RBNZ's next move is up, but when?

00:15, Jan 31 2013

Reserve Bank worries about rising house prices is a clear sign that the next move for official interest rates is up, economists said today.

Some predict the rise will come later this year, while others believe the first rise won't come until December, or perhaps March 2014, given the low levels of inflation.

Reserve Bank Governor Graeme Wheeler this morning held official interest rates at 2.5 per cent, but took a tougher line on the housing market and said the currency was over-valued.

Wheeler pointed out that house-price inflation had increased, and said the central bank was keeping a close eye on that, as well as household credit growth.

"The Bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply," he said.

TD Securities head of Asia-Pacific research, Annette Beacher said Wheeler's comment on house prices was "the clearest indicator" that the next move for the cash rate was up, as housing supply always responded to demand with a lag.

Demand was high with the average days to sell a "tiny" 32 days - which was in line with double-digit house-price inflation seen last decade.

Consents were rising in Auckland and Canterbury, but actual construction was slow.

However, Beacher also said that Wheeler's comment that inflation would move only slowly back to the midpoint of 2 per cent meant TD Securities had shifted its first expected rate rise from June to September.

Westpac chief economist Dominick Stephens expected rates to start rising in December this year, but rise more than others currently expected.

He said Westpac had long believed that rising house prices and the Canterbury rebuild would provoke inflation.

Rising house prices could unbalance the economy and the Reserve Bank was reminding the market that it could keep rates higher "in order to prevent excessive lending from imperilling financial stability" Stephens said.

Infometrics continued to expect the cash rate to remain unchanged till December.

But it said that with house prices rising rapidly and concerns about banks' exposure to residential debt, the chance of intervention in the mortgage market were more likely.

The Reserve Bank could make banks hold more capital for each mortgage they sold, or it could bring in maximum loan-to-value ratios, to curb lending.

ASB Bank chief economist Nick Tuffley expected the cast rate to remain on hold until March 2014, given a weak starting point for inflation and given that inflation would likely stay in the bottom half of the target band for another 18 months.

He said the Reserve Bank did appear to be moving out of its comfort zone because of rising house prices, with a small but growing possibility that it would intervene to limit lending with so-called "macro-prudential tools" such as loan limits.

The central bank is widely expected to keep rates low with inflation running below its target band and high unemployment levels.

The New Zealand dollar also remains higher than the bank assumed late last year, trading at US83c just before this morning's announcement, down almost US1c in the past day.

The currency rose to US83.4c just after the announcement, even though the Reserve Bank said the currency was "over-valued", which was holding inflation down and undermining profits in the export sector.

The bank said economic growth would strengthen over the coming year, reducing spare capacity and bringing inflation slowly back towards the 2 per cent target midpoint.

"On balance, it remains appropriate for the OCR to be held at 2.5 per cent." Wheeler said this morning.