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Did the RBNZ get it wrong?

The Reserve Bank's recent OCR rate cut caught the market by surprise, raising the question: "Did the bank get it wrong?" Jenny Ruth investigates.

Tuesday, May 13th 2003, 7:03AM

by Jenny Ruth

The last thing the housing market needed was last month’s interest rate cut. Both the median house price and the volume of sales reached records in March while the number of housing consents hit the highest number in the month of March since 1977.

The sales figures come out the day before the Reserve Bank reviewed its Official Cash Rate (OCR) and were seen by some economists as putting paid to any chance of an OCR cut. But then the central bank took them by surprise and cut it by 25 basis points to 5.5%.

Through the mid-1990s, some thought former Reserve Bank governor Don Brash paid too much attention to the housing market. So is current governor Alan Bollard paying the housing market too little attention?

Most economists don’t think so. ASB Bank chief economist Anthony Byett, doesn’t think Brash got it so wrong either.

Back then, Brash was still fighting relatively high inflation expectations and had a much narrower zero to 2% inflation target. "Put Alan Bollard in the same circumstances in the early 1990s and he might have done the same," Byett says.

While the last thing the housing market needs right now is lower rates, "that’s only one part of the equation of the whole economy. The export sector in particular is suffering," he says.

A big reason the housing market is so strong is the high level of immigration coupled with a shortage of housing stock. The high level of housing consents shows supply is starting to catch up with demand. He also thinks that immigration will slow. "I can’t see us taking in 1% of our population year in, year out," he says.

Deutsche Bank senior economist Darren Gibbs says that if the immigration numbers dried up suddenly, the economy , and the housing market, could very quickly look very sick.

He doesn’t think current house price inflation, which peaked at about 10%, isn’t much to worry about, particularly given the very low rate of house price inflation in the years before the current boom.

Gibbs also notes that other central banks are ignoring far higher rates of house price inflation. The Bank of England, for example, is easing rates even in the face of a 25% jump in house prices.

Stephen Toplis at Bank of New Zealand agrees current pricing isn’t much of a worry. Back in the mid-1990s house price inflation was running at double-digit figures for several years in a row and was threatening to go higher, he says.

"You shouldn’t look at the housing market in isolation. The bank saw activity levels across the whole economy look like they’re going to be suppressed. By providing a low interest rate environment, they may be able to support particular sectors so that overall growth doesn’t suffer," Toplis says.

In any case, given that any change in monetary policy takes between 12 and 18 months to work its way through the economy, it’s way too early to be making any judgment about Bollard’s effectiveness, Toplis says.

Cameron Bagrie at National Bank doesn’t think Bollard’s method of conducting policy is materially different to Brash’s.

Brash had already moved away from fighting inflation expectations towards trying to keep the economy stable, he says. "Inflation is just not the threat that it was Bollard’s using monetary policy as a shock absorber. Bollard’s basically extended the framework and the interpretation that Brash had been following in the last 18 months of his tenure," Bagrie says.

If Bollard has picked it wrong and the housing market overheats, that may add a small amount to overall inflation but not enough to cause major concerns.

But if he was too slow off the mark to ease interest rates in the face of a slowing economy, the political consequences would be much greater, Bagrie says.

« Few think BNZ's decision goodProperty Pack Auckland are mortgage people »

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.24 6.79 6.65
ANZ 8.64 7.84 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.24 6.79 6.65
ASB Bank 8.64 7.24 6.79 6.65
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - 7.24 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.84 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 7.04 - -
Co-operative Bank - Owner Occ 8.40 7.24 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.74 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.69 6.45 6.19
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.75 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.39 7.25
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 8.25 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 7.25 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.75 7.35 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 ▼8.09 ▼7.59 ▼7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 ▼9.09 ▼8.59 ▼8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.84 7.45 7.25
SBS Bank Special - 7.24 6.85 6.65
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.74 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 8.04 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 7.24 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - - 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.89 7.49 7.25
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.29 6.89 6.65
Median 8.64 7.29 7.32 6.65

Last updated: 28 March 2024 9:42am

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