By David Hargreaves
Lower and lower and lower go the interest rate predictions.
It's almost a given that the Reserve Bank will drop the Official Cash Rate this week - not least because the RBNZ virtually said it would - so, the key talking point is how much lower rates might go.
Kiwibank economists were the first among the major banks to suggest that the OCR, currently at a record low 2.25%, might ultimately have to go as low as 1.5%. They pick this will happen by early next year.
Now, Kiwibank's got company, with BNZ economists changing their pick for the low point from 1.75% to 1.5% also - but they think it will happen before the end of this year.
BNZ head of research Stephen Toplis said in the BNZ's weekly Market Outlook that if the RBNZ remained fully committed to pushing CPI inflation higher then it had "absolutely no option" but to cut the OCR this Thursday, pencil in at least one further reduction and commit to ongoing rate cuts if need be.
"Only then does it stand any chance of keeping the [New Zealand dollar] in check which, currently, is about all it can hope for in a world where central banks seem to have less and less impact on economic outcomes," Toplis said.
Taking all factors into consideration, Toplis said the BNZ economists believed the RBNZ would cut rates this week and then build two further rate cuts into its "central scenario".
"Anything less and the NZD will head higher still and the Bank’s credibility will be brought into question," he said.
Accordingly, the BNZ economists were are also making an adjustment to their own forecast interest rate track.
"We already had rate cuts penciled in for August and November. We are now inserting another cut into that track for the September OCR review," Toplis said.
"On this basis, we now see the cash rate troughing at 1.50% by the end of this year. By then we think it will be clearer that inflation will pick up allowing the cash rate to stabilise."
However, Toplis said the balance of risks around these forecasts should be seen as "symmetric".
"If the NZD slumps, the Fed tightens, house price inflation accelerates, the labour market tightens further and dairy prices bounce then there will be fewer rate cuts than we have forecast. If, on the other hand, the NZD stays stronger for longer, the global economy weakens and the Fed delays further then more OCR stimulus would be forthcoming."
Toplis said the BNZ economists' rationale for the timing of the rate cut track was largely tactical in nature.
"In short, if the RBNZ is convinced that interest rates need to be lower then there is no point cutting in August and then waiting until November for the second cut.
"And, then, if the Bank does cut in August and September, and still has an easing bias, the wait until February (from September) is way too long to risk delay. Hence, it will be a question of move quick, move often until such time that the Bank believes it has a modicum of control."
Some people were arguing that the RBNZ "should well and truly bite the bullet" and actually cut 50 basis points this week, Toplis said.
"We have to concede that the degree of undershoot we are seeing in the CPI argues strongly for the Bank responding in such a manner.
"The only reason we are placing a relatively low probability on this outcome is that we think this would simply be a step too far for a group of conservative policy-makers who have shown themselves to be reluctant cutters (and for good reason) in the recent past."
The BNZ economics team have long argued that rate reductions are actually not needed in New Zealand until such time as the economy shows definitive signs of slowing - and Toplis re-iterated that vieew again.
"...We are strongly of the view that rate cuts in New Zealand are having only a very modest impact on the NZD.
"The real driver is what central banks, especially the [US Federal Reserve], are doing elsewhere as evidenced by the rise and fall of the NZD last week as perceptions of the Fed changed.
"Be that as it may, the RBNZ has said that it will remain firmly committed to getting CPI inflation to the mid-point of its target band. It shouldn’t really matter to them whether this happens through lower interest rates stimulating domestic demand or lowering the NZD.
"This being so we simply have to take the Reserve Bank at its word."
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Taking all factors into consideration, Toplis said the BNZ economists believed the RBNZ would cut rates this week and then build two further rate cuts into its "central scenario".
"Anything less and the NZD will head higher still and the Bank’s credibility will be brought into question," he said.
Isn't it shot already with inflation doggedly not responding to so called interest rate cut "stimulus"?
Wheeler will be piled on to the forex market pyre that burnt both the SNB and BoJ governors.
Stephen,
Regarding the Japanese and Swiss, you and I differ. They each have printed trillions, partly to keep their currencies down, and partly to take advantage of their ability to print, and therefore to buy up vast amounts of global wealth. There may be some paper intra government debt on their part, but given they have printed the money in the first place, they seem trillions ahead. And although we cannot know what their currencies would have been valued at otherwise, they are likely winning in the currency wars as well.
The risks to them in the future seem nil to negligible. If their currencies should collapse for some strange reason, (given still high current account surpluses, that would be remarkable) then they can always sell up some of their newly acquired free foreign assets. If their currencies should appreciate some more, they can print further and keep buying up the world.
The Japanese also have bought I understand over half the Japanese government bonds on offer- in other words they have printed away half of their government debt. With still zero inflation, very low unemployment, and little else of concern.
Where I think you and I do agree is that they did not need to go to negative rates to achieve the above. They could easily have done it anyway.
It's more complicated than you wish to investigate. Start here and follow the links.
No sovereign taxpayer should be comfortable with it's central bank underwriting other's equity risk.
Considering all it appears to be doing is pumping up house prices, making banks potentially more vulnerable to a crash, I also don't see the logic. They say inflation is low, but they then omit all the things that have high inflation from their calculations, such as houses. The main reason inflation is low, is because things are being made cheaper, so prices don't need to rise on them.
There is a production oversupply problem which is forcing prices down, technology is only making a minor contribution. Low global interest rates are propping up industries that are losing money, but that means production stays high when there is not enough demand. We have another 12-15 years of oversupply before things will get better.
Article here suggesting pension funds are moving into residential property.
Stephen - you are dead wrong on japan. Have you seen their sovereign credit rating? BBB. That is junk bond status. In their latest budget they are handing out "gift certificates" to the population to encourage spending. AKA helicopter money.
The world will follow japan down the road of negative interest rates and money printing to infinity. I give it 6-9 months before we see the Japanese bond market blow up. Haha... just before our NZ elections. Hows john gunna handle that? As for nz - no rate cuts needed. Increase investors housing deposits to 60% and stop foreign students buying houses. Ive heard a real figure of 38% foreign buyers if you use the Australian method, not nz's shonkey methods
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