The Reserve Bank of New Zealand should move to continue to lower the OCR in response to continued low inflation and a high exchange rate, as well as continuing to implement financial stability measures in mortgage lending, say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive Dieter Adam says, “Our exchange rate remains stubbornly high, and still has a way to move down to reach a more fair value.  The exchange rate is currently sitting significantly above what the RBNZ assumed in their last forecasts.”

“The RBNZ should continue its downward interest rate moves to better align New Zealand’s interest rates with those in the rest of the developed world, helping to take some pressure off our exchange rate.

“At the same time, it is apparent that risks remain in the housing market, particularly in Auckland, but with increasing evidence of spread.  This poses financial stability risks that can damage our whole economy, as well as significant social problems that we are already seeing – people need to be able to afford homes to live in, both as owners or renters. We are also seeing rising household debt, which appears to be moving back to record levels, adding these risks.

“This is a complicated issue that needs to be looked at from both sides – demand as well as supply.  While supply is the core longer term issue, we are already seeing the limitations of this approach in terms of the speed of response, but more needs to be done in this space by government where possible.  LVRs were a positive move for financial stability, but had only the expected limited effects on prices.  We encourage the RBNZ to continue to look and at and implement other macro-prudential tools that can protect financial stability.

“But the RBNZ cannot fix the issue alone – Government needs to step up.  We need to understand what role foreign investors are playing, and the upcoming data release will help.  It is positive to see a land tax discussed in response to foreign investors, but we also need to consider the role domestic investors are playing.  Investors, both foreign and domestic, are huge driver of demand, influenced by tax imbalances and price expectations – at 41% of the Auckland housing market in data referenced by the RBNZ, investors are making up an increasing share of demand.

“These incentives can push investment activity away from productive investment and towards unproductive assets, pushing up prices. Any serious measure to address housing needs to look at demand from investors as well as increasing supply.”