Liam Dann: Why the Reserve Bank was right to hold

Name: The Economy Hub: Interest rates on hold
Uploaded: 2016-06-09T11:20:51+12:00
Duration: 140 s
Description: The Reserve Bank has left interest rates on hold at 2.25 per cent and the kiwi dollar has soared. Liam Dann talks to EY’s David Snell And Mark Lister from Craig’s Investment Partners about the big factors behind the decision.

By Liam Dann

Business Editor at Large·NZ Herald·

9 Jun, 2016 12:10 AM2 mins to read

The Reserve Bank has left interest rates on hold at 2.25 per cent and the kiwi dollar has soared. Liam Dann talks to EY’s David Snell And Mark Lister from Craig’s Investment Partners about the big factors behind the decision.

Opinion by Liam Dann

Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.

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The Reserve Bank has made the right call to leave rates on hold at 2.25 per cent this morning.

It avoids throwing fuel on the all ready overheated housing market and has time to wait for stronger economic signals out of the US.

Reserve Bank Governor Graeme Wheeler is clearly worried about housing.

"New Zealanders seem to think house prices can only ever go up," he warned at the post-decision press conference today.

The New Zealand economy is still stable and growing. There are risks around low inflation and a dairy driven slow down, if they prove to be serious the Bank will still have fire power later in the year to address them.

Exporters won't be happy the kiwi dollar has soared above US71c this morning but its strength in the past few days has more to do with the US currency than local monetary policy which - this time at least - appears to have been widely anticipated by the market.

Lousy employment figures in the US on Friday put paid to any chance of the US Federal Reserve lifting interest rates there in June.

That's seen the greenback fall sharply pushing the kiwi up.

If the Reserve Bank had any thoughts of a surprise cut today in order to push the dollar down sharply they would have been killed off by the US data.

A cut today would have been well and truly up against the headwinds of the lower greenback.

If, as the statement suggests, there is still one cut to come this year then far better to time it closer to movement from the Federal Reserve.

At that point the US dollar would be rising and the impact on the kiwi would be marked.

The other advantage of not fueling the housing market now is that it buys the Bank time to develop its new macro-economic tools - possible debt to income ratios - which it can deploy to try dampen demand later in the year.