The Reserve Bank would rather do ‘too much’: Will you regret that?

Mortgage loan rates could fall as low as 1.5 percent, as the Reserve Bank is betting on stimulating the economy.

It has been fanning monetary flames with quantitative easing, which injects cash into the system, a record low (and potentially falling) official cash rate, and an upcoming Financing for Loans (FLP) program designed to make it easier for banks to make loans to the clients. at lower interest rates.

The FLP is expected to have an immediate and lasting impact on retail rates. Heartland became the first New Zealand bank to offer a mortgage loan rate of less than 2 percent this week.

While the central bank is aware of the risks of rapidly rising asset prices, including growing inequality, it sees economic risks as a more pressing concern and the potential for rising unemployment a greater threat than rising unemployment. house prices.

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The central bank’s chief economist, Yuong Ha, said he would rather decide that he had done too much too early in response to the Covid-19 recession than too little and too late.

NZIER Chief Economist Christina Leung said the “least regrets” strategy poses a risk to financial stability and could have a destabilizing effect on the economy in the future, if people who borrowed large amounts of money when rates were low they found they couldn’t pay their mortgages.

“Other unintended consequences include that these measures greatly benefit those who have the capital in the first place to take advantage of lower interest rates, with rising house prices making it difficult for those trying to save for a deposit from Get it first rung of the ladder. Conditions that favor borrowers will tend to magnify both rises and falls in asset prices. “

Infometrics economist Brad Olsen said home loan rates of 1.5 percent appeared to be likely by mid-2021, but he didn’t expect them to fall below 1 percent.

“Low interest rates are here to stay until business investment begins to recover.

“The conversation has shifted from ‘should we borrow?’ to “how much should we borrow?” and people are now turning away from savings due to lower interest rates.

“The risk, if the Reserve Bank did nothing, is that without interest rates, conditions would not be right to drive investment and spending by businesses and households in the future.”

ASB economist Mike Jones said that interest rates would fall below 2 percent in two years in 2021. ASB now believes that the house price correction that was expected this year has disappeared and house prices housing will go up 11 percent on the year. to June 2021. “The [Reserve] The bank is not particularly concerned about the asset price boom. In fact, if anything, the bank is actively encouraging asset price cycles. “

NZIER Chief Economist Eric Crampton said the Reserve Bank would think that exceeding its inflation target of 1% to 3% was preferable to not reaching it, and that that would be consistent with its mandate to achieve maximum sustainable employment.

“In the long term, the best way to achieve maximum sustainable employment is through low volatility in inflation rates around a low level of inflation, so there is no conflict between an inflation target of 2% and maintain maximum sustainable employment.

“Going into a global pandemic-induced recession makes it tough territory. The pandemic has been both a supply and demand shock, and forecasting inflation will be more difficult.

“At the same time, the government has signaled that it wants a substantial increase in the minimum wage during a recession, which will hit employment among vulnerable groups. Inflating some of the effects of the minimum wage increase would be tempting if the bank wanted to prioritize its employment mandate, although doing so would pose some risk to long-term inflation expectations. “

He said that the Reserve Bank’s statements about the desire to prop up house prices to stop a market crash that reduces people’s wealth were more concerning.

“Asset price inflation is, at best, an unwanted side effect of monetary policy that aims to keep inflation above the lower bound. The bank really shouldn’t aim to ‘do too much’ to prop up house prices. “

Westpac chief economist Dominick Stephens said there were indications that the Reserve Bank may already have “overdone the salad.” Data from the Institute of Real Estate on Tuesday showed that prices rose 11.1 percent in September compared to the previous year.

He said it would come as a surprise to the central bank, which in August had forecast a 7.7 percent drop in house prices in the six months to September.

“The Reserve Bank will have to make a major adjustment to its forecast for house prices, and therefore its forecast for consumer spending (because one reliably influences the other).

“This may call into question how much monetary stimulus the Reserve Bank really needs to deliver. We continue to forecast that the official cash rate will fall to -0.5 percent in April next year, because the inflation outlook is very low. However, we recognize that [the] the data is a mark against that forecast. “

Kiwibank economists said the Reserve Bank would likely try to tackle the market by reintroducing loan-to-value restrictions.

ANZ Chief Economist Sharon Zollner said the Reserve Bank’s risk of overrun appeared low in terms of inflation and GDP and that if the FLP was successful it reduced the chances of the official cash rate falling below. from zero.