MNI STATE OF PLAY: RBNZ Eyes On "Patchy" Recovery

The Reserve Bank of New Zealand's monetary policy committee meets Wednesday with the economy in a better place than previously feared and the strength of the housing market a looming concern for policymakers and legislators alike as house prices rack up year-on-year gains of more than 20%.

Despite the improved outlook for the economy, no change expected to the main policy settings, with the official cash rate unchanged at the historic low of 0.25% -- where it has sat since March last year. Last month, RBNZ deputy governor Geoff Bascand told MNI it was too early to remove the accomodative punchbowl.

The bank has previously said it was prepared to cut the OCR to zero or even into negative territory, asking the banking system to be ready for a possible move. However, the RBNZ recently signaled a potential change of outlook with an announcement easing the dividend payment restrictions placed on commercial banks at the height of the COVID-19 disruptions.

Banks are now able to pay 50% of normal dividends to shareholders with restrictions coming off in July.

"The New Zealand economy has rebounded to a stronger position than anticipated at the outset of the Covid-19 pandemic and as such, the complete restriction on dividends is no longer needed," Bascand said recently in announcing the move.

"Economic activity in New Zealand has picked up over recent months," he added.

At the same time, the RBNZ has also reintroduced loan to value ratios (LVRs) for mortgages in an attempt to de-risk the booming housing market, which has seen median prices spike 23% over the last 12 months.

PATCHY

Bascand described the NZ economic recovery as "patchy," suggesting that the central bank will take a cautious approach before moving away from its dovish approach.

The most recent Monetary Policy Statement, released in February, said that "significant monetary stimulus remains necessary" to meet the bank's targets of full employment and an inflation rate of between 1% and 3%. Inflation is currently at 1.4%.

The RBNZ is also mindful that changing policy before any of the other larger central banks will put upward pressure on the NZD, which has appreciated by just over 15% in the last year to USD70 cents. Some pressure has come off in the last month after the NZD hit USD74 cents in late February, a trend which the RBNZ will welcome.

The RBNZ also has a program of Quantitative Easing in place, and has said it will buy up to NZD100 billion of NZ Government bonds and some local government bonds on the secondary market by June 2022.