Hamish Pepper – Jan 28, 2020

Key Points

• The Reserve Bank of New Zealand (RBNZ) has found a fiscal friend in the past two months. Following the $12bn of capital spending announced in the Government’s December Budget, Kāinga Ora (Housing NZ’s parent) plans to borrow an additional $4bn to help its state housing efforts.
• While there is uncertainty about delivery, any additional government capital spending is likely to add to inflation via increased construction demand.
• RBNZ rate cuts are less likely as a result and activity indicators are already picking up. Rate hikes remain a long way off however, with still-low inflation suggesting the RBNZ can adopt a patient approach.

The Government has substantially increased its spending plans over the past two months, turning out to be a better friend to the RBNZ in supporting economic activity than most had anticipated. Not only did the December 2019 Half-Yearly Economic and Fiscal Update (HYEFU) unveil a capital spending package worth $12bn (adding 1.4% to real GDP over the next four years), Kāinga Ora announced on January 19^th an additional $4bn of borrowing to help its ongoing state housing upgrades. Kāinga Ora raised its borrowing limit to $7.10bn, from $3.05bn, and intends to use most of this new limit over the next two years to help finance “much-needed warm, dry and safe houses across New Zealand”.

In its latest (September 2019) investor update, the government agency planned to build 7,500 new homes over the next four years, and upgrade or replace 45,000 homes (c.70% of current stock) over the next two decades. We noted in September, after the OCR had plumbed new lows, that fiscal policy was better placed to provide additional economic stimulus (see NZ Monetary Policy: Diminishing Returns, 26 September 2019).