Economists are pushing out the timeframe for interest rate rises, while ANZ economists say they are tempted to 'flat-line' their future interest rate projections

Economists are pushing out the timeframe for expected interest rate rises in New Zealand, with ANZ's economics team saying they've even considered removing any forecast rises from their future expected interest rate track.

BNZ economists have pushed their expectation of a first interest rate rise back to August next year from May previously, Kiwibank economists expect rises from late next year, ASB economists recently pushed out their expectations of future rate rises to 2019 from next year previously, while Westpac's economists now expect the first rise in the final quarter of 2019 - which is actually pretty much in line with the Reserve Bank's forecasts.

In their weekly Market Focus, ANZ economists say they are tempted to "flat-line" their projections for the Official Cash Rate, "such is the degree of uncertainty".

"Secular forces and disinflationary signals are hard to ignore," they say.

"However, we’re resisting that temptation for now, preferring to instead push out the timing for when we see the first OCR hike to November 2018 (from May). However, it seems clear, as we mentioned last week, that these forces have manifested in a lower ‘neutral’ rate, meaning any tightening will be gradual and modest."

The RBNZ has been forecasting for some time that it won't move interest rates higher till late 2019 - but the 'market' has been disinclined to believe those forecasts, with a prevalent view that rates will move higher next year.

But in the face of recent benign inflation figures, and with the RBNZ last week revising down its expectations of future inflation, the market view is altering - and the projected start of interest rate tightening is being pushed out, while the expectations of the size of any rises are also weakening.

The ANZ economists say that conceivably, the prevailing global and domestic forces "could mean the OCR is on hold indefinitely".

"Some may even argue that these forces mean that the days of inflation targeting (at least in the current form) are numbered.

"Central banks have been struggling for years to generate higher levels of inflation despite unprecedented amounts of stimulus.

"Sector deflationary forces mean that those challenges will persist, if not intensify. Yet financial stability risks have risen," the economist say.

They say a strategy of pushing economies "to run hot" to attempt to get inflation higher is not without risks.

"For now, we are more inclined to see some of these forces manifesting in a lower neutral policy rate, rather than replacing a future tightening cycle altogether.

"As we highlighted a few weeks ago, when it comes to a view around the neutral OCR, we fully agree that it is far lower than where it was historically. In fact, we are inclined to think it is perhaps a little below 3% at present. It all means that future hikes are going to be modest and gradual by historical standards."

In putting the timing for when they see the first OCR hike to November 2018, from May 2018, the economists say three considerations dominate:

► "The global economy is expected to hold together well enough; not necessarily sufficiently to drive inflation strictly to target, but enough that policy needs to be wound back, given central banks’ increasing focus on financial stability risks. The Fed is close to the balance sheet unwind exit door and the ECB is expected to inch towards it in 2018. It’s untenable to think New Zealand’s interest rates end up below those in the US, but that is precisely what the Fed’s dot plot and RBNZ’s OCR profile portray; the NZD/USD won’t be anywhere near current levels in that situation.

► "The NZD looks set to correct lower as central bank policy settings shift globally and the liquidity cycle turns. Now we are not expecting it to fall by much, but still enough to alter the tradable inflation pulse.

► "We are forecasting the local labour market to tighten sufficiently to lift wage inflation."

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57 Comments

Inflation is dead, who needs it

Capitalism.

You need it to prevent deflationary spirals. It would be good if we could learn from the past.

https://www.khanacademy.org/economics-finance-domain/core-finance/inflat...

You need inflation in the consumption of resources to pay the interest on the borrowed money that paid for past, and current, consumption. The real problem is the finite resources being consumed.

Unless the volume of goods and services being sold is increasing due to the decline in price.

Why weren't the economists able to predict this even a few months back? Why isn't at least one economist willing(?) to predict deflation in the next year or more?

Thanks Laminar. Can we suggest to all our economists to take a listen too, and it might be a good idea if they return to study under Prof Keen: http://www.kingston.ac.uk. With respect, they might then be useful to us all.

Steve Keen is not that radical. He simply horrifies the mainstream when he suggests that houses are not money trees. Keen points to the Japan experience with regards to asset prices. The main argument seems to be that the West is fundamentally from Japan: there are many arguments as to why the West is not Japan in terms of deleveraging (from which deflation is the crucial element).

Steve Keen is pretty extreme with his Minsky model. The 99% of economists do get upset when he takes into account money creation and debt which is completely ignored by the vast majority of economists.

Worth having a listen to his podcasts if you get the chance.

His theories are also supported by relatively sophisticated double entry bookkeeping dynamic modeling software which he created to illustrate his ideas. Anyone can download it and check it out.
https://sourceforge.net/projects/minsky/ The guy is a legend.

I knew he'd made it available but I hadn't investigated it. I didn't think it'd be up on sourceforge, that's pretty awesome.

He's a part of the modern monetary economics movement. Too bad there aren't more economists getting into this.

