MNI INTERVIEW: RBNZ's Hawkesby Very Happy With Rate Cut Effect

By Lachlan Colquhoun

     SYDNEY(MNI) - Bank of New Zealand Assistant Governor Christian Hawkesby is

"very happy" with the way in which interest rate cuts are feeding through into

the economy, he told MNI, adding that rising house prices could also boost

consumption and ultimately inflation.

     While some indicators, such as business confidence, continue to disappoint,

Hawkesby said in an interview on Monday that the transmission of monetary policy

had been successful, translating into lower interest rates for borrowers as well

as keeping the New Zealand dollar low and helping exports.

     "We have been very happy to see the way the interest rate cuts are working

through the transmission mechanisms," he said, adding that the RBNZ was focused

on maintaining sustainable levels of employment and keeping inflation close to

the middle of the target band of between 1% and 3%.

     After two interest rate cuts this year brought the RBNZ's official cash

rate down to a record low 1.0%, house prices are tipped to move higher, with

leading bank Westpac tipping a 7% rise in 2020 centred on the major markets of

Auckland and Christchurch. This is a positive development, according to the

deputy governor.

     "House prices are absolutely a key part of the transmission of low interest

rates," he said, "There is a correlation between house price inflation and

consumption, and in the lower interest rate environment we expect that will be

one of the ways policy works its way through the economy."

     --LESS CONCERN ABOUT LOW RATE EFFECTS

     High levels of household indebtedness have been an issue in New Zealand,

and were behind the RBNZ - in its prudential capacity - raising loan to value

ratios (LVR) for home borrowers in stages from 2013.

     Those measures were relaxed last November after an RBNZ report said the LVR

change had significantly de-risked the housing market, and now the Bank sees

moderately rising prices as evidence of successful monetary policy transmission.

     "Our sense is that in the environment we are in at the moment, where credit

growth has been moderate and house price inflation has been more modest, we are

less concerned about the impact of lower interest rates on financial stability,"

said Hawkesby.

     "This is one of the mechanisms of monetary policy and how its works by

lowering the cost of capital, and you are encouraging households and business to

invest and part of that will be through borrowed funds."

     Third quarter inflation data released last week showed that annual

inflation decreased to an annualised 1.5% from 1.7%, largely due to falls in the

cost of transport.

     Consumer prices increased by 0.7%, up from 0.6% in the previous quarter.

     "It will take longer to judge the success in terms of economic activity and

inflation, and it really is something you have to come back and look at over the

next 12 to 18 months," Hawkesby said.

     The RBNZ's monetary policy committee begins a series of meetings in early

November to assess fresh economic data and whether even more monetary stimulus

is required.

     The Bank announces its next interest rate decision on Nov. 13, when the

next Monetary Policy Statement is also released.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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