Market Update: August 2017

The latest statement from the Reserve Bank reported that the Official Cash Rate remains on hold at 1.75 percent.

Governor Graeme Wheeler said that CPI inflation was down in the June 2017 quarter (at 1.7%). It is, however, expected to be variable in the near future, in part due to movements in tradables inflation.

House price inflation continues to moderate because of constraints around housing affordability, credit conditions and loan-to-value ratios. However, a resurgence in prices could be on the cards, due to the construction sector’s resource constraints as well as population growth.

NZ Herald’s Business Editor Liam Dann said that this latest announcement from the Reserve Bank would be interesting to buyers wanting to fix their mortgage rates. "If you are considering a fixed rate mortgage it may remove some of pressure to fix long," said Liam.

In other news, headline inflation, which had increased across countries such as China, is now expected to drop. This is because the inflation increases seen over the past year was due to increases in the cost of food and oil. So with the effects of higher fuel and food prices predicted to dissipate early next year, annual headline inflation is expected to fall below the bottom of the target range and then return to the target midpoint.

Wheeler noted that GDP has been lower than expected. However, growth is predicted due to the accommodative monetary policy, elevated terms of trade and population growth, among other factors. GDP’s annual growth is expected to be around 3.4% over the next couple of years.

Monetary policy will remain accommodative to support strengthening GDP growth and rising capacity pressure. “This support is needed for headline inflation to move towards the target midpoint over the medium term,” he said.

A weaker US dollar has resulted in the trade-weighted exchange rate rising. In order to increase tradables inflation and deliver more balanced growth, a lower NZD is needed.

This statement from Wheeler will be his last: he is due to step down from the role late next month. This comes just three days before the general election. Deputy-governor Grant Spencer will step into the role for six months, after which there will be a long-term replacement. The next announcement from the Reserve Bank will come after the election, on 28th September.