Wheeler opens door to OCR increases for first time in two years

Reserve Bank governor Graeme Wheeler cut the official cash rate to 1.75% this morning but has signalled the next move could be up.

Against a backdrop of markets still absorbing the shock following the knife-edge election of Donald Trump as US president, Mr Wheeler stuck to the script, cutting the OCR again as signalled back at the last review.

But instead of saying, as he has previously that further accommodative moves – that’s more interest rate cuts, to use plain language – might be needed, Mr Wheeler now says there are “numerous uncertainties” and “policy may need to adjust accordingly.”

That opens the door for interest rate rises for the first time in two years.

But it does not rule out further cuts either. As well as large global uncertainties – of which the US election is but one – there is also the happy fact the New Zealand economy keeps outperforming expectations.

“Domestic growth is being supported by strong population growth, construction activity, tourism, and accommodative monetary policy. Recent dairy auctions have been positive, but uncertainty remains around future outcomes. High net immigration is supporting growth in labour supply and limiting wage pressure.”

Mr Wheeler is keeping a wary eye on both the housing market and the global dairy price: both are moving in the direction the Reserve Bank would like, but they may not continue to do so.

“House price inflation remains excessive and is posing concerns for financial stability,” he says.  “Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand.”

Which, in turn, is one reason the governor is now prepared to countenance the prospect of raising interest rates again. Private sector borrowing for houses is on the rise again and is getting uncomfortably risky given New Zealand’s existing high household debt levels.

The global dairy price has been shifting upwards in recent auctions and if this rise is sustained should see dairy farmers return to profit – but not until next season. In cash flow terms, do not expect to see the cow cockies unlock their chequebooks until spring 2017.

That is especially so, of course, for the dairy farmers carrying high debt – and who will, by then, be faced with higher interest rates on that debt.

But all this remains highly provisional, against a backdrop of rising uncertainty not just from the US presidential election but also from the UK Brexit vote, tensions in Syria and eastern Europe, and the South China Seas.