Reserve Bank not ready to rein in lenders

JAMES WEIR
Last updated 10:09 07/12/2012

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The Reserve Bank is flagging its first interest rate rise in 2014, after leaving rates on hold at 2.5 per cent.

However, no sign exists of a rate cut in the meantime.

Despite concerns about rapidly rising house prices in Auckland and banks offering loans with small deposits, the central bank said it was not yet telling banks to rein in lending. But it is closer to signing an agreement with the minister of finance to give the Reserve Bank the tools to control lending if needed when a housing asset bubble occurs.

New governor Graeme Wheeler said yesterday economic growth had slowed in recent months and inflation had been low, while unemployment was rising. "On balance, it remains appropriate for the OCR (official cash rate) to be held at 2.5 per cent," he said in the latest monetary policy statement.

No hint exists that rates could be cut, despite extremely low inflation and high unemployment, so the statement was seen as "hawkish", or tough, on inflation by economists. That caused the kiwi to initially rise from about US82.5 cents to about US82.9c, and briefly breach the US83c mark.

Unemployment at 7.3 per cent, a 13-year high, was largely dismissed as a statistical blip and inflation was expected to head back towards 2 per cent.

Wheeler indicated that the first rate rise would not occur until 2014, but ASB economists still expected it next September, because of a stronger growth outlook compared with the central bank.

The central bank warned that interest rates could rise if house prices keep rising and household credit growth gathers steam. Auckland's house prices have risen about 12 per cent in the last year. Nationally, prices are up about 5 per cent.

That was underpinned by a housing shortage, a growing population, under-investment in housing since 2007 and mortgage rates at a 50-year low, with some rates under 5 per cent.

Banks were also lending more of the value of a home loan, sometimes more than 90 per cent.

"Those things are a concern that we are looking at, and talking to banks about," Wheeler said, noting New Zealand's house prices were "expensive" and much less affordable than in the 1990s.

But house prices were not rising rapidly nationwide. And credit was only growing about 3 per cent on an annual basis, which was not "dramatic" or a "major concern at this point in time".

More recently, bank credit numbers were increasing on a monthly basis. But rising prices would make housing less affordable, at the same time as new homes were being built to respond to a housing shortage.

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"That will stop prices from increasing dramatically in the next period of time," he told Parliament's Finance and Expenditure Select Committee yesterday.

The Reserve Bank was talking to banks about controls on lending and has a paper that is awaiting agreement with the minister of finance, but those controls would be used when there were risks to financial stability.

"At present, we don't see that we would need to use macro- prudential instruments (such as controlling lending ratios) but that could change at any time, if we felt asset price bubbles were starting to build up and posed a threat to the economy," Wheeler said.

- © Fairfax NZ News

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