-Grant Spencer, Deputy RBNZ Governor
The widely-anticipated Financial Stability Report from the RBNZ showed the domestic financial system remains sound, even though there are certain risks that need to have a close eye kept on, including a high level of household debt, rising house prices as well as extremely volatile dairy-sector. Graeme Wheeler claimed that property prices are highly overvalued on several measures, posing a serious threat to the financial stability in case there is a sharp correction in the property market.
Two consecutive rate hikes are likely to damp the house price inflation, while the central bank is still keeping options open on when to remove the restriction of high Loan-to-Value mortgages. Wheeler also pointed out it is possible that these limits will be phased out rather than removed completely. The RBNZ projects that house-price inflation could have been 2.5% higher in the absence on the LVR restrictions, while his deputy claimed they can be removed by the end of this year already in case policymakers see a more balanced housing market.
While higher rates help to curb the housing inflation, it also slow retail spending, as a report from Statistics New Zealand showed retail sales picked up only 0.7% in the three months to March. Lower than the 0.9% increase expected by markets and following a 1.4% gain in the previous quarter.
© Dukascopy Bank SA