exchange rate will support export earnings.

“As capacity pressures build, core consumer price inflation is expected to rise to around the midpoint of our target range at 2%.

“Downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.

“Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate. Our projection assumes firms have limited pass-through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Links:
Monetary policy statement
Press conference live-stream

Attribution: Bank release.

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Reserve Bank holds rate at 1.75%

The Reserve Bank held its official cashrate at 1.75% today – as forecast by governor Adrian Orr – and he reiterated his view that the rate would stay at that level through 2019 & into 2020.

Mr Orr said: “Employment is around its sustainable level and consumer price inflation remains below the 2% midpoint of our target, necessitating continued supportive monetary policy. Our outlook for the official cashrate assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target midpoint.

“Our projection for the New Zealand economy, as detailed in the August monetary policy statement, is little changed. While GDP growth in the June quarter was stronger than we had anticipated, downside risks to the growth outlook remain.

“Robust global economic growth & a lower $NZ exchange rate is expected to support demand for our exports. Global inflationary pressure is expected to rise, but remain modest. Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth. Domestically, ongoing spending & investment, by both households & government, is expected to support growth.

“There are welcome early signs of core inflation rising towards the midpoint of the target. Higher fuel prices are likely to boost inflation in the near term, but we will look through this volatility as appropriate. Consumer price inflation is expected to gradually rise to our 2% annual target as capacity pressures bite.

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Attribution: Bank release.

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Reserve Bank holds, projects low cashrate into 2020

The Reserve Bank kept the official cashrate at 1.75% today, and governor Adrian Orr projected that it would stay at that level into 2020.

That’s longer than the bank projected in its May statement. Also, it doesn’t mean a rate rise at the end of that period: “The direction of our next official cashrate move could be up or down,” Mr Orr said.

The bank governor’s view contrasted with recent business survey predictions of a slowing economy, although he hedged his bets, acknowledging that low business confidence can affect employment & investment decisions.

The bank analysis

“While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.

“Robust global growth & a lower $NZ exchange rate will support export earnings. At home, capacity & labour constraints promote business investment, supported by low interest rates. Government spending & investment is also set to rise, while residential construction & household spending remain solid.

“The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level.

“There are welcome early signs of core inflation rising. Inflation will increase towards 2%t over the projection period as capacity pressures bite. This path may be bumpy, however, with one-off price changes from global oil prices, a lower exchange rate and announced petrol excise tax rises expected. We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.

“Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment & investment decisions.

“Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Link:
August 2018 Monetary policy statement (PDF 1.69 MB)

Attribution: Bank release.

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Expect a 1.75% cashrate for some time, says Orr

The Reserve Bank held the official cashrate (OCR) at 1.75% today, and new governor Adrian Orr said it would remain at 1.75% for some time to come.

His forecast? “The direction of our next move is equally balanced, up or down. Only time & events will tell.”

His assessment of economic conditions: “Economic growth & employment in New Zealand remain robust, near their sustainable levels. However, consumer price inflation remains below the 2% mid-point of our target, due, in part, to recent low food & import price inflation and subdued wage pressures.

“The recent growth in demand has been delivered by an unprecedented increase in employment. The number of willing workers continues to rise, especially with more female & older workers choosing to participate. Likewise, net immigration has added to the supply of labour and the demand for goods, services & accommodation.

“Ahead, global economic growth is forecast to continue supporting demand for New Zealand’s products & services. Global inflation pressures are expected to rise but remain contained.

“At home, ongoing spending & investment, by both households & government, is expected to support economic growth & employment demand. Business investment should also increase due to emerging capacity constraints.

“The emerging capacity constraints are projected to see New Zealand’s consumer price inflation gradually rise to our 2%/year target.

“To best ensure this outcome, we expect to keep the OCR at this expansionary level for a considerable period of time. This is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low & stable inflation.

“Our economic projections, assumptions, and key risks and uncertainties, are elaborated on fully in our monetary policy statement.”

Link: Reserve Bank May 2018 monetary policy statement

Attribution: Bank release.

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NZ Reserve Bank holds cashrate at 1.75%

While the US Federal Reserve lifted its federal funds rate target to a range of 1.5-1.75% overnight, New Zealand’s Reserve Bank held its official cashrate at 1.75% this morning.

Bank governor Grant Spencer said in his release on the decision:

“The outlook for global growth continues to gradually improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up. Equity markets have been strong, although volatility has increased. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

“GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, Government spending & population growth. Labour market conditions are projected to tighten further.

“Residential construction continues to be hindered by capacity constraints. The Kiwibuild programme is expected to contribute to residential investment growth from 2019. House price inflation remains moderate, with restrained credit growth & weak house sales.

“CPI inflation is expected to weaken further in the near term due to softness in food & energy prices and adjustments to Government charges. Tradables inflation is projected to remain subdued through the forecast period. Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure. Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. “Longer-term inflation expectations are well anchored at 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Attribution: Bank release.

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Reserve Bank holds as uncertainties rule

The Reserve Bank left the official cashrate unchanged today at 1.75%.

The Reserve Bank of Australia held its cashrate at 1.5% yesterday and the US Federal Reserve decided on 1 February to hold its target range for the federal funds rate at 1.25-1.5%.

NZ Reserve Bank acting governor Grant Spencer said there were numerous uncertainties, and monetary policy would remain accommodative for a considerable period. This is how he saw the economic landscape:

“Global economic growth continues to improve. While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have increased, although agricultural prices are relatively soft. International bond yields have increased since November but remain relatively low. Equity markets have been strong, although volatility has increased recently. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

“The exchange rate has firmed since the November statement, due in large part to a weak $US. We assume the trade-weighted exchange rate will ease over the projection period.

“GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending & population growth. Labour market conditions continue to tighten. Compared to the November statement, the growth profile is weaker in the near term but stronger in the medium term.

“The bank has revised its November estimates of the impact of government policies on economic activity based on Treasury’s half-year economic & fiscal update. The net impact of these policies has been revised down in the near term. The Kiwibuild programme contributes to residential investment growth from 2019.

“House price inflation has increased somewhat over the past few months but housing credit growth continues to moderate.

“Annual CPI inflation in December was lower than expected at 1.6%, due to weakness in manufactured goods prices. While oil & food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period. Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures. “Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2%.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Link: Monetary policy statement

Earlier stories:
7 February 2018: Australian central bank holds rate
1 February 2018: Fed holds rate, no mention of debt programme

Attribution: Bank release.

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Reserve Bank eases loan:value rules

The Reserve Bank foreshadowed today what it called a modest easing of the loan:value ratio (LVR) restrictions on residential lending.

From 1 January, the restrictions will require that:

  • No more than 15% (currently 10%) of each bank’s new mortgage lending to owner-occupiers can be at LVRs over 80%, and
  • No more than 5% of each bank’s new mortgage lending to residential property investors can be at LVRs over 65% (currently 60%).

Reserve Bank governor Grant Spencer said: “The bank will monitor the impact of these changes and will only make further LVR adjustments if financial stability risks remain contained. A cautious approach will reduce the risk of resurgence in the housing market or deterioration in lending standards.”

Releasing the bank’s November Financial stability report, Mr Spencer said New Zealand’s financial system remained sound, and risks to the system had reduced over the last 6 months.

“Momentum in the global economy has continued to build over the past 6 months, reducing near-term risks to financial stability. However, the New Zealand financial system remains exposed to international risks related to elevated asset prices & high levels of debt in a number of countries.

“Domestically, LVR policies have been in place since 2013 to address financial stability risks arising from rapid house price inflation & increasing household debt. These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans.

“Over the past 6 months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016, a more general firming of bank lending standards and an increase in mortgage interest rates in early 2017.

“Housing market policies announced by the Government are also expected to have a dampening effect on the housing market.

“In light of these developments, the Reserve Bank is undertaking a modest easing of the LVR restrictions.”

Deputy governor Geoff Bascand said: “Looking at the financial system more broadly, the banking system maintains adequate buffers over minimum capital requirements and appears to be performing its financial intermediation role efficiently. The recovery in dairy commodity prices since mid-2016 has supported farm profitability and has helped to reduce bank non-performing loans in the sector. Recent stress tests suggest that banks are well positioned to withstand a severe economic downturn & operational risk events.

“The bank has released 2 consultation papers on the review of bank capital requirements and a third paper on the measurement & aggregation of bank risk will be released shortly. The aim of the capital review is to ensure a very high level of confidence in the solvency of the banking system while minimising complexity & compliance costs.

“The bank has also completed a review of the bank directors’ attestation regime and is making good progress in implementing a new dashboard approach to quarterly bank disclosures. This is expected to go live next May.”

Real Estate Institute critical of no move for first-homebuyers, but…

Real Estate Institute chief executive Bindi Norwell expressed surprise that restrictions had been eased for investors but remained at the same level (20%) for first-time buyers: “For some months now, the institute has been calling for a review for first-time buyers to make it easier for them to get a foot on the property ladder.

“We constantly receive feedback from our members around the country that for many young couples, saving a 20% deposit is just too much for them – especially when they’re already paying rent. With a median house price of $530,000 in New Zealand, this means a deposit of $106,000 is needed. In Auckland, with a median house price of $850,000, this is a deposit of $170,000.”

However, that’s not what the Reserve Bank said. Loans can exceed 80% of value, but the bank has to watch the proportion of its total book in that category.

Link: Financial stability report

Attribution: Bank & Real Estate Institute releases.

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Reserve Bank holds cashrate, warns of Government policy uncertainties

The Reserve Bank left the official cashrate unchanged at 1.75% today. Alongside that certainty, bank governor Grant Spencer said the impact of policies of the new government were uncertain.

Bank governor Grant Spencer said: “Global economic growth continues to improve, although inflation & wage outcomes remain subdued. Commodity prices are relatively stable. Bond yields & credit spreads remain low and equity prices are near record levels. Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

The exchange rate has eased since the August monetary policy statement and, if sustained, will increase tradables inflation and promote more balanced growth.

GDP in the June quarter grew broadly in line with expectations, following relative weakness in the previous 2 quarters. Employment growth has been strong and gdp growth is projected to strengthen, with a weaker outlook for housing & construction offset by accommodative monetary policy, the continued high terms of trade and increased fiscal stimulus.

The bank has incorporated preliminary estimates of the impact of new government policies in 4 areas: new government spending, the KiwiBuild programme, tighter visa requirements and increases in the minimum wage. The impact of these policies remains very uncertain.

House price inflation has moderated due to loan:value ratio restrictions, affordability constraints, reduced foreign demand and a tightening in credit conditions. Low house price inflation is expected to continue, reinforced by new government policies on housing.

Annual CPI inflation was 1.9% in September, although underlying inflation remains subdued. Non-tradables inflation is moderate but expected to increase gradually as capacity pressures increase. Tradables inflation has increased due to the lower $NZ & higher oil prices, but is expected to soften in line with projected low global inflation. Overall, CPI inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2%.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

Link: Monetary policy statement

Attribution: Bank release.

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