With the year drawing to an end, speculation is rife on the future of interest rates in New Zealand. While some analysts are calling for a slight reduction in the official cash rate (OCR) sometime in 2015, this is unlikely for a number of reasons. If the Reserve Bank of New Zealand (RBNZ) do make a slight downward adjustment in order to balance the local economy with global conditions, this reduction is likely to be limited and short lived as the New Zealand economy continues to gain strength.
Current conditions in New Zealand do not support an interest rate drop, just as they do not support an end to LVR restrictions. Supply and demand in the property market are still far from balanced, with increasing migration figures and strong residential mortgage lending just two examples of upwards pressure. While house price inflation has dropped from almost 10 percent to 5 percent over the year, Westpac has just revised their 2015 forecast from 3.5 percent to 7 percent. It could take another 12 to 24 months for the supply response to catch up with ongoing housing demand, and in that time the OCR is unlikely to drop.
While an interest rate reduction is unlikely, however, the RBNZ are in no rush to increase rates either. According to a recent survey at mortgagerates.co.nz, an interest rate rise is unlikely before the end of 2015 or early 2016. Only nine of the survey respondents said an increase is possible in September next year, with others revising their forecasts and pushing the next increase out to 2016. Many of the big banks have similar expectations, with the ASB pushing its forecast hike from September to December 2015.
"The RBNZ has plenty of time on its side to wait for more tangible signs of inflation before there is any need for a rate hike encore - particularly given how low fixed-term mortgage rates are... Further OCR increases are a matter of if as much as when. We can easily conceive of events that would mean inflation remains benign for an extended period. But we are mindful that migration is very strong and that the housing market may be gaining a second wind."
With a rate rise unlikely in the near future, some quarters are calling for a slight reduction due to cheaper oil prices and easing global markets. According to the Employers and Manufacturers Association chief executive Kim Campbell, "A year ago we said interest rates did not have to be raised this year and that has proved correct... We are concerned the Reserve Bank has paid too much attention to domestic house price rises in Auckland and Christchurch and not enough to the rapid changes in global markets."
In Westpac's monthly Home Truths report on the housing market, chief economist Dominick Stephens also raised the issue of a slight OCR reduction as a reaction to global conditions: "Cheaper oil is sure to suppress inflation in New Zealand. We now expect that inflation will drop below 1%, and stay below 1%, until September 2015. As a result it now looks unlikely that the Reserve Bank will increase the OCR in 2015 at all. If anything, financial markets will probably start speculating on the possibility of OCR reductions."