New Zealand's Reserve Bank will likely use its new macro prudential tools within the next six months to cool Auckland's overheated housing market and follow up with interest rate rises, according to the New Zealand Institute of Economic Research.
"The Reserve Bank will want to use and have to use macro prudential tools over the next six months," Shamubeel Eaqub, principal economist at the institute, said at a briefing in Wellington today. "I don't think it's going to be enough on its own. From the beginning of next year, we expect the Reserve Bank to start raising interest rates, despite the fact that it's a very blunt tool. They can't allow the Auckland housing market to get away on them."
The Reserve Bank has been looking at ways to cool the heating property market in Auckland and keep tabs on the major residential rebuild in Canterbury, without lifting the yield attraction of the kiwi dollar, which has been kneecapping exporters and local manufacturers who compete with imported rivals.
The central bank will use its new tools in an attempt to limit new home lending rather than hit current borrowers which could hurt the economy, Eaqub said. The bank's new macro-prudential measures would allow it to restrict the level of low-equity home loans.
Eaqub expects the central bank to raise the 2.5 per cent benchmark rate by 25 basis points in January, increasing it to 3.75 per cent by the end of 2014.
The New Zealand dollar slumped to 49.23 US cents in March 2009 and has since surged to above 87 US cents, recently trading at 80.63 US cents.
"It will keep the kiwi high," Eaqub said. He declined to forecast a level for the New Zealand dollar.
The Reserve Bank releases data on foreign currency positions and flows tomorrow that are likely to show the size of a recent intervention that governor Graeme Wheeler referred to at a select committee earlier this month.