The chance of the official cash rate (OCR) moving at Thursday’s Reserve Bank meeting is as close to zero as it could get, BNZ senior economist Doug Steel says.
The OCR was likely to stay at 1.75% but there would be plenty of interest in the central bank’s commentary and projected interest rate track.
The Reserve Bank was still in a holding pattern but it would need to take account of recent inflation developments. Those included a higher than expected starting point for inflation, a much lower than anticipated dollar, a tighter than forecast labour market and the prospect of higher minimum wages ahead, more fiscal stimulus, and an improvement in the global economic backdrop, he said.
On the negative side, business confidence had fallen and the housing market looked softer than the central bank had forecast.
On balance, it was almost certain the Reserve Bank would revise up its inflation track. What was less certain was what it would do with its interest rate track, as it would depend on the bank’s judgement as to the permanence of the inflationary pressures, Mr Steel said.
The Bank of England increased its benchmark interest rate from 0.25% to 0.5% but said it did not expect the increase to hit the budgets of borrowers hard, given how low rates remain by historical standards.
But the psychological impact of the first interest rate rise in more than a decade may be hard to measure.
The United States Federal Reserve last week kept interest rates at a historically low target range of 1% to 1.25%, pointing to solid US economic growth and a strengthening labour market while downplaying the impact of recent hurricanes, a sign it is on track to lift borrowing costs again in December.
The US central bank acknowledged inflation remained soft, but it did not downgrade its assessment of inflation expectations. It also noted that the nation’s unemployment rate had declined further.
The Federal Reserve’s benchmark interest rate had been set at an unprecedented near-zero level from December 2008 to December 2015, before the Fed lifted it to its current level.
The Auckland housing market was stable in October despite the political uncertainty.
Prices were steady although sales volumes dropped.
The number of sales fell to 634 in October from 778 in October 2016, the lowest in an October month for seven years, realtor Barfoot & Thompson said in a statement. New listings dipped 9% on an annual basis to 1733, while stock available at the end of the month was 20% higher than a year earlier at 4451.
The Labour-led Government plans to implement legislation to stop foreign investors buying existing housing stock in New Zealand. It also plans to curb immigration.
ANZ chief economist Cameron Bagrie said housing market activity had remained soft.
Turnover was the lowest since 2011 and annual house price growth was "broadly flat". Post-election anecdotes had remained weak.
The Reserve Bank faced a complicated situation as it prepared to release its Monetary Policy Statement, he said.
There was more political clarity in many respects, but plenty of uncertainty.
Fiscal policy would become far more expansionary, but to what extent was unclear — particularly when it needed to be weighed up against possible housing and migration restrictions.
"The picture is hardly clear cut. Developments have been mixed to say the least, no doubt leaving the Reserve Bank with the view ‘numerous uncertainties remain’.
"What has struck us since the Reserve Bank shifted to a ‘dove-ishly neutral’ stance earlier this year is even though there have been data surprises along the way, its stance and view on the outlook have barely shifted."
The Reserve Bank was looking through the noise and focusing on the overall picture. But to Mr Bagrie, the noise level might have increased in the past couple of weeks. The trend was still not clear enough to warrant a shift in the central bank’s message.
The ANZ was still biased to OCR rises in time. The policy mix under the new Government appeared likely to mean a lower dollar and higher interest rate combination for monetary conditions.
The timing of the first rise was still unclear, but ANZ continued to lean towards late next year, he said.
