NZ dollar falls as pressure comes off RBNZ over housing market

The New Zealand dollar has weakened steeply in reaction to the Government’s announcements on housing – which have been seen in the market as taking the pressure off the Reserve Bank to act on an over-heated property market.

By late morning the currency was hovering at around US70c, down from US71.70c just before yesterday’s release.

In the interest rate market, the yield on two-year swaps fell to 0.41 per cent from 0.49 per cent.

While much of announcement was anticipated – particularly the extension of the “bright line” test to 10 years from five – the move to eliminate the tax deductibility of interest on property investment was not.

ANZ senior strategist David Croy said the market had readjusted its interest rate expectations after the announcement, which in turn had put downward pressure on the currency.

The market had almost fully priced in a rise in the official cash rate (OCR) by May next year, but now rated the chance of that happening as being at about 50/50.

In February the currency spiked higher after the Government moved to require the central bank to take into account rampant house prices when it sets interest rates.

At the time, the move was seen in the market as restricting the central bank’s ability to run the kind of loose monetary policy required to help the economy recover from Covid-19.

Finance Minister Grant Robertson said then that the Reserve Bank’s remit would be amended so that the bank considered “the impact on housing when making monetary and financial policy decisions”.

In response to the February announcement, the New Zealand dollar jumped to its highest since 2017 as investors ramped up their bets on interest rates moving higher.

“If these new Government announcements take the heat out of housing, there is less work, if any, for the official cash rate to do for a while,” ANZ’s Croy said.

“So I don’t think it’s an over-reaction. It just takes us back to where we were.”

Elimination of tax deductibility of interest would make property investors more cautious.

“It’s been a significant force in the market and a lot of the conversation in recent days has been: What will this do to investors?

“Investors might be quite a lot more cautious after this because it dramatically changes the cash flow profile associated with investing in property,” Croy said.

Stephen Bennie, co-founder of Castle Point Funds, said the currency reaction was “decisive and sharp”.

“Those currency investors actions relayed the impression that the measures would have an impact on our economy, potentially reducing the need for future interest rate hikes,” Bennie said.

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