The Minsky Model belongs to Hyman Minsky, not Steve Keen. The theory as it relates to financial instability is not "extreme".

Cue the Wikipedia experts and their access to Google.

Can I suggest that what is most important is whether he is correct or not.

The interest rates will rise ... they will rise - that was what everyone was hearing. So, people fixed their mortgages for 2...3....5 years to avoid it. Now - they are not rising. Is it a surprise - of course it is not.
So if you are locked for 4 or 5 years you may be already paying more than floating.

The banks must lend, they must 'print money' and at the current levels it is not looking good so the interest rates may need to go lower...

Some of us may be part or the problem: busy selling down, paying off debt, keeping all unnecessary spending to a minimum, and any debt on short terms.

Get out of my finances, internet person!

I'm hardly suggesting I'm an expert, quite the contrary. Most topics aired on this site I don't comment on, because I have nothing to add. In respect to finances, I find it difficult to understand why we bother taking notice of what economists have to say, because most other than one mentioned above have been much use. In respect to your finances, I'll leave that up to you. If you want to have a go, then have a go, but I'm not going to be bullied to not making comments or asking questions by you.

I was joking, you described my situation so exactly.

Okay, I accept I shouldn't be so sensitive - never been called an internet person before, hence my reaction.

I admit I don't have much of a sense of humour over this issue as I know quite a few friends and family who got convinced by their bankers economists comments to fix for lengthy terms at high rates. It's not insignificant the amount of money they are paying, which if they had fixed for shorter terms at the lowest rates, could be put towards paying down debt....

Why aren't we throwing our toys over this? If I had conned you out of this same amount of money, you would be demanding I be thrown in prison.

It was only a few months ago these same bank economists were predicting higher rates.... I'm glad many on this site dismissed them, but no doubt, these commentators are being dismissed as just internet persons.

http://www.interest.co.nz/property/87568/bnz-economists-now-predict-rate...
http://www.interest.co.nz/property/88817/westpac-economists-see-higher-m...

BNZ are the least reliable economists. They failed to understand there would be OCR cuts when they started happening. They were could off guard by the obvious.

There was a chance of higher interest rates that didn't emerge as the Federal Reserve has been moving slowly and very cautiously. As none of us can see into the future the interest rates could go up, down or stay flat. As such people should be splitting their mortgages and not making one way bets on 5 year fixed mortgages etc. Being half right (splitting in two) is better than being entirely wrong.

How could you listen or trust a bank economist, maybe one working for the RB, better still a professor at a school, but at the end of the day greed takes over and people will hear what they like to line there pockets, it's not new, and governments will do the same, look where we are now because of mainly national

Yep, we're in the same boat - minus the debt. In fact, we usually struggle to think of anything to spend on.

Even if you did fix it can't have been that high , rates haven't changed that much, even over many years they've been in about a .8 % range, maybe a lot to some

I fixed at 1, 2 and 3 years because there's no way to predict where things will go. All of the rates are below 5% which is well less than any floating rate. It's also extreme low based on historic interest rates.

It's tough to have higher interest rates when the Fed, RBNZ, RBA, BoJ and ECB are all afraid of increasing interest rates or winding down their equity positions. The days of bold Central Banks seems to have disappeared thinking that they will trigger the next big crash. So instead they are waiting for it to happen by itself so it does more economic damage and threatens global financial stability.

Currency wars to better each other for exports because they're all doing poorly , nz can't play that game with the big boys, I'm surprised the nz dollars isn't lots higher

If we were at 9% interest right now we'd be better off because 1, house prices wouldn't have gone anywhere near as high as they are now (less dept) and 2 , we would be starting to in joy 5% of lowering which helps to get things going again, but not to worry, with a OCR of 1.75 % and banks at around 5% we won't be seeing much anyway ether way, there's not much ammo to lift or drop, and I can't see the banks getting anywhere near the OCR, they'll being needing as much profit as they can find, the days of getting 4 or 5 % to save the day are over, 1% if we're lucky

the days of getting 4 or 5%... 1% if we are lucky? What do you mean?

In 2008 interest rates were 9% , then slowly dropped from there, now the RB is at a all time low of 1.75 , maybe it can go down a bit? , nz banks haven't normally gone under 4% but you never know, we are close to there now

Yes and by having them at 9% you would have caused New Zealand's greatest financial crash since 1930 by driving businesses bankrupt and placing a lot of people out of work

New Zealand did alright from 2006 to 2008 lifting interest rates, it wasn't that that coursed the crash then it was the GFC from American, and if we had lifted rates in 2015 to early 2016 we wouldn't be in anywhere near this amount of dept, Lifting interest rates stops risk before it gets out of control, although I'm for LVR and DTI because it targets the problem, housing, but in 2015 nz didn't do anything but try to grow the problem to when we are today

Bankruptcy is a mathematical certainty, it is just a matter of now or in another ten years.

