On Wednesday the Reserve Bank of New Zealand announced additional macroprudential measures to cool Auckland’s hot property market. Higher deposit requirements for investor lending within the city, along with higher capital charges for banks who write these loans, will “promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market” according to the RBNZ.
While the measures are yet to be implemented, yet alone proven, they may assist in lowering other things besides housing investor activity – interest rates and the New Zealand Dollar.
Morgan Stanley’s Sung Woen Kang and Jessica Liang certainly believe that to be the case, forecasting the potential for multiple rate cuts from the RBNZ in the second half of 2015.
“We now expect a 25bp cut in both the September and October meetings this year: Previously we had pencilled in a 25bp cut in 4Q – essentially a 50% probability of a 50bp easing scenario in September and October. In short, we raise our probability of a 50bp cumulative cut scenario. Recent developments do point to mounting risks of earlier moves though. We expect the RBNZ to hold the OCR at 3.50% at the upcoming June meeting”.
Aside from increasing the likelihood of multiple rate cuts, Kang and Liang also believe that further monetary easing in New Zealand, along with the likelihood that the US Federal Reserve will begin to lift interest rates in the second half of the year, could see the New Zealand Dollar crunched before the year is out.
“The RBNZ had hiked rates last year in anticipation of a build-up in domestic inflation, given the estimated positive output gap and peak migration numbers, but this has not eventuated as wage growth remains low even despite a firm labour market. Furthermore, there is risk that headline inflation at 0.1%Y may feed through to price-setting behaviour and reducing structural inflation expectations in the country. Second, as we move closer to the Fed’s first hike, the possibility of a significant sell-off in global fixed income should compress New Zealand’s yield spread differential, reducing its attractiveness as a carry currency. This is important for NZD, given New Zealand’s high net foreign liability to GDP (at 65% of GDP), which means it has to pay close to 5% of GDP per year to foreign investors in income payments. We maintain our year-end forecast of 0.63 for NZD/USD”.
At present the NZD/USD is trading at .7450.
While forecasts for rate cuts and a lower NZD are not unusual at present, perhaps the most notable part of their analysis is that macro-prudential tools offers the benefit of greater monetary policy flexibility. It can be used to target a specific area of concern while allowing monetary policy settings to be appropriately configured to the outlook for the broader economy. In essence, one complements the other.
Given the similarities between Auckland’s property market and Sydney’s, observers can’t help but wonder what monetary policy settings would look like in Australia at present had APRA adopted a similar approach to that taken by the RBNZ several years ago.
While interest rates are already at record lows, yield differentials remain attractive, helping to underpin the Australian dollar: at a time where the economy is growing below trend with high unemployment and low levels of inflation.
Had measures to cool Sydney’s red-hot property market been put in place in the past, given the current economic outlook, it’d be likely that the cash rate, along with the Australian Dollar, would be sitting significantly lower.
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