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It’s less certain that the official cash rate will fall below zero next year, commentators say, but it may still be necessary as New Zealand works through the effects of the pandemic.
The Reserve Bank has suspended the official cash rate by 0.25 percent until at least March.
It was expected to slow from that point to further stimulate the economy, and banks had been told to make sure their systems could cope by the end of this year.
But better-than-expected data and robust house prices have led some to question whether that would still be necessary.
Data from the Real Estate Institute last week showed that house price inflation across the country stood at nearly 20% year-on-year.
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ASB chief economist Nick Tuffley said his team had revised its view and now expected the central bank to put the rate on hold at 0.25 percent for the foreseeable future.
He said there were question marks about how much stimulus it would take. The bank’s Funding For Lending (FLP) program, designed to allow banks to make loans at lower interest rates, also had relatively few restrictions and was reasonably large in size, which would provide some boost, he said.
Households had already responded strongly when interest rates had fallen so far, he said, and the effect would be even more stark if rates fell further.
Infometrics economist Brad Olsen said there was a feeling that the central bank would “catch its breath” before changing the cash rate.
“The bank will want to see how the FLP is adopted and how it translates into interest rates first. This pause, coupled with the bank’s more optimistic expectations for the economy, appears to push the decision on a negative official cash rate as soon as the bank could implement it, “said Olsen.
“From the bank’s point of view, I don’t think they would let the real estate market prevent them from considering or implementing a negative official cash rate if they felt the conditions warrant more support.
“From last week’s announcement and press conference it was clear that the bank is sensitive to the issue of housing, but not to the extent that it would influence its decision-making.
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Infometrics economist Brad Olsen said there was a feeling that the central bank would “catch its breath” before changing the cash rate.
“In fact, the bank highlighted last week that, in fact, higher asset prices, such as rising house and equity prices, would be beneficial to the economic recovery, as the wealth effect drives the spending. I would be very concerned if New Zealand’s path out of a pandemic-induced economic recession were to inject adrenaline into the housing market. “
He said that if there were more job losses next year, as Infometrics hopes, or if inflation remains low, the Reserve Bank could be expected to ease monetary policy further. A negative cash rate was the most likely tool.
“However, given the most optimistic economic data today, and wanting to evaluate the latest tool to be implemented, the bank has bought a breather before we can see a negative official cash rate implemented. A negative cash rate is not out of the question, but it sure does not seem as safe as expected a few months ago. “
But Westpac chief economist Dominick Stephens said he still expected the official cash rate to turn negative before long.
The Reserve Bank would run out of bonds to buy before the need to stimulate the economy disappeared, he said.
Stephens said the central bank would likely lower the bond purchase rate as drops in the official cash rate and the FLP program go into effect.
He said it was “backwards” to say that since things were going well, the bank would not make further cuts.
“Part of the economy has been stimulated because the Reserve Bank has cut. We are completely losing the tourism sector, that is a hole that must be filled elsewhere. It should come as no surprise that there is activity in the housing market and other parts of the economy not related to tourism. There is still a long way to go to make up for the absence of tourists ”.
