Economic Week

August 11, 2017

Reserve Bank Governor Graeme Wheeler didn’t go out with a bang and spring any surprises in his final review of the Official Cash Rate this week.   As universally expected the OCR was kept on hold at 1.75 percent while the language of his statement remained studiously neutral, despite softer than expected inflation and GDP data over recent weeks.

Mr Wheeler’s conclusion that “Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly” was identical to those he made in June and May.  However, in the wake of a persistently strong NZ Dollar, Mr Wheeler did strengthen his wording about the need for a lower exchange rate.

The forecasts in the accompanying Monetary Policy Statement suggest that consumer price inflation will be contained at or below 2 percent over the next two years.  As a result, the OCR is forecast to remain on hold until the second half of 2019 after which it is forecast to start increasing again. 

The exchange rate seems likely to stay strong, with the MPS suggesting it will ease only slowly from its current 78 on the Trade Weighted Index to around 75 in three years’ time.  However, as everyone knows exchange rates are almost impossible to predict with any certainty, especially when we are talking about years into the future.

The latest cereals statistics from the Arable Industry Marketing Initiative show that as of 1 July 2017 average yields were up on last season.  Milling wheat yields were up 12 percent, feed barley up 8 percent, and milling oats up 13 percent up 10 percent.  Unsold stocks of feed barley, milling wheat, milling oats and feed oats were higher but feed wheat stocks were much lower than the same time last year. 

AIMI also said that while wet weather has delayed sowing in many regions, the area sown in cereals is expected to increase this season by around 13 percent to 122,000 hectares.  The dairy industry’s revival with its higher demand for supplementary feed is likely to be factor.

Food prices dropped 0.2 percent in the month of July according to Statistics NZ’s monthly Food Price Index, mainly due to a 1.0 percent fall in fruit & vegetable prices (fruit down 5.2 percent, vegetables up 1.6 percent). Meat, poultry & fish prices also fell 0.8 percent (lamb, mutton & hogget down 1.4 percent, beef & veal up 1.3 percent) but grocery food prices rose 0.2 percent (bread & cereals up 0.4 percent, milk, cheese & eggs up 1.5 percent).

On annual basis, comparing July 2017 to July 2016, food prices were up 3.0 percent, mainly due an 8.2 percent increase in fruit & vegetable prices (fruit up 1.9 percent, vegetables up 12.2 percent).  Meat, poultry & fish prices were also up 1.0 percent (lamb, mutton & hogget up 5.6 percent, beef & veal up 1.9 percent), and grocery food prices were up 3.1 percent (bread & cereals down 0.1 percent, milk, cheese & eggs up 7.6 percent).

The impact of a very wet autumn on production is still affecting vegetable prices while the recovery in dairy commodity prices over the past year will be a factor behind higher consumer prices for dairy products. 

House sales volumes have slumped according to the latest monthly Residential Statistics from the Real Estate Institute of NZ.  The number of properties sold across New Zealand in July 2017 fell by a quarter (24.5 percent) compared to July 2016, with the number of properties sold in Auckland down 30.6 percent.

Overall, the national median selling price was up 3.4 percent year-on-year to $518,000.  Median prices fell in four regions – Auckland (down 1.2 percent) Bay of Plenty (down 1.2 percent), West Coast (down 21.1 percent), and Canterbury (down 1.7 percent).  On the other hand, there were still big year-on-year increases in Northland (up 23.0 percent), Hawkes Bay (up 25.8 percent), Gisborne (up 16.0 percent) and Otago (up 15.3 percent). 

REINZ claims that banks’ tighter lending practices and the Reserve Bank’s loan-to-value restrictions have done their job of cooling the market but are now acting as a handbrake.  It wants a review of LVR policy, especially for first home buyers.  No doubt this will generate political debate in the lead-up to the election.

 

 Exchange Rates

NZ Dollar versus

This Week (10/8/17)

Last Week 3/8/17)

Last Month (10/7/17)

Last Year (10/8/16)

US Dollar

0.7330

0.7403

0.7267

0.7205

Australian Dollar

0.9276

0.9334

0.9556

0.9364

Euro

0.6236

0.6254

0.6370

0.6463

UK Pound

0.5636

0.5604

0.5635

0.5513

Japanese Yen

80.70

81.88

82.99

72.96

Chinese Renmimbi

4.8839

4.9815

4.9426

4.7887

Trade Weighted Index

77.37

78.09

78.30

76.34

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

 

This Week (10/8/17)

Last Week 3/8/17)

Last Month (10/7/17)

Last Year (10/8/16)

OCR

1.75%

1.75%

1.75%

2.25%

90 Day Bank Bill

1.96%

1.95%

1.97%

2.22%

10 Year Government Bond

2.80%

3.00%

3.02%

2.17%