December, 2003

November, 2003

Comment

Two key causes of concern in the economy at the moment are housing costs and the high dollar. They underlie the tensions of a two-speed economy with a strong domestic economy and a weaker export sector. They also pose a problem for the Reserve Bank under pressure to increase interest rates to try to dampen the housing sector, and to (at least) hold the official cash rate at 5% to protect the NZ dollar against any greater financial speculation forcing up the dollar even higher. Many banks are forecasting increases in the official cash rate starting either December this year, or in 2004 to lift the OCR to 5.75% or 6%.

There are many good reasons not to increase interest rates at the moment. Although house price inflation is high (17% for the year), overall inflation is still 1.5% which is well within the 1-3% target range for the Reserve Bank. Also, although the main impact on the NZ dollar is from overseas, a further interest rate rise will attract more speculation on the dollar (if you are in Japan you know that interest returns on your money will be nearly 5% higher in NZ dollars than the yen). The TWI (NZ dollar compared with a trade weighted index of overseas currencies) is running about 4% ahead of Reserve Bank expectations and has leapt by 4.5% in about a month. We have had a tight labour market for 2 years, and as yet, no real sign of this resulting in inflationary wage pressures. In addition, migrant inflows are much lower. The year to May 2003 was 42,000. But estimates for the May 2004 year are more like 27,000. Another factor to note is that housing supply is being boosted at a record rate.