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Dilemma for RBNZ as kiwi stays high, Auckland housing market heats up

Monday 22nd April 2013

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The Reserve Bank will keep interest rates unchanged this week, though it may use the six-weekly review to highlight the conflicts of a high currency keeping prices in check and a housing market that's threatening to stoke inflation.

Governor Graeme Wheeler will keep the official cash rate at 2.5 percent, the record low it has been held at since March 2011 on Wednesday, according to a Reuters survey, and may reiterate interest rates are on hold through 2013.

Since the RBNZ's full monetary policy statement on March 14, the trade-weighted index has taken flight, to reach a record 79.39 on April 12, well above the 75.5 average level it forecasts for all of 2013. Economic growth in the fourth quarter of 1.5 percent was almost twice the pace the bank expected, though gross domestic product will likely be trimmed this year and next by the drought effects.

Inflation is bang on track so far, at a 0.4 percent rate in the first three months of the year although

house sales rose to a six-year high in March and prices touched a new record.

"The key tension that the RBNZ faced at the March Monetary Policy Statement, between a strengthening housing market and continued appreciation in the NZD, has intensified since then," said Christina Leung, economist, institutional banking and market, at ASB Institutional.

Given this week's review is expected to yield no change in interest rates and the statement typically only runs to a few paragraphs, Wheeler is less likely to see a sharp reaction as he did for last month's MPS, where he hinted at a policy reaction to a high dollar, sending the kiwi briefly lower.

Yet some economists say Wheeler may harden his language around the currency, putting the market more on more notice of potential action.

"Given that the trade-weighted Index has risen to a new all-time high, the RBNZ might even invoke language associated with exchange rate intervention, such as labelling the New Zealand dollar 'unjustified' and 'exceptional'," said Dominick Stephens, chief economist at Westpac Banking Corp.

"The nature of the dichotomous risks facing the RBNZ means there is scope for markets to move if the RBNZ unexpectedly emphasises the risks on one side more than the other," he said.

The national median sale price reached $400,000 for the first time in March, according to Real Estate Institute figures. About 90 percent of the increase was driven by Auckland and Canterbury. The spillover effects may be yet to come, including households finally feeling wealthy enough to spend more.

UBS New Zealand expects the economy to accelerate to a 3.1 percent pace this calendar year, rising to 3.2 percent in 2012. Fixed capital formation for residential buildings this year is forecast to jump to 29.2 percent from 12.5 percent in 2012.

"The risks look tilted towards the possibility that households are, at least in part, reverting back to old

habits of borrowing and spending in excess of incomes," said UBS economist Robin Clements.

Traders are pricing in an increase of 10 basis points to the OCR over the coming 12 months, according to the Overnight Index Swap curve. That's down from as much as 37 basis points on Feb. 19.

The ANZ-Roy Morgan Consumer Confidence survey out last week showed kiwis are more upbeat about buying big ticket items than they have been in five-and-a-half years.

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