Market Update June 2017

Unchanged Official Cash Rate (1.75 percent)

It was no surprise this month as the Official Cash Rate remained on hold at 1.75 percent, given that Reserve Bank Governor Graeme Wheeler has previously mentioned that it was likely to remain accommodative.

In his recent statement, Wheeler noted there’s been an increase in widespread global economic growth, but at the same time, he highlighted the challenges we all face, such as political uncertainty and issues with on-going surplus capacity (which is the ability to produce more than customer actually need).

Commodity prices have increased over the past year because of stronger global demand. And overall, while the level of core inflation stays low, there has been an increase in headline inflation across countries such as Australia and China.

The increase has been put down to higher tradables inflation, which has had an affect on the prices of petrol and food in particular, but it’s thought that these effects will just be temporary.

In his statement, Wheeler said that non-tradables and wage inflation isn’t that significant, but it’s expected that both will gradually increase. “This will bring future headline inflation to the midpoint of the target band over the medium term,” he said. “Longer-term inflation expectations remain well-anchored at around two percent.”

The falling of the trade-weighted exchange rate should also be noted. It’s partly a response to global instability, and reduced interest rate differentials (the difference between the interest rate and a bank's posted rate on the prepayment date). Since February this year, the rate has reduced by 5 percent. If it remains the same, it will help rebalance the growth outlook in the the trades sector.

The second half of last year saw a lack of expected GDP growth, but Wheeler said the outlook still remains positive, “supported by ongoing accommodative monetary policy, strong population growth, and high levels of household spending and construction activity”.
House price inflation has slowed (particularly in Auckland), which is being attributed to tighter lending conditions and loan-to-value ratio restrictions, and this moderation is expected to continue. “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly,” Wheeler shared.