MNI INTERVIEW: RBNZ Faces Property Downturn Rate Risk - Brash

MNI (MELBOURNE) - A sharper or more prolonged downturn in the domestic property market will further chill consumer sentiment and lead the Reserve Bank of New Zealand to further adjust downwards its already significantly altered cash rate assumptions, a former RBNZ governor told MNI. 

Don Brash, governor from 1988 to 2002, said the government was focused on housing affordability, which would stifle the real-estate market further following the impact of the elevated official cash rate. This would continue to worsen consumer confidence, compounding the RBNZ’s task, he said. 

“This government looks as if it may actually be serious about changing the [housing] situation,” Brash noted, pointing to Housing Minister Chris Bishop’s plans to increase housing supply revealed last month. “If they are, then one must expect a gradual decline in house prices over quite a period of time. It may very well affect [New Zealanders'] overall mood and spending patterns.”

The housing market will likely remain flat or depressed for some time, despite mortgage rate reductions and cuts to the OCR, he said.

CoreLogic's Home Value Index fell 0.5% in July, its fifth consecutive monthly decline. The housing market has fallen 2.5% since February. 

The RBNZ’s refreshed cash rate assumptions, which had factored in about 100 basis points of easing by mid-2025, were about right despite the swift change, Brash said, arguing the Bank had likely made an error in May with its more hawkish forecasts. 

Chief Economist Paul Conway told MNI following the Reserve's August decision to cut the OCR 25 basis points to 5.25% that the monetary policy committee would accelerate cuts should the economy slow faster than anticipated, dismissing criticism of the Bank's forecasting capacity. (See MNI INTERVIEW: RBNZ To Accelerate Cuts If Needed-Conway)

However, a rapid recovery in the agricultural sector could also risk the RBNZ’s easing assumptions, Brash continued, pointing to recent strong dairy prices that will underpin sentiment among the country’s farmers. 

WEAK MANAGEMENT

Brash, a former leader of the New Zealand National Party and current Chair of the Industrial and Commercial Bank of China (New Zealand), said the government had in all likelihood missed an opportunity for reform of the RBNZ this year by renewing Chair Neil Quigley’s role for a further two years. 

The former governor has been a strong proponent of RBNZ reform, calling for the government to implement rules to hold the Reserve’s leadership -- particularly Governor Adrian Orr -- to greater scrutiny. (See MNI INTERVIEW: RBNZ Reform To Add Urgency To Inflation Fight) 

"If [the government] wanted to send a signal to the Reserve Bank, they would have changed the chairman, but for some reason, they decided not to and that was disappointing.”

The Reserve’s mandate was returned to a single focus on prices last year, a move which was likely to have had limited impact on recent decisions, Brash added. 

The government will have little chance for cultural change at the RBNZ during the rest of its term, he said. “The whole senior structure of the Reserve management is very weak. We've got people on the Monetary Policy Committee with virtually no background at all in macroeconomics or monetary policy."