Hope for rate hikes may be in vain

Reserve Bank Governor Graeme Wheeler telling reporters at the May 11 Monetary Policy Statement news conference that the OCR was on hold for the foreseeable future. Photo by Lynn Grieveson.

The Government hopes higher interest rates will help improve housing affordability in the long run, but it will have to wait a long time for that particular cavalry to gallop over the horizon.

Finance Minister Steven Joyce said on the eve of the Reserve Bank's monetary policy announcement on Thursday that record low interest rates all over the world were a major factor in bidding up house prices beyond the reach of many home buyers. He said a rise in inflation from ultra-low levels would help solve the problem of housing unaffordability, along with measures such as KiwiSaver HomeStart and extra housing supply.

"The biggest problem we've got with first home buyers able to buy properties is we have very, very low interest rates historically, and as a result that's directly linked to how much house prices have been bid up around the world," Joyce told RNZ before the Reserve Bank's announcement of its latest decision.

Joyce agreed low interest rates were not the only reason for problems with high house prices creating housing unaffordability, which were detailed on Wednesday with the release by MBIE of its new Housing Affordability Measures.

"It's not just houses. It's shares and everything else, but it's certainly one of the dominant reasons for that. Unfortunately, it's going to be a little bit of time yet before that changes, although there's indications that this period of ultra-low interest rates is coming to an end. That will improve affordability over time," he said.

"There's no point gilding the lily. One of bigger problems is low interest rates and that's making it difficult for people."

Also unfortunately for the Government, the Reserve Bank announced just over an hour later that interest rate relief could be more than two years away.

'On hold for the foreseeable future'

Governor Graeme Wheeler surprised many economists and financial markets players by sticking to the Bank's forecasts from February that it would not need to put up the Official Cash Rate until the second half of 2019 at the earliest, given the outlook for inflation was relatively subdued. Economists had expected the Reserve Bank to pull forward its forecast for the first rate hike to early to mid 2018.

Instead, Wheeler said inflationary pressures were well contained and the economic data received since the Bank's last set of public forecasts in its February Monetary Policy Statement were neutral for monetary policy.

"For the foreseeable future, we would expect the Official Cash Rate to remain at its current level," he said after leaving the OCR at its record low level of 1.75 percent for the third consecutive decision as expected.

He pointed to the Reserve Bank's preferred measure of core inflation (the sectoral factor model) being stable around 1.5 percent, which puts it towards the lower end of the Reserve Bank's one to three percent target band.

The surprise decision to leave the forecast track unchanged and the dovishness of the commentary from Wheeler drove the New Zealand dollar down almost a cent to 68.4 USc and wholesale interest rates fell around five basis points.

Wheeler later told the Finance and Expenditure Select Committee that the difference between the Reserve Bank and the market's view of inflation was centred around the bank's view of continued low wage inflation. He pointed to a variety of factors, including previously low price inflation and high net migration of people of working age. He said 204,000 people of working age had migrated since 2012 and a further 130,000 were expected to arrive over the three years.

'Banks helping a bit'

However, the Reserve Bank and the Government are getting some help from banks that are tightening their lending criteria and nudging up their mortgage rates anyway, regardless of the flat OCR. That's because bank are experiencing slower growth in retail term deposits from households, which makes it harder and more expensive to fund new lending. Reserve Bank rules introduced in 2010 to reduce the reliance of banks on 'hot' wholesale markets have made the banks more reliant on long term bond issues in overseas wholesale markets, and on local term deposits.

Wheeler said the Reserve Bank's own 40 percent deposit requirement on loans to landlords had slowed overall lending growth, along with the slight rise in mortgage rates and because banks were taking a more cautious approach to keep within their own limits.

Deputy Governor Grant Spencer said some of the banks were hitting their own internal limits for how much funding they could obtain on overseas wholesale bond markets.