Economic Week - November 13


by Nick Clark

Cheap bank funding coming

As universally expected, the Reserve Bank this week announced it would be rolling out a Funding for Lending Programme, commencing in December.  By reducing banks’ funding costs, the FLP should lead to lower lending rates for businesses and households.

It also kept the Official Cash Rate unchanged at 0.25% and continues to keep the door open for a negative OCR from next year. It will also continue with its Large Scale Asset Purchase (LSAP) programme of up to $100 billion.

The FLP will see the Reserve Bank offer loans to banks for three-year terms against high quality collateral.  The loans will be lent at a floating rate linked to the prevailing OCR. Loans will be available for the next 18 months, with additional allocation available for an extra six months after that. Market commentators think the maximum size of the programme would be in the range of $20-30 billion.

The Reserve Bank isn’t targeting the FLP funding to particular sectors, such as business or agriculture, considering this to be the role of the banking sector or government initiatives. Businesses and farmers are understandably wary of investment in the current uncertain economic outlook and this might limit demand.

It will be important that the reduced funding costs from the FLP is passed on to bank customers through lower lending rates.  It will also be desirable if FLP funding encourages banks to lend to the productive sector, including agriculture, rather than just throwing more petrol on the housing bonfire.

The economy is doing better than expected and loose monetary policy is helping drive the housing market into the stratosphere.  The Reserve Bank still sees the need in the face of ongoing uncertainty for further monetary stimulus to prop up the economy – although not as much as earlier thought.  Some market players think the prospects for a negative OCR have diminished, with government bond yields and the NZ Dollar both jumping in response.

We now have a relatively long wait until the Reserve Bank’s next scheduled review of monetary policy settings – 24 February 2021.  As 2020 has vividly shown, a lot could happen in the meantime!

 

Delay to bank capital requirements

The Reserve Bank this week announced a further delay in implementing its tougher bank capital requirements. 

Last year, when the Reserve Bank decided to proceed with its changes, it meant for them to start kicking in from July this year.  When COVID struck it pushed this out to July 2021 and this week it pushed the start out further to July 2022.

This is a sensible move recognising the fragile state of the economy and the need for banks to continue lending, especially for productive purposes.  The announcement will come as a particular relief to farmers who have been told for more than a year by their banks that the tougher requirements will hit agricultural lending especially hard and will increase the cost of that lending. 

With a further delay to the tougher requirements banks have less of a need to squeeze agricultural lending as hard as they have been.  We expect banks to stand by their farmer customers and support them so they can continue to drive our exports and our economy. 

The Reserve Bank also announced consultation on bringing back loan-to-value ratio restrictions on residential lending, especially lending to investors.  It plans to bring the LVR restrictions back from 1 March 2021, which is sooner than it had previously indicated (1 May 2021). 

Reimposing LVR restrictions shouldn’t be a surprise given the boom in house sales and prices over the past few months.  A fear is the boom could be further stoked by a rush in lending to beat the 1 March deadline, so one bank, ASB, moved ahead to impose its own LVR restrictions on investors (but not on first home buyers).

 

And the housing boom continues

The Real Estate Institute of NZ’s monthly Residential Market Statistics showed the nationwide median house price hit $725,000 in October 2020, up 19.8% from October 2019’s $605,000 and setting a new record high. 

Auckland’s median house price reached the million dollar mark for the first time, after rising 16.3% compared to the same time last year.  However, the biggest annual increases in median prices were in the regions like Gisborne (up 34.1%), Marlborough (up 26.8%), West Coast (up 25.6%), Taranaki (up 23.2%), and Otago (up 22.7%).

Meanwhile, the 8,830 houses sold nationwide in October 2020 was up 25.0% on October 2019’s 7,063.  This was the highest monthly number of properties sold in 53 months and the highest October month of sales since 2006.

The median days to sell a house also fell to 29, down 5 days compared to October 2019.

 

Government finances less awful

Three months into the 2020/21 financial year, the Government’s books are tracking better than expected.

According to Treasury’s Financial Statements of the Government of New Zealand for the three months ended 30 September 2020, the operating balance before gains and losses was a deficit of $3.2 billion, less than half the $6.5 billion deficit forecast in the Pre-Election Economic and Fiscal Update (PREFU).

Core Crown tax revenue was $22.0 billion, $2.1 billion above the PREFU’s forecast.  Stronger domestic spending pushed up GST revenue while wage and salary income was better than expected, meaning source deductions were also up on forecast.  Core Crown expenses were $27.0 billion, $1.1 billion below forecast, mainly due to less than expected spending from the Wage Subsidy Scheme.

Net core Crown debt was $94.0 billion (30.5%) of GDP, $3.6 billion less than forecast.  Although better than expected, this is still nearly $35 billion up on pre-COVID’s $59.7 billion (19.2% of GDP) in February 2020.

