By Paul McBeth
Jan. 31 (BusinessDesk) - Reserve Bank governor Graeme Wheeler singled out rising house prices as a threat to the country's financial stability and kept the official cash rate at 2.5 percent, as expected, saying the overvalued New Zealand dollar was holding consumer prices below the bank's target band.
"The bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply," Wheeler said in a statement. The bank is closely watching house price inflation and household credit growth, which it expects will get a boost from the Canterbury rebuild, he said.
Wheeler is facing increasing pressure to use macro-prudential tools, such as limiting loan-to-value ratios or increasing banks' capital requirements, to deliver looser monetary conditions and take some pressure off the strong New Zealand dollar. The governor has been reluctant to accept this lobbying, saying the tools, which are still under construction, are to protect the country's financial stability, not influence monetary policy.
The governor is scheduled to deliver a speech to the Canterbury Employers' Chamber of Commerce in Christchurch tomorrow, entitled 'Improving New Zealand's economic growth'. On Feb. 20 he will speak to the New Zealand Employers' and Manufacturers' Association on export issues, including the impact of the exchange rate.
The strong currency is seen as the main cause of the consumers' price index tracking outside the bank's 1 percent to 3 percent annual target band for inflation, and is "directly suppressing inflation on traded goods" and "undermining profitability in export and import competing industries," Wheeler said.
New Zealand's CPI unexpectedly shrank 0.2 percent in the final three months of 2012, taking the annual rate of inflation to 0.9 percent.
Mike Jones, currency strategist at Bank of New Zealand, said in a note before the release, the bank has stepped up its currency trading in December, which marked "the resumption of the passive intervention the bank employed successfully through the 2008 period of currency strength" and that the Reserve Bank "believes the NZD is overvalued."
The bank softened its expectation for a pick-up in inflation, saying it expects economic growth over the coming year to "slowly" bring the CPI back to the target 2 percent midpoint.
An improving global economy and lift in international market sentiment had also contributed to lower bank funding costs, some of which filtered through to local retail interest, Wheeler said.
"On balance, it remains appropriate for the OCR to be held at 2.5 percent," Wheeler said.