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Roger J Kerr sees little downside for the RBNZ to now surprise the markets with another 0.25% OCR cut at the next review date in September

Bonds
Roger J Kerr sees little downside for the RBNZ to now surprise the markets with another 0.25% OCR cut at the next review date in September

By Roger J Kerr

The RBNZ’s annoying habit of underwhelming the prior financial market expectations in their various monetary policy statements has consistently propelled the NZ dollar higher over the last 12 months.

Inflation has also been consistently lower than RBNZ forecasts all year, largely due the TWI currency value being substantially above the lower TWI assumption the RBNZ apply to their economic and inflation forecasts.

The pattern of unjustified RBNZ caution in cutting interest rates has to be broken, otherwise the Governor could be up for a serious job performance/appraisal review for consistently missing the 1% to 3% inflation target band.

The late July special economic update from the RBNZ, coupled with the tightened LVR rules on residential investment properties, appeared to pave the way for aggressive interest rate reductions to turn the appreciating tide of the Kiwi dollar.

Unfortunately, the two RBNZ statement since then (the MPS on 11 August and the Wheeler speech last week) have seen the RBNZ return to their overly-cautious mode and a higher NZ dollar has been the result.

There seems little downside to me for the RBNZ to now surprise the markets with another 0.25% OCR cut at the next review date on 22 September.

The scheduled OCR review date is one day after the US Federal Reserve FOMC meeting on 21 September where there is a greater than 50/50 chance of a 0.25% interest rate hike in the US.

Governor Wheeler will have the opportunity to turbo-boost a lower NZ dollar exchange rate from the expected strengthening of the US dollar over the next month.

If the RBNZ is really serious about returning inflation to above 1.00% and closer to 2.00% over the next 12 months, the market opportunities to drive the NZ dollar lower need to be taken, it is over to you Graeme!

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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11 Comments

Inflation is easy we just need a legislative change under urgency to allow the Government to issue a simple instruction to RBNZ. Get the Reserve Bank to create $15b NZD and use it to purchase or pay the Government's debts. If that doesn't crash the dollar and create inflation then nothing will.

That would also give an export led recovery while shafting our creditors.

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Correct analysis and observation Roger

Mr. Wheeler seems to be more concerned about interest rate differentials with others than nominal value of the NZD .... he might have a point there, but being too cautious for so long proved to be damaging and a slow pain ...

He also indicated that he doesn't want to let go of all his 35bp too quickly ... just yet!
Maybe the FED's hike will eventually force his hand ! while the Banks are lending him a big hand by not passing the full OCR cuts to their customers !!

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I dont see the problem with low inflation? I also dont see how a low NZD benefits me as a consumer?It means I pay more for petrol and everything else imported. It also makes it better for me buying NZ made goods.

If we had 0% inflation and real wage and GDP growth who gives a rats!!!!

As for another cut my bank the ANZ isnt going to pass it on anyway. .05 of .25 last time what about this time?They replied in an email that due to increased overseas borrowing costs they were unable to pass the cut on.

This seems to make the Reserve bank even more impotent in being able to change inflation through ocr cuts if the banks refuse to pass it on!

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people with a lot of debt like inflation because it reduces the amount they owe, in real terms. The government has A LOT of debt.
Lower ND makes life easier for exporters which is good for our current account: more exports than imports = more money in than out.

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I agree no more OCR cuts. It is only enhancing the Bank's profits. Okay if the Bank's funding costs are increasing put their lending rates up!!! No way they might lose customers, BUT not if they all did it. Time the ball changed in favour of the Majoirity of NZRS not just the Property Investors.

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As a consumer, we don't need more shiny beads and trinkets. We need a robust economy, and we are not going to get that from consuming from overseas. As a consumer, you will benefit in the long term by having an economy that can produce and support itself. That means having a lower dollar to support our economy as a whole.

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Yeah, great. Lets keep feeding the housing fire with lower and lower interest rates. WOW.

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The housing crisis is being fed with people and foreign investment. Remove these two fundamentals and the housing crisis will evaporate with prices adjusting back to what working class NZ'ers can afford.
There will still be a huge deficit of infrastructure needed to support the new population of people and get Auckland out of gridlock.
It will take 30 yrs to repair the damage of our social experiment of unrestrained population growth and there will be tears.

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TWS - Are you saying rural NZ and exporters have to suffer relatively high interest rates and a high exchange rate because of what Key and his mates are letting happen in Akl?

The hicks should just suck it up then so that foreigners and the housing Ponzi can give jk another 3 - is that it?

Housing NZ - TBTF until it does then watch the pain.

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Smalltown...The exchange rate is at historical norms. Interest rates are already the lowest in about in 40 years. Keep lowering interest rates and some of the money keeps going into property for better returns, even if temporary. I don't spend more on consumables just because interest rates are low. But I would consider more real estate. The rbnz is absolutely causing part of the housing problem, and not only that, continually fueling the fire with their policies, not KJ. Sorry, I don't know what TBTF is?
I'm all for a massively lower exchange rate. I'll shift more of my offshore money into NZ real estate, again. I loved it when we were getting NZ$2.40 for US$1. Made a killing!! Go rbnz. HooRah.

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Agreed Roger. Unfortunately I'll bet you that after the FED raises rates, Wheeler will think it best to just sit on his ar*e and wait to see what happens.

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