RBNZ caught between high dollar and strong housing
(23 April 2013 – New Zealand) Economists expect the Reserve Bank of New Zealand (RBNZ) to hold interest rates at 2.5 percent on Wednesday, caught between a high New Zealand dollar and a strong housing market.
The one-page April review of official interest rates is due out a day earlier than usual because of the Anzac Day holiday on Thursday.
The central bank is expected to hold rates this week and indicate that they would remain on hold till the end of the year, with inflation benign at less than 1 percent in the past year and a widespread drought denting economic growth.
ASB Bank economists expected official interest rates to remain on hold till March 2014.
The currency was about US84.5c on Friday, not far off a recent peak above US86.7c. The exchange rate is about 4 percent higher than the RBNZ forecast in March.
House prices are up about 8 percent in the past year, driven by hot markets in Auckland and Christchurch.
Official inflation remains extremely low, at 0.9 percent up for the year to March and is expected to remain below 1 percent, at the bottom of the RBNZ’s target band, for the rest of the year.
The overvalued dollar suggests the Reserve Bank will hold interest rates lower for longer, even though the lowest mortgage rates in 50 years are boosting the housing market.
The tension between the high currency and a stronger housing market has become worse since March.
While the Reserve Bank has held official interest rates at 2.5 percent for two years, Westpac Bank Chief Economist Dominick Stephens told reporters the central bank now seemed to be 'sitting on the fence' and that was becoming uncomfortable.
On one side, the Canterbury rebuild and rising house prices were producing rapid growth, which could see inflation rise.
On the other side, inflation was being kept down because of the high dollar, and the currency could rise even more.
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