New Zealand’s central bank sees a risk that a strong housing recovery could keep inflation elevated for longer, underscoring policymakers’ decision this week to signal they’re in no rush to lower borrowing costs.
(Bloomberg) — New Zealand’s central bank sees a risk that a strong housing recovery could keep inflation elevated for longer, underscoring policymakers’ decision this week to signal they’re in no rush to lower borrowing costs.
The Reserve Bank kept the Official Cash Rate at 5.5% on Wednesday and projected a small chance of another rise in interest rates. The central bank also signaled the benchmark won’t fall below the current level until early 2025, in contrast with many economists who predict an easing in late 2024.
“Near term, there are still some risks on the upside to inflation,” Assistant Governor Karen Silk said in an interview on Friday in Wellington. “The OCR track is slightly higher and we’re saying potentially retaining rates at a higher level for longer. Probably the biggest driver of that is really housing.”
Higher house prices typically produce a wealth effect that has the potential to spur consumer spending and fuel inflation. The RBNZ this week said it expects property prices will rise 3.6% this year, a reversal from a forecast 3.5% decline in May. The property market has dropped about 15% from a late-2021 peak.
Silk said it remains to be seen whether the stabilization in the housing market and a slow recovery next year will fan inflation. Partly this is because higher mortgage rates mean households will have less money to spend, even if they feel wealthier.
“We are looking at it as a gradual resumption in house price trend, but in an environment where labor market pressures continue to ease and at the same time you’ve got a higher interest rate environment,” she said. “So debt servicing costs play a part.”
The RBNZ also expects home-loan rates to stay high as bank funding costs increase, particularly as the gap between wholesale funding costs and term deposits returns to its usual levels.
“Funding costs are going to stay up, and if bank funding costs are going to stay up then it’s likely that you will see mortgage rates remain higher,” Silk said.
While there are near-term upside risks to inflation, there are also key risks to the downside, not least the outlook for global growth. The RBNZ got a reminder of that earlier Friday when Fonterra Cooperative Group shaved 25 New Zealand cents off its projected milk price, citing weakness in demand from key customers including China.
Silk said the weakness in recent dairy auctions was more than the RBNZ had assumed, but it still expects a recovery through 2024. The risk to its outlook is if there is a continuation in the weakness for longer than expected.
“One of the medium-term risks for us is global growth,” said Silk. “We’re really focused on global growth and in particular how weak is China. Is China really going to be able to deliver the growth that they’re suggesting?”
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