As was expected the Reserve Bank left its cash rate unchanged at 2.25% this morning and retained a warning that a further reduction may be needed. They in fact have one pencilled in which we think will arrive in August, and forecast no rate rise until beyond the end of their forecast horison which is the middle of 2019. This ongoing good environment for borrowers can do nothing other than provide continued support to a housing market replete with more and more people seeking accommodation but restricted by some existing shortages and less than optimal construction growth.
House prices will rise further and the chances are now very high that soon the RB will strengthen existing loan to valuation rules – though it pays to note that the RB estimate that their effects in restraining the housing market can only be temporary.
Some exporters might be surprised by the NZD’s rise above US 71 cents this week. They shouldn’t be. As we have long pointed out, compared with the rest of the world NZ looks politically stable fiscally and economically robust, our currency has already factored in a one-third fall in commodity prices, post-GFC developments suggest US monetary policy will tighten little and may reverse direction quickly, and our current account deficit is below average.
But at current levels the NZD is looking stretched in the short-term so importers might want to discuss hedging with their currency advisors – at the BNZ of course.