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Auckland housing crisis stymies New Zealand stimulus moves: economic think-tank

Xinhua, May 27, 2015 Adjust font size:

New Zealand's central bank is unlikely to cut interest rates this year for fear of aggravating an already overheated housing market, an independent economic think-tank forecast Wednesday.

The economy was under almost no inflation pressure and inflation was expected to stay well under the Reserve Bank of New Zealand's 1-percent to 3-percent target band well into next year, said the New Zealand Institute of Economic Research (NZIER).

However, any stimulus interest rate cut by the Reserve Bank was unlikely given soaring house prices in Auckland, the country's largest city and home to a quarter of the population, said an NZIER statement on the release of its Quarterly Predictions economic forecast.

Ordinarily low inflation and an uncertain global situation would warrant an interest rate cut, "but the Reserve Bank can't afford to throw any more fuel on the Auckland housing market fire. We can see no alternative other than to hold rates steady until mid-2017."

The Auckland housing market was still vulnerable to a sharp correction despite new lending controls implemented by the Reserve Bank and the government's tightening of tax rules on capital gains from residential property sales.

New Zealand's economic growth was expected to remain solid at around 3 percent a year till next year, driven by strong net migration, a booming Auckland and the rebuild of earthquake- battered Christchurch and the surrounding Canterbury region.

The unemployment rate would drop from the current 5.8 percent to 5.2 percent by early 2017, but wage growth would be muted at around 2.5 percent, primarily due to weak inflation pressures and an expanded labor force from strong net migration.

However, the outlook faced numerous challenges.

Falling global dairy prices had left hole of 6 billion NZ dollars (4.34 billion U.S. dollars) in rural incomes, the Canterbury rebuild was nearing its peak, and demand for exports was softening in New Zealand's two biggest markets of Australia and China.

Other economic forecasts, including that of the ASB Bank, have predicted the Reserve Bank will cut its 3.5-percent official cash rate by a total of 50 basis points later this year. Endi