 

Retail spending strengthening

Statistics NZ’s monthly Electronic Card Transactions showed retail spending continuing to recover in October after a dip in August. 

Compared to the same month last year, October’s retail sales were up 8.2%.  Most sectors were up strongly, with spending on ‘durables’ (e.g., furniture, electrical and hardware, recreational goods, department stores, etc) up 16.9%; spending on apparel up 12.9%; spending on vehicles up 11.3%; and spending on consumables (supermarkets, liquor and specialty food) up 9.5%. 

Spending on hospitality was up a modest 3.0% compared to October 2019 but grew strongly compared to September and has made up ground lost during the second Auckland lockdown.  

Fuel was the only retail sector to decline, with its spending down 10.9% compared to October 2019, continuing its weakness this year.  Non-retail card spending was also down 12.9%. This category includes medical and other health care services; travel and tour arrangement services; postal and courier delivery services; and other non-retail industries.

 

Traffic volumes settling

ANZ’s monthly Truckometer for October 2020 has shown a 0.6% increase in its light traffic index compared to September but a 3.0% drop in its heavy traffic index.  ANZ thinks this drop reflects a settling of traffic after the second Auckland lockdown.

Compared to October 2019 the light traffic index was up 5.9% and the heavy traffic index was up 7.1%.  Both are pretty solid considering the turmoil of 2020 and reflect the economy having regained momentum.  There is still caution about what might be around the corner though.

 

Migration and travel still low

People movements across the border continue to be a trickle, according to Statistics NZ’s International Migration Statistics and International Travel Statistics.

In the September 2020 month New Zealand had around 2,900 migrant arrivals (down 80.7% on September 2019), and around 2,100 migrant departures (down 69.2%).  This resulted in a net migration gain of around 800.

Migrant numbers in both directions have been very low since March when our borders were closed, but before that time migrant flows had been strong.  This is still reflected in the annual data for the year ended September 2020.  Over that period there were 130,100 migrant arrivals (down 12.1% on the year ended September 2019) and 62,300 migrant departures (down 29.7%), resulting in a net migration gain of 67,700 (up 14.0%).

Meanwhile, there were 8,600 overseas visitor arrivals in the September 2020 month, down 96.7% on September 2019.  2,700 New Zealand residents returned from an overseas trip in September, down 99.0% on September 2019.   

Over the last six months, from April to September 2020, there were only 27,700 visitor arrivals, down 1.4 million compared to the same six months in 2019.   And there were only 20,300 New Zealand resident arrivals, down 1.6 million. 

 

Banking survey

Thank you to the hundreds of respondents so far to Federated Farmers’ November Banking Survey.  Federated Farmers members will have received an email invitation to complete the survey so if you haven’t already done so, please take a few minutes to answer a few questions and go in the draw to win a $500 grocery voucher.  Responses close on Monday 16 November.

 

NIWA Soil Moisture Data

NIWA’s latest soil moisture maps (as at 9am Thursday 12 November) show the impact of heavy rain over the past week.  Most of the country’s soils are now either about normal for this time of year or significantly wetter than usual.  This is especially the case in eastern areas of the North Island and the Tasman region of the South Island.  The rain will be most welcome as many parts of the country were significantly dryer than usual as recently as last week.



Exchange Rates

The past week has been a strong one for the NZ Dollar, surging 2.1% against the TWI.  It was up against all our major trading partners.  The jump seems to be a response to market players trimming their expectations for a negative OCR next year.

 

 

NZ Dollar versus

This Week

(12/11/20)

Last Week (5/11/20)

Last Month (12/10/20)

Last Year (12/11/19)

US Dollar

0.6897

0.6697

0.6657

0.6366

Australian Dollar

0.9470

0.9334

0.9222

0.9289

Euro

0.5856

0.5709

0.5636

0.5769

UK Pound

0.5217

0.5167

0.5110

0.4951

Japanese Yen

72.69

69.83

70.31

69.49

Chinese Renminbi

4.5658

4.4954

4.4693

4.4603

Trade Weighted Index

73.45

71.97

0.7147

70.44

Source: Reserve Bank of NZ

 

Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was down one basis point, but the 10 year Government Bond yield jumped 30 basis points to 0.84%.  As mentioned above, this seems to be a response to reduced market expectations for a negative OCR. 

 

The Reserve Bank will next review monetary policy settings (including the OCR) on 24 February 2021.

 

 

This Week

(12/11/20)

Last Week (5/11/20)

Last Month (12/10/20)

Last Year (12/11/19)

OCR

0.25%

0.25%

0.25%

1.00%

90 Day Bank Bill

0.28%

0.29%

0.28%

1.14%

10 Year Government Bond

0.84%

0.54%

0.54%

1.38%

Source: Reserve Bank of NZ