By Bernard Hickey
For months politicians and economists have looked at Reserve Bank Governor Graeme Wheeler as if he was a potential arsonist in the Auckland housing market, having the ability to pour petrol on the fire with rate cuts.
Both Prime Minister John Key and Finance Minister Bill English have openly mused about how the Reserve Bank would have to be careful about cutting the Official Cash Rate because any rate cut would further pump up already over-valued housing prices.
The question of rate cuts bubbled to the surface this year as inflation plunged towards zero and the Governor faced growing calls to cut to push inflation back towards the 2% mid-point of his 1-3% target band, as specified in his Policy Targets Agreement.
However, exporters, unionists and business leaders alike have worried that Auckland's housing market could prevent a much-needed rate cut.
But it's now clear after this week's Monetary Policy Statement that Wheeler himself does not think he can 'pour more petrol on the fire' by cutting the OCR.
He said the Auckland market was a concern from a financial stability point of view, but it was not a factor in his decision to hold the OCR at 3.5%. It also didn't stop the bank from removing any prospect for higher rates in its forecast track for interest rates.
Wheeler said the Auckland housing boom of 2015 was different to the one seen more widely throughout New Zealand in 2006 and 2007, when home-owners flush with the joys of all the fresh equity in their housing ATMs went on a spending spree. Back then, mortgage lending was growing at over 15% a year to finance a swathe of new baches, boats, holidays and decks. That drove up consumer prices generally and helped push domestic inflation to over 4%, well north of the bank's 1-3% target band.
Wheeler said he was not seeing that sort of spree this time around, with bank mortgage lending still growing at less than 5% per year.
"You're not seeing the sorts of wealth effects feeding into consumption that you were seeing in 2006 and 2007," he told a news conference this week. "You're seeing quite a lot of consumption growth in the economy, but a lot of that is because of employment growth and strong income growth," he said.
"We're concerned about the Auckland housing market for financial stability reasons, but it didn't affect the way we thought about monetary policy."
That means Wheeler will not hold back from cutting the OCR if he thinks in the coming months that the inflation outlook over the next couple of years has softened markedly.
He opened up that possibility by pointing to a Reserve Bank scenario where inflation expectations halved to near 1% over the coming year. That would allow the Reserve Bank to cut the OCR by 50 basis points.
The way is now clear for rates to be cut if inflation expectations keep falling in the coming year, as they have done over the last year.
The irony is that such a rate cut would no doubt pump Auckland house prices even higher.
Wheeler is still considering forcing banks to hold more capital to back mortgages to landlords, as well as other tools, but for now he doesn't think his can of OCR cuts will spark the sort of inflationary fire he has to worry about.
He has other fire-fighting tools he may use.
A version of this article was also published in the Herald on Sunday. It is here with permission.