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3/7/2015 — General
Alarm bells at the RBNZ?
By Simon Hartley
Alarm Bells will be ringing with the Reserve Bank with May having been a “whopping” $1.5 billion mortgage lending month, and some economists now picking up to three more cuts to the interest driving official cash rate (OCR) this year - back to the record low 2.5%.
The economy is proving a double-edged sword for the Reserve Bank, with Auckland's heated housing bubble fuelled by the low OCR, while dairying's downward spiral rips cash from dairy farmers, regional economies and trade receipts.
ASB senior economist Nick Tuffley said overall the country's credit growth was running at its fastest pace since the global financial crisis hit, during 2008/09.
“Mortgage lending had a whopping month in excess of $1.5 B of net lending growth,” Tuffley said earlier in the week.
However, following the eighth consecutive decline in the global dairy auction yesterday, of 6% overall and 10% to the crucial whole milk powder component, Tuffley predicted the Reserve Bank would cut the OCR a further 75 basis points; in July, September and October, to a low of 2.5%.
He said four key reasons was the weakening in the dairy auction, business confidence and consumer confidence in dairy-focussed reasons, and now a revised review to there being a slower recovery in dairy prices.
“There are some uncertainties around when or if the last cut [October] cut will be delivered,” Tuffley said.
Similarly, ANZ chief economist Cameron Bagrie said there was little on the horizon to suggest there will be a meaningful turnaround in international milk powder prices anytime soon.
Having previously forecast the OCR down to 2.75%, Bagrie yesterday revised that down a further 25 basis points to 2.5% also.
“Following a 25 basis point cut later this month, we forecast the Reserve Bank to deliver a third consecutive cut in September,” he said.
However, Bagrie said “the economy is not grinding to a halt just yet,” noting the extent of New Zealand dollar depreciation seen to date, and key positive economic pillars which still existed, such as net migration, tourism and net wealth gains.
On the questions of the country's rising credit, Tuffley said housing credit would be the aspect catching the Reserve Bank's attention the most.
“It is clear that, even before the Reserve Bank cut the OCR in June, past falls in interest rates were already fuelling mortgage borrowing demand,” he said.
Mortgage lending was at its strongest dollar value growth since November 2007.
“The temperature remains high in the Auckland housing market, with signs of lifting activity elsewhere,” Tuffley said.
Recent declines in mortgage rates were likely to be playing a part in stimulating the added lending growth.
*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.
More on the housing bubble in Auckland.