New Zealand raises rates as BoE hesitates

The Reserve Bank of New Zealand raised interest rates for the third time this year on Thursday. Bloomberg reports:

“It is important that inflation expectations remain contained and that interest rates return to a more neutral level,” Governor Graeme Wheeler said in Wellington after increasing the official cash rate by a quarter-percentage point to 3.25 percent. The Reserve Bank of New Zealand left its forecast for the 90-day bank bill rate broadly unchanged, suggesting borrowing costs may rise twice more this year.

In contrast to the RBNZ, the Bank of England has been slow to tighten monetary policy despite improving economic data. Alen Mattich says that BoE policy is being pulled in two directions.

Nowhere is the central bank’s dilemma more concisely captured than in the latest set of employment data, released Wednesday. U.K. unemployment fell faster than analysts had anticipated–to 6.6% against an expected rate of 6.7% and from 6.8% in March... On a single month basis, the unemployment rate was down to 6.4%. That’s within the Bank of England’s estimated equilibrium unemployment rate–the rate consistent with stable inflation–of between 6% and 6.5%.

In normal times, reaching the equilibrium rate of unemployment at a time when official interest rates are at historic lows would send inflation alarm bells ringing...

So why is the Bank of England not rushing to raise rates? The answer lies in the average earnings data released at the same time as the unemployment numbers. Average earnings rose a mere 0.9% on the year in April. That’s well below the inflation rate of 1.8% reported the same month.

But the unemployment rate is not the only indicator suggesting a need to raise interest rates.

UK house prices rose in May, with the Royal Institution of Chartered Surveyors reporting on Thursday that its main house price balance rose to +57 last month from +55 in April. That brings it back close to March's +58, the highest reading in 12 years.

But not all BoE officials are alarmed by the house price increases. From Reuters:

Britain's housing market upturn bears little resemblance to the debt-fuelled booms of the past, Bank of England policymaker Ben Broadbent said on Wednesday, adopting a more relaxed tone on housing risks than some of his peers...

While accepting that housing was currently the main potential threat to Britain's financial stability, Broadbent said past periods of strong house price growth were marked by rapid growth of risky mortgage debt. “We are not yet at that stage,” he told British lawmakers who were questioning him about his appointment as the BoE's next deputy governor for monetary policy...

Broadbent's comments contrast with firmer warnings on the risks of another house price bubble from some of his colleagues, including from BoE Governor Mark Carney, who has warned of rising numbers of high loan-to-income mortgages.