Introduction to the Current State of the Economy

The Reserve Bank of New Zealand (RBNZ) has expressed surprise that house prices have not been increasing as expected. Despite cutting interest rates, the RBNZ believes that only about half of the impact of these cuts has been felt in the economy so far.

The RBNZ’s Forecast for House Prices

The RBNZ is now forecasting that house prices will fall by 0.3% for the full 2025 calendar year. This is a significant reversal from their previous forecast, which predicted a 3.5% rise for 2025. Earlier forecasts, made at the end of last year, had predicted a rise of just over 7%.

Past Forecasts vs Current Predictions

In the previous Monetary Policy Statement (MPS), issued in May, the RBNZ had forecast a 3.5% rise for 2025. However, the new forecast, contained in the latest MPS, predicts a fall in house prices. The RBNZ expects prices to start rising again next year, with a predicted increase of 3.9% by the end of 2026 and 5.0% by the end of 2027.

The Impact of Interest Rate Cuts

At a media conference, RBNZ chief economist Paul Conway stated that the bank had expected house prices to be increasing more at this point in the cycle. However, Conway noted that the bank is not expecting significant increases in house prices over the coming 18 months. Assistant Governor Karen Silk explained that of the 250 points of cutting that have been done to the Official Cash Rate (OCR), "we’ve probably seen 50% of that transmit through, so, there’s another 50% still to go."

Factors Affecting the Transmission of Interest Rate Cuts

Silk identified two main factors that are affecting the slow transmission of the lower interest rates. The first factor is consumer behavior, with people opting to stay in shorter terms, on demand, or up to six months at higher rates. The second factor is the impact of disposable income for households, with increases in electricity prices, rates, and food prices reducing the amount of money available for discretionary spending.

The Challenge of Monetary Policy

Governor Christian Hawkesby noted that monetary policy "lags" are "long and variable." There is a lot of uncertainty about how quickly these things will work through, and the bank needs to constantly re-adjust or recalibrate its policies. Hawkesby expressed confidence that monetary policy works, but noted that the challenge is to determine whether enough has been done or if more needs to be done.

Conclusion

In conclusion, the RBNZ is predicting a fall in house prices for 2025, followed by increases in 2026 and 2027. The bank believes that only half of the impact of the interest rate cuts has been felt so far, and is expecting further stimulation to come through. The slow transmission of the lower interest rates is due to factors such as consumer behavior and the impact of disposable income for households. As the bank continues to navigate the complexities of monetary policy, it will be important to monitor the situation closely and make adjustments as necessary.