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Opinion: Financial markets appear to view new Reserve Bank Governor Graeme Wheeler as more 'dovish' than predecessor Alan Bollard

Opinion: Financial markets appear to view new Reserve Bank Governor Graeme Wheeler as more 'dovish' than predecessor Alan Bollard

By Dominick Stephens

In ordinary circumstances, our preview of next Thursday’s Official Cash Rate (OCR) review would have been an incredibly bland affair.

At the September Monetary Policy Statement the Reserve Bank issued a “firmly on hold” outlook for the OCR. In coming to that view, the central bank contemplated a weak global economic environment, modest GDP improvement in New Zealand, fiscal austerity, rising house prices, the Canterbury rebuild, low inflation, and the excessively high New Zealand dollar.

The economic landscape has changed very little since that time. True, inflation data was slightly weaker than expected, but GDP data was slightly stronger. The recent round of fixed mortgage rate reductions will act like monetary stimulus. But that is probably welcome, given that there have been signs of slightly slower economic growth over the September quarter.

The exchange rate is still high, but no more so than the RBNZ anticipated. And global markets are arguably calmer than they were six weeks ago. In ordinary circumstances we would have said that things are evolving broadly along the lines the RBNZ anticipated, so there is no need to change the “on hold” stance for the OCR. End of story.

New Governor seen as more dovish

But these are not ordinary circumstances. The Reserve Bank has a new Governor (with Graeme Wheeler replacing Alan Bollard), and he may interpret the current economic situation differently to his predecessor. Financial markets appear to have taken the view that the new Governor will be more “dovish”. Interest rate markets are increasingly pricing in the possibility that the OCR will be reduced within a few months.

Experience certainly suggests that the person at the top matters for monetary policy. The Reserve Bank rapidly changed tack from OCR hikes to OCR cuts soon after the last change of Governor, surprising markets in the process.

The big unknown is how the new Governor’s attitude will differ from his predecessor’s. Our views are no more or less valid than anybody else’s. But for what it is worth, our thinking is that the incoming Governor will start his term calmly and cautiously. The Reserve Bank’s target is to keep future inflation close to 2%, on average over the medium-term.

Wheeler will be presented with a staff inflation forecast that averages bang on 2% from one to three years in the future, which is the usual target horizon. The most prudent course of action would be to keep the OCR on hold and issue a statement that is ambivalent about future OCR changes. This could be achieved by repeating the last sentence of the September statement: “It remains appropriate for the OCR to be held at 2.5 percent.”

If market speculation is closer to the mark, and the new Governor decides that lower interest rates are appropriate, then the October OCR review would probably be used as a signalling opportunity. On the day, the OCR would probably be left at 2.5%. But strong hints of future OCR reductions would be given in the accompanying press release.

Market implications

Markets are nervous about this OCR review. A reaction of some sort seems highly likely. Current market pricing suggests a better than 50% chance that the OCR will be cut by January. If the Reserve Bank validates that thinking in any way by hinting at OCR reductions, interest rates could fall sharply on the day.

By contrast, if our tentative thinking proves correct and the RBNZ issues a bland OCR review, interest rates would probably rise only slightly.

*Dominick Stephens is Westpac's chief economist.

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19 Comments

Can you tell me which Central Banker in this planet is not "dovish" ?

 

The new Central Bank Governor is just another automate that will not do anything to right our current course into disaster as our economy slowly sinks into debt and trade deficit.

 

The day will suddenly come when our foreign creditors decides to recall their loans and we go into a death spiral....but the RBNZ will just exclaim "Unexpected" to absolve himself from guilt..... 

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Can you tell me which Central Banker in this planet is not "dovish" ?

 

Brilliant - they come from the factory predisposed - lol

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Perhaps the Aussie banks found action man Bollard a little too hawkish and pre-ordered the new dove-lite model?

