RBNZ swan song paves the way for hawkish Spencer - TDS
|Analysts at TDS, explain that the outgoing Governor Wheeler managed to promote financial stability as a key RBNZ policy objective and threw in an “overheated domestic housing market” into the opening paragraph of his “Reflection on the stewardship of the Reserve Bank” speech.
Key Quotes
“The hawkish opening stance quickly corrected the NZD free-fall (sank 30pip to $US0.7232) when Bloomberg published a “Wheeler says lower NZD is needed” headline. It turns out that the outgoing Governor used the quite well-worn phrase where ”A lower New Zealand dollar is needed to increase tradables inflation [45% of CPI] and help deliver more balanced growth” in his speech. NZD back to $US0.7264.”
“The Governor attributed a fair amount of “blame” on prolonged low inflation and a strong housing market on monetary policy developments offshore, where “New Zealand, with its stronger output growth, higher interest rates, and impressive international rankings on numerous business and governance–related surveys attracted portfolio flows from the rest of the world”. This kept the exchange stronger and cash rates lower than would otherwise be the case.”
“Are LVRs temporary? “ … the underlying drivers of housing demand (population growth, low interest rates) remain strong with housing demand still outstripping supply. There is a risk of a housing market resurgence (and a sharp lift in high LVR lending) if LVRs were removed at this time”.”
“Domestic risks according to Wheeler are (1) sharp decline in immigration and (2) resurgence of house price inflation. We see the risks as heavily skewed towards the latter with rates this low for this long. OIS is 50/50 for a hike in June 2018.”
“TD view: take rates off the floor at the same time as removing macro tools “in stages”. Until we are proved wrong, our long-held view is that the “dovish hold” environment of 2017 to date has been squarely under worry-wart Wheeler. We see a shift in tone towards a more hawkish stance embedded the 9 November Monetary Policy Statement, the only one that Governor Grant Spencer will be supervising.”
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