The Reserve Bank is expected to hold the official cash rate
at 2.5 per cent on Thursday, so the focus will be on the
accompanying statement and how the bank's view of the outlook
In particular, economists are looking for evidence of a
higher level of fretfulness at the central bank about the
Westpac chief economist Dominick Stephens said the Reserve
Bank had long taken a sanguine view, calling the pace of
house price rises "modest" and predicting the market would
"That view has been challenged by recent statistics, which
have revealed increasing market activity and ongoing house
price inflation, especially Auckland," Stephens said.
"Still, the housing market is not dangerously overheated and
household debt levels are growing only modestly, so the
Reserve Bank may not alter its core views at this stage."
Households' mortgage debt grew 2.8 per cent in the year ended
October - its fastest pace since mid-2010 but nothing like
the double-digit increases which marked the mid-2000s boom.
ASB chief economist Nick Tuffley said the current heat in the
housing market in Auckland and Christchurch was largely a
result of undersupply and over time construction should
increase and ease supply constraints.
Building consents have been picking up, but from a low base.
In the year ended October they were up 20 per cent on the
previous year but still more than a third down on the year to
With mortgage rates at 50-year lows, Tuffley said there was a
growing risk of fuelling demand in supply-constrained
Dropping interest rates in this environment would be
reminiscent of the cuts made in 2003 which stoked an already
hot market and which former Governor Alan Bollard has
acknowledged was, with the benefit of hindsight, a mistake.
Swaps pricing implies an expectation in the money market that
the Reserve Bank will cut the OCR by June next year.
But according to the latest Reuters poll, economists continue
to expect its next move to be a rise in the OCR, though not
until late next year or 2014.
Stephens expects the bank's forecasts for economic activity
to emphasise the boost from the Canterbury rebuild, although
that will be offset by government austerity.
Since the September monetary policy statement the run of
economic data has been soft, and weaker than the bank, or
other forecasters, had expected.
Inflation has fallen to just 0.8 per cent, unemployment has
jumped to 7.3 per cent and retail sales in the September
Consumer confidence remains becalmed.
In the latest ANZ Roy Morgan poll a net 5 per cent considered
themselves worse off than a year ago, even though real
household incomes have risen on average 1.3 per cent in the
the past year, as much as they did altogether over the
The New Zealand dollar remains stubbornly high - though not
much more sothan the bank forecast - and the annual trade
deficit widened to $1.4 billion in October.
Bank of New Zealand head of research Stephen Toplis said the
economy was going through a soggy patch and the Reserve Bank
would have to lower its inflation forecasts and indicative
forward track for interest rates.
"That said, we are hanging, by our fingernails, to the view
that the economy is far from dead and does not warrant extra
Toplis said a drop in New Zealand interest rates would not
bolster Australian demand for New Zealand exports, it would
probably have little impact on the exchange rate, and it
would be unlikely to boost consumer or business spending
because the level of interest rates was not providing a
hurdle in those areas.
- Brian Fallow of the New Zealand Herald