Glad I fixed for one year now.

ditto :)

ditto

Thus, the decline of interest rates to zero corresponds with a monetary imbalance in favor of deflation, if at least an abundance of deflationary pressures. This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."

To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks. Read more, more and more

So does that mean if nz went to zero % we were in the shitter

Yeah, I think if the govt and friends start putting rates down, you'll know Kiwis of the future have basically been sacrificed for the lot of those in a good situation right now.

Perhaps. I think it is more if the FED gets to zero % that the world has a problem.

Think of it this way, the interest rate is the yield of money. It parallels the yield on all investments. The problem isn't so much the OCR, but when any person living of the yield isn't getting one. Then they have to start selling assets.

I've been fixing between 4 and 5 % for years , I can't see things changing much anyway, we might start getting the odd 4.19% , they was good times

if they actually calculated inflation and didn't use the CPI model they would possibly have their inflation most of the low CPI has been a result of adjustments due to technological improvements not actual price drops.

Inflation has I suspect been getting along quite fine in things like food, rent and energy.

You will not see any change in interest rates for some time or ever under the current scheme with house hold debt at 170% wages not moving due to immigration but costs of food and rent rising there is little spare capacity left in most budgets and you will find what there is is being used to pay off debt where possible.

If by some miracle the CPI starts to rise in the near term any interest rate rise will be the end of a large number of people and a recession to finish us off.

Out of curiosity what does an interest rate represent? if it represents risk levels then what does a negative rate mean? can you have better than no risk?

If it represents value what value does a currency with a zero or negative interest rate have?

And why would we trade with countries whose money is valueless according to their interest rates? what exactly are they giving us in return?

I used to think this, but it isn't true. The interest rate represents the maximum extractive value from the economy.

The economists & RB have been predicting rate rises in the 18 month horizon ever since 2009.
Have they even noticed that the world has changed since the GFC?

They may have been predicting it but how much hopeful thinking the market would keep going up, maybe they should have just done it because is the world or more so nz better or worse off since the GFC

Serious question MortgageBelt and O4 normal: Do the decision makers in banks really take much notice of their economists predictions, or are their economists really just part of their marketing/sales team?

Hobo, I don't know banks I'm just bloody old, but really how could u trust a bank Johnny if your question was should I buy or not, I'd rather watch prices and sales and try and decide is the market going up down and how long, for many years nz has had bull markets for 6 years and bear for 4 , but that in no way could always be the case, at the end of the day I buy a house because I like it and can afford it without to much risk

being old you would remember when we used to trust banks, that all changed with basel and settings banks up to generate huge profits off creating debt for housing as the main source
how many stories do you read now about bad practices to create profits now compared to back in the day

Yes we are letting banks rule the country, look at what big banks in America can do like the GFC, banks probably shouldn't have lent to half the people in Auckland in 2016, and if hadn't the boom wouldn't have happened so bad , we would be talking right now "housings ticking away nicely " LVRs and DTI need putting in place for good , but they'll get adjusted and the powers to be normally like to lift housing prices and never nip it in the butt early enough, look at history, every 10 years we have about 6 years of boom (going to far) and 4 years of bust (because of going to far) you would think balancing this would be better all round, also to add to the powers to be stupidity they add massive overseas investment with super high immigration, dumb dumb and dumber , We'll pay now big time, this is one hell of a high boom and in a very very short period, most parts of the country a boom of only a year, and up so fast, with so much dept, I wouldn't put money on where this could end

Does it mean anything that nz more than likely has just gone threw the fastest boom ever, most of nz other than Auckland Hamilton and Tauranga have hardly had a 1 year boom, Hamilton and Tauranga maybe 2 years and Auckland 3 or 4, that's really short, but looking at the hole overseas investors part and Aucklands getting large amounts of money for houses with many moving to other areas of nz you can see why, SEE WHY IT WAS SO SHORT, what's next tho

Boom is still on, just wait until the sun comes out past spring...

"Interest rate hikes disappearing into the distance"

You don't say

If the prediction is being pushed out, then prepare for the opposite. Banks are hunters, they're just laying some bait.

I wouldn't go counting ya chickens yet with lower interest rates even tho there might be some small drops, We're only now getting more permanent figures coming out that the boom has reached its limits because over several well advertised factors, historically we have 4 years of this with governments and the RB trying to fix it, the new way of the RB is low rates so not much help there, interest rates could go slightly ether way

If you actually want a desirable inflation rate, then we need to reverse the growing inequality trend. If you print money and grow inequality, you're just sending piles of money to the top that doesn't flow. We need to address money velocity.

"The NZD looks set to correct lower as central bank policy settings shift globally and the liquidity cycle turns. Now we are not expecting it to fall by much, but still enough to alter the tradable inflation pulse"

NZ banks haven't been able to predict NZD accurately anymore than they have been able to predict inflation but it is still very interesting that they see a currency correction. Currency corrections are notoriously unpredictable and occasionally quite extreme.