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Yes, its known as the school of neo-classical economics.  Except they are all hawkish until their underwear fills as they see a greater depression heading their way and much of the blame is theirs...

dad's army comes to mind....dont panic.......DONT PANIC!!!

regards

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The ECB? They still use money supply targets for goodness sake. 

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There is dovish and desperate....I'd suggest they are all hawkish but are finally admitting to being frightened of a second Great(er) Depression and with little prospect of inflation in the medium term can afford to be.

Sounds like you think like an Austrian, which is demonstartably (1930s depresion) a failure, let alone the attempts of austerity for the last 4 years.

"The day" that is no more than wishful? thinking...the Govn says right ow it is and will balance the books and looks to be doing everyting sensible to achieve that.

regards

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"dovish" as in 'bird brain' most likely. All this analysing of the entrails stuff  would be comical if it was not so serious. In the real world decisions have to made the impact over such a long time- decades, not quarters.

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Request to Interest.co.nz staff

 

Make the reader's choice the default tab.  Usually find the reader's choice to be likely to be interesting.

 

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More cuts are on their way. 

Unless NZ wants unemployment to increase to 11%.

House prices actually quite flat outside of desirable Auckland suburbs.

Don't fix yet  -  banks will be forced to drop their floating rates soon. 

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Drop, maybe, but their wholesale rate is higher than the OCR now?  At some point our "hot money" borrowed via carry trade simply isnt going to get "cheaper".

Un-employment i'd suggest is determined by how well our exporters do into a world looking to go broke...rather than the domestic need for workers....Hence I wonder if dropping the OCR isnt moot.

regards

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dont know if its true but was told that everyone is holding repayments the same so as time goes buy a geometric rise in repayment to the banks has left them with lots of money

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I think also after the finance co fiasco lots of OAPs money is hiding in banks...hence so much whining about the low rates...

regards

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Haha, haven't checked in at interest.co for a while.

An OCR of 2% ?!! ...but... but...  all the gloomsters here have been repeatedly forecasting double-digit interest rates for several years now...?!

As well as double-digit unemployment & double digit house price falls (now I remember why I tuned out from interest.co, the dysphoria was wearing me down!)

My bank rang the other day wanting me to fix some loans for 2 years, which is always a sure sign that rates are about to go lower !

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You must owe a lot - I never hear from my banks - are you a swap counterparty to one of them?

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no....well...um depends on which gloomsters.  In GBH's term me the gloomster has been saying lower and lower for longer....even a Depression is very probable.  The gold and property bugs on the other hand have been forecasting "hyper-inflation" would arrive tomorrow for 4 years now.....not sure if they are "gloomsters".....

The bank rings you? wow....me they almost sneer at me when I ring them as I owe them so little....im not worth salesmens time....

regards

 

 

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So you have no borrowings & no savings?? interesting...

 

I would much rather owe the bank $1million than the other way around - I owe them = their problem, they owe me = my problem.

 

I believe in conservative leverage though, so I have more equity than the banks do. Too much leverage = risk going bust, no leverage = risk going nowhere, conservative leverage = good long term strategy..... ;)

regards

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... " dysphoria " ..... was that a shot at Bernard ?

 

Bulls-Eye ! ...... gotcha arch gloomsteriser dead centre ...

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Ha ha Gummy, long time no see - I didn't mention names but well spotted ;)

 

Did you see this hilarious comment from Bob Jones in which he suggests prefrontal lobotomies for several economic doomsdayists - BH included.

 

As Sir Bob points out, a quick skim through newspapers from the last few centuries will reveal plenty of good folk complaining of the same old things & making the same doomsday predictions - I read one recently from the Auckland Star, early 1900s, people lobbying government for legislation against the excessively high rents in some parts of Auckland - over 20 shillings per week!  (that's 1 pound or 2 dollars for those of you born like myself in metric times)  Apparently rents at those levels were "unsustainable" !

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http://www.doctorhousingbubble.com/echo-housing-bubble-california-low-i…

 

notes on a Southern California new Housing bubble developing- sounds a lot like AKL to me

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