KEY POINTS:
Home owners, particularly those with mortgages, can look forward to more pain.
Reserve Bank governor Alan Bollard surprised no one today when he left the Official Cash Rate (OCR) unchanged on 8.25 per cent in the bank's quarterly Monetary Policy Statement.
Not only did he indicate it will be into the second half of next year before interest rates are likely to fall, but the bank forecasts house prices will fall on average by 5 per cent this year.
The bank's forecasting manager Tim Hampton reckoned house prices might be overvalued by 20 to 30 per cent.
While the bank is not expecting a "correction" of the magnitude seen in the depressed US market, house prices may stagnate for some years as they come into line with relative income levels, he said.
"We are not seeing a real slide, we are seeing them (house prices) come off pretty much as we have been forecasting," Dr Bollard said.
But there was potential for a more marked housing market correction.
The bank estimated nearly a third of mortgagees on fixed rates will have to refinance in the next 12 months and, on average, they will have to pay between 0.7 and 1.5 percentage point higher rates.
The good news was that with disposable incomes continuing to rise, housing affordability was projected to improve.
The bank was seeing evidence private sector banks were being more conservative about lending.
"That's not inappropriate in a period where we see concerns about financial stability in the northern hemisphere," said Dr Bollard.
Given the tighter credit and the rise of the New Zealand dollar, Dr Bollard effectively sanctioned a tightening of monetary policy.
"We think the tightening of monetary conditions is not inappropriate for this sort of situation," he said.
Although he acknowledged a deteriorating global economy, he saw less risk to New Zealand, with its exports skewed towards the booming east Asian and Australian economies.
"We do not believe it is appropriate to lower official interest rates as insurance against these downside risks," he said.
The bank now projected the annual inflation rate would be 3.4 per cent in the year to March 2008, even higher than forecast in December and well outside the bank's target range of 1 to 3 per cent.
"We expect that the OCR will need to remain at current levels for a significant time yet to ensure inflation outcomes of 1 to 3 per cent on averages over the medium-term," he said.
The bank has included the Government's planned emissions trading scheme in its inflation outlook and that will add 0.3-0.4 percentage points to inflation next year and the year after.
It also blamed higher food and energy prices for the higher inflation outlook.
"Furthermore, over the medium-term, a tight labour market, strength in commodity prices, and the impact of announced government spending plans and assumed personal tax cuts will add to inflationary pressure," he said.
The bank lowered its growth forecast, thanks to the gloomier world economic outlook, tighter credit conditions, the depressed housing market and recent dry conditions.
GDP growth is now picked to be less than two 2 per cent in the year to March 2009 and the following year.
"After a period of strong activity, the New Zealand economy is entering a period of sub-trend growth," he said.
This was payback for a period of above trend growth, he said.
Dr Bollard said, given the degree of the slowdown in the housing market, it was surprising consumer confidence had not fallen by more.
He said the New Zealand dollar, which this month has risen to over US82 cents, its highest level since it was floated in 1985, was exceptionally and unjustifiably high against the US unit.
However, he said its rise had been less than might have been expected on the basis of relative interest rate expectations.
Private sector economists assessed Dr Bollard's quarterly statement as in line with the December economic review and essentially neutral in tone.
They said the lower growth forecasts were realistic.
ANZ-National Bank chief economist Cameron Bagrie said the key phrase that rates would stay on hold for some significant time, showed that the Reserve Bank's hands were tied.
"They have easing growth and still high inflation so they have little room to move."
- NZPA
