Reserve Bank Governor says 'some further easing' in OCR still likely, but conscious of impact low rates have on housing demand and higher price inflation

Reserve Bank Governor Graeme Wheeler says the central bank’s still likely to further reduce official interest rates, but is conscious of the potential impact on the housing market.

The RBNZ last month lowered the Official Cash Rate to 2.75% and indicated that it may reduce rates further, though the markets are finely balanced in their opinion of whether such a reduction will come when the next OCR decision is made on October 29, or if the RBNZ will “pause” at least till its December review.

The latest comments from Wheeler are being taken as a clear sign that the RBNZ will hold off on moving rates at the next OCR decision. Westpac chief economist Dominick Stephens said the comments “firmed up our expectation that the October OCR Review will return an on hold decision”.

Wheeler told the Institute of Finance Professionals New Zealand (INFINZ) annual conference in Auckland that while there has been a great deal of economic uncertainty and turbulence around the world, recent economic indicators have been more encouraging.

“Some further easing in the OCR seems likely, but this will continue to depend on the emerging flow of economic data. At the same time, however, we remain conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher price inflation. It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly.”

The RBNZ is charged with maintaining inflation between 1-3%, with more recently an explicit target of 2%. However, it has for some time now fallen well short of the target. New inflation figures out on Friday are expected to show annual inflation still only around 0.4%.

Wheeler said the Policy Targets Agreement the RBNZ has with the Government explicitly recognises “as has been the case”, that annual headline inflation may fall outside the target band because of exceptional movements in commodity prices.

“The medium-term focus of policy means that the Bank does not try to immediately correct deviations of inflation from its target range, but aims to do so steadily over time.”

Wheeler said the PTA also requires the Bank to have regard to the potential impact of its monetary policy decisions on financial imbalances in the economy.

“We have used macro-prudential policy instruments and some prudential management interventions to help reduce the risks to the financial system and broader economy associated with a potential correction in Auckland house prices. Although financial stability considerations are secondary to the price stability objective in the PTA, housing market considerations do influence our thinking on the OCR.”

Latest housing sales figures out this week show that the Auckland housing market has continued to roar ahead, but also that other parts of the country – particularly those adjacent to Auckland – are now picking up too.

The RBNZ has new measures targeting Auckland investors taking effect from next month in an effort to rein in Auckland prices.

The RBNZ’s next official statement on financial stability comes with its six-monthly Financial Stability Report to be released on November 11.


While at first reading the Governor’s latest speech backs up the sentiments expressed in the September Monetary Policy Statement there appear two clear, though subtle, changes of emphasis. Firstly, Wheeler talks about more “encouraging” recent economic data – which I would take to allude to the sharp rebound in diary prices.

Secondly, and intriguingly, is the increased emphasis again on house prices.

Taken together these two things would suggest that the RBNZ’s still seeing only one further cut to the OCR at the most and that it’s probably going to pause for breath at the OCR announcement on October 29.

In general terms the RBNZ has backed off on house prices since announcing the moves on Auckland investors back in May. In general terms also, the house prices have been referred to as a ‘financial stability’ issue. Remember, the setting of the OCR is a ‘monetary policy’ issue – dealing specifically with inflation.

Well, now here we’ve got the Governor talking about house prices in terms of potential inflationary impact – but at a time when there’s no inflation in sight – other than through the RBNZ’s windscreen! House prices as such are not included in inflation – they only become an inflationary issue when they feed into ‘secondary’ inflation such as costs of building supplies, consumer durables etc.

To me, these latest comments from Wheeler demonstrate the increasing conflict between the monetary policy role of the our central bank and it’s financial stability role. The two roles are getting in each other’s way.

It will be of great interest in the marketplace if the RBNZ does hold off on further rate reductions because of the state of the house market, which is now clearly showing signs of heating more generally around the country. I think if it becomes widely perceived and understood that the RBNZ’s holding up interest rates because of the housing market, then the Kiwi dollar is likely to rise again – which would likely reduce inflationary pressures.

The Government’s been showing increasing signs of impatience at how far from the inflation target the RBNZ has veered. If the inflation the RBNZ’s expecting to come through strongly in the New Year doesn’t emerge (and I’ve already said I can’t see it) then something is going to have to give.