RBNZ OCR cuts likely in December, March and June

Last week's data revealed that New Zealand's housing market had another very strong month in September, although the boom's centre of gravity is shifting. In Auckland, house prices continued rising at a rapid clip, but the straws of a slowdown are in the wind. Turnover in Auckland fell in September, and numerous media sources are reporting lower auction clearance rates.

Meanwhile, Hamilton is experiencing a bona fide housing market upturn, featuring rapidly accelerating turnover and a 9% price gain over three months. The Tauranga market is also heating up, and there have been modest signs of life in a few other locations such as Dunedin and Nelson.

"A hawkish speech from the RBNZ, strong housing market data, and slightly stronger than expected inflation data have prompted to alter the OCR forecast. Now the OCR cuts are anticipated in December, March and June (previously December, January and March). The terminal OCR will be 2.0%, compared to the current market expectation of 2.5%", says Westpac.

Some of the shift in regional focus is due to Aucklanders buying houses in cheaper centres nearby. But Reserve Bank and Government policy is also playing a role. For most regions of the country, lower interest rates and the upcoming loosening of mortgage lending restrictions is a stimulatory cocktail for house prices. 

Meanwhile, mortgage lending restrictions are about to be tightened for Auckland. And new tax rules targeting property "flippers" are more of a negative for Auckland than other markets, due to the preponderance of speculators in Auckland.

The strong housing market is clearly worrying the Reserve Bank. In a speech last week Governor Wheeler reinstated housing as an issue of direct concern for monetary policy, mentioning the risk of low interest rates inflaming the housing market. 

That's quite a turnaround, the RBNZ downplayed the housing market when it decided to cut the OCR in June, to our surprise at the time. And the September Monetary Policy Statement pointedly omitted any forecast of house prices.

In this week's speech the Governor also reiterated that "Some further easing seems likely," confirming that the RBNZ still intends to reduce the OCR below the current level of 2.75%. But other comments were hawkish. 

In addition to the housing market, the Governor referred to encouraging local economic data, and to the virtue of correcting deviations from the inflation target only slowly. And he eschewed reference to the renewed vigour of the exchange rate.