Reserve Bank likely to announce further mortgage restrictions this week

The Reserve Bank is widely expected this week to add to its arsenal of tools other than interest rates to quell the resurgent housing market, particularly in Auckland.

The central bank will release its latest six-monthly financial stability report on Wednesday and could either extend its current loan-to-valuation ratio (LVR) restrictions or adopt other tools, such as lending limits based on borrowers’ incomes.

Adding pressure on the Reserve Bank was last week’s surprise move by Australia’s central bank to cut its cash rate to a record low 1.75% in the wake of much lower than expected inflation data, the same problem New Zealand has.

New Zealand financial markets are now pricing in an 82% chance of a rate cut in June, up from 58% a week earlier.

“The Reserve Bank is caught between a rock and a hard place, having been forced into more interest rate cuts in the face of very low inflation, a strong currency and ongoing easing policies from other central banks,” Craigs Investment Partners’ head of wealth research, Mark Lister says.

“However, they will be very uncomfortable with how these low interest rates are fuelling the housing market further,’ Mr Lister says.

The Reserve Bank is likely to come under further pressure from its Australian counterpart, which published sharply lower inflation forecasts last week.

That has led to the Australian markets pricing in expectations of a further rate cut in August – current pricing suggests a 62% chance.

And the Australian rate cut has only served to boost the New Zealand dollar relative to the Aussie currency – it gained 1.2% last week to 92.84Ac.

But, mercifully, against other currencies, the Australian dollar helped drag the kiwi sharply lower. It shed 2.05% against the US dollar to 68.39USc and was also down 1.6% against the euro.

Also last week, the Top 50 Index gained more than a percent, taking its gains so far this year to more than 9%, with Metlifecare last week’s biggest gainer, up 7.5%, and Sky TV being the biggest loser, down 13.1%.

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