Climate change may still seem a distant threat, but a "Super El Nino" summer is already evident. The weather has turned warm distinctly earlier than usual. Even in the north of the country we are accustomed to unsettled weather until Christmas, not the calm, warm spell we have been having so far this month. If it augurs well for the enjoyment of the coming holidays, it is already a worry for farmers.
The prospect of a serious drought in the summer and autumn of next year was not the main reason the Reserve Bank decided to cut the official cash rate by a quarter of a per cent on Thursday. It ought to have been. In most other respects it finds the economy performing well in comparison with Australia, China, Japan and Europe. Growth has picked again in the second half of this year and is forecast to continue at close to 2 per cent. We are still gaining from immigration, and tourism is doing well. Consumers are spending and business is reasonably confident.
The main reason for reducing the cash rate again was not to stimulate the economy, but rather because the governor had said he would. It was the final step, for the moment, in a programmed reduction in the rate to bring it in line with the trend in economies that are not doing so well. If this unnecessary stimulant causes some inflation, the governor will not mind. Inflation has been lower than the target range of 1-3 per cent in his current agreement with the Government. New Zealanders with longer memories will find it remarkable that inflation above zero can ever be considered too low, but that is now the official view.
The only inflation the bank has had to worry about in recent years is that of house prices, particularly in Auckland. The fact the governor felt able to reduce interest rates last week is a clear sign he believes the measures the bank and the Government have recently taken to slow the rate of house price rises in the Super City is having some effect. The Government's tax and foreign registration requirements came into force in October; the bank's higher loan-to-value ratio for mortgages on investment property in the region took effect last month.
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Real estate agencies usually talk up the market, but Barfoot & Thompson managing director Peter Thompson has noted the average and median prices in Auckland stalled in October. He is not yet certain whether this is a temporary pause or the start of a new, lower price cycle. However, the bank must be reasonably confident it is, otherwise it would not have risked pouring fuel on the fire with another interest rate cut.
It is a credit to the bank's foresight back in May, when it announced these restrictions on Auckland mortgage lending, that it is now better able to set interest rates in the interests of the trading economy. With dairy prices still low, and a drought in prospect, the productive sector needs a favourable exchange rate next year. If the United States Federal Reserve starts to raise its base interest rate, as expected this week, our dollar will fall and farmers will be relieved.