Am I the only one who spends a lot of time trying to translate RBNZ communication into English? Below is a quick take in 200 fewer words what I think the key messages are from the October OCR announcement:
|The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.||The OCR is unchanged at 2.5%.|
|Reserve Bank Governor Graeme Wheeler said: “The recovery in the United States and other major advanced economies remains patchy. Nevertheless, world prices for New Zealand’s export commodities are very high.||Global conditions look patchy, but our exporters are getting good prices.|
|“Global long-term interest rates are still very low, but have been volatile recently. This volatility has largely been due to uncertainty as to when the Federal Reserve will exit from quantitative easing.||Global interest rates are low but the outlook is uncertain.|
|“The New Zealand economy is estimated to have grown by more than 3 percent in the year to September. Household spending is rising, and reconstruction in Canterbury is being reinforced by a broader rise in construction in Auckland and across the country more generally. This will support economic activity and start to ease the housing shortage.||NZ economy is growing strongly. Driven by household spending and Canterbury rebuild. Restrained government spending will slow growth [from last para].|
|“In the meantime high house price inflation persists, especially in Auckland. As has been noted for some time, the Reserve Bank does not want continued high house price inflation to compromise financial or price stability. Recently introduced restrictions on high loan-to-value mortgage lending are expected to help slow house price inflation and the Bank will continue to monitor the situation closely.||House prices are rising too quickly in Auckland. We are using LVR restrictions to dampen it.|
|“The exchange rate remains high and is a headwind to the traded goods sector. Sustained strength in the exchange rate that leads to lower inflationary pressure would provide the Bank with greater flexibility as to the timing and magnitude of future increases in the OCR. Fiscal consolidation is also expected to continue weighing on demand over the next few years.||Exchange rate is high and reducing export competitiveness. But it is also reducing inflation. Delaying interest rate increases.|
|“Annual CPI inflation increased to 1.4 percent in the September quarter. As domestic demand pressure picks up, headline inflation is likely to rise towards the 2 percent target midpoint. The Bank is aiming to keep inflation and inflation expectations close to 2 percent over the medium term.||CPI inflation is low, but gradually picking up.|
|“Although we expect to keep the OCR unchanged in 2013, OCR increases will likely be required next year. The extent and timing of the rise in the policy rate will depend largely on the degree to which the momentum in the housing market and construction sector spills over into broader demand and inflation pressures.”||No interest rate increases this year, but expect some in 2014. Later if house prices fall, earlier if Canterbury construction inflation infects other regions and sectors.|
1. The interesting spacing of commodity prices and exchange rate comments. In the beginning of the statement, exporters are facing positive conditions in terms of world prices. At the end of the statement, the exchange rate is a headwind. Export share of the NZ economy is currently at the highest level since the latest GDP data started in 1987. Also, the NZD moves very closely with commodity prices. No free lunch.
2. Treating as given “the housing shortage”. I am not convinced that housing shortages exist to the degree that the RBNZ and Auckland Council are touting:
“Auckland’s Council suggests that Auckland’s current housing shortage is 20,000 – 30,000 houses with 13,000 houses needing to be built each year to meet future demand.”
These figures are not defensible in the context of the latest Census that shows population growth was much smaller than previously expected. Also, I am pretty sure the analysis used the incorrect household size assumption in deriving the current shortage estimate.
- Estimate of current shortage: To get to 20,000-30,000 Auckland shortage, the intercensal (2006-2013) household size assumption has to be 1.9-2.2 people per household. Since 1981 the household size has been pretty steady at around 3.1 persons per household. At 3.1 persons per household the ‘shortage’ in Auckland is more like 5,000. I actually have some issues with the way this figure is calculated, as it assumes there are no relative price effects, that markets are 100% dynamically efficient and that there are no regulatory barriers to housing supply.
- Estimate of future required rate of building: The 13,000 homes per year over the next 30 years assumes very high population growth and falling household size. In Auckland, it is unlikely IMO that household size will fall so dramatically, because the required growth in population has to come from inward migration,which tends to happen in family units.