Reserve Bank unlikely to cut OCR next month or, possibly, this year, Westpac says

The Reserve Bank isn't likely to cut the official cash rate at its review on June 11 and may not see scope to cut rates this year as it walks a tightrope between trying to nudge inflation back up within its target band and keeping Auckland's housing market under control, economists at Westpac Banking Corp say.

The central bank will definitely be taking a wait-and-see approach in June, said Dominick Stephens, chief economist at Westpac. The two conditions for an OCR reduction – weakening inflation and cooling domestic demand – have not been met, and the latest housing market policies are yet to play out their effect, he said.

Compared with the central bank's target of keeping annual inflation broadly at about 2%, income level and price-setting behavior are still borderline, with wage inflation at 1.7% and market expectations for inflation are at about 1.5%, he said. Domestic demand remains strong, along with the retail sales, employment data and the housing market, which is rampant in Auckland.

"The key to the OCR outlook later in the year is the housing market," Mr Stephens said. "It is slightly more likely that the OCR will remain on hold all year."

To put out the Auckland housing market fire, the Reserve Bank and the government have rolled out a series of curbing policies, including tightened tax rules and mortgage lending requirements for property investors. An ill-timed OCR cut may just add more fuel.

It is not safe to assume that the current untried housing policies will work as planned to a powerful yet poorly understood price surge, Westpac said. Gauging the effectiveness of the policies won't be possible until at least July, Stephens said.

Quarterly predictions published by NZIER this week also took a cautious stance on the likely success of a policy-led reversal in house prices in Auckland.

Christina Leung, senior economist at NZIER, said she doesn't see any sharp downward correction because strong local population growth keeps bolstering the market. The latest curbing policies, which as a reminder of market downside risks, may dampen speculative sentiment but are more about buying the government more time to bring supply up with measures such as freeing up government-owned land for housing.

(BusinessDesk)

(Anna Lu is a journalist for the Shanghai Daily news service, on an Asia-NZ Foundation internship with BusinessDesk.)