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RBNZ holds OCR at 2.5% and pledges again to hold it there until middle of 2010 (Update 5)
January 28th, 2010The Reserve Bank of New Zealand has left the Official Cash Rate on hold at 2.5% and again pledged to leave it on hold until the middle of 2010. The global economy and the New Zealand economy were recovering, but sustained growth overseas was dependent on continued fiscal and monetary support and vulnerable to weak financial sectors, the bank said.
(Update 4 includes links to special report video. Update 5 includes ANZ reaction.)
New Zealand inflation remained within the bank’s target range and the removal of monetary stimulus was not needed until the middle of 2010, Governor Bollard said. This was in line with the bank’s December announcement and economist expectations. The New Zealand dollar fell marginally to 70.3 USc in the first 10 minutes of trade after the announcement before rebounding to 70.6 USc by 9.40am.
My view:
The Reserve Bank has delivered on expectations for a ’steady as she goes’ statement that leaves enough wiggle room for rate hikes to start from April 29, June 10, or July 29. Luckily for Reserve Bank Governor Alan Bollard, he is able to rely on tighter bank lending and higher market interest rates to start sucking the punch out of the bowl before the party gets too rowdy.
Bollard can also afford to keep his powder dry because inflation is not a problem yet and the initial signs of a strong recovery seen late last year have faded somewhat both locally and globally.
Reserve Bank data on credit card billings for December, which are the first useful figures from the key Christmas retail sales season, show sales fell 1.3% on a seasonally adjusted basis. Mortgage approvals data up until last Friday show bank lending is starting to dry up again. Lending approvals by value, which are a useful indicator of what will happen in the next couple of months in the housing market, fell 2.3% to NZ$645.8 million in the week to January 23 from the same week a year ago. This is the first year-on-year fall since April last year.
That is less than half the lending going on at the peak of the boom. The Reserve Bank’s new rules on prudential liquidity are forcing the banks to pay more for their funds because they are having to raise more money for longer terms and more money from local savers, instead of going to international markets for cheap short term funds. Also, banks globally are having to put aside more of their own capital to back lending, which is making them more careful before they lend.
The housing market’s recovery of the last 9 months is running out of steam as this lending dries up and affordability hits the doledrums again. This, in turn, is keeping a lid on any consumer spending excitement. Various local inflationary influences are also being dampened through other means. Local councils are under the thumb from central government to avoid big local rate increases and some state-owned power companies have frozen their price increases.
There remains a big risk of a double dip recession in the United States, Japan and Europe as the combined weight of heavy public debt and weak banking systems restrict lending and push up interest rates.
The mortgage market is also gradually shifting in New Zealand towards variable mortgage rates rather than fixed mortgage rates. That’s because variable rates are now consistently lower than all but the six month rates, which is such a short term it may as well be variable. This could be a historic shift that gives the Reserve Bank more monetary policy potency, similar to that enjoyed by the Reserve Bank of Australia.
The proportion of New Zealand borrowers on variable rates has almost doubled to 25% in the last two years, meaning they will feel the full effects of an OCR hike immediately. Those refixing for what was the most popular term of two years have already seen that average bank rate rise from 5.92% in February last year to around 7.2% now.
Interest rates are rising globally too as investors realise the decision through 2009 to shift private debt to the public sector has not removed the debt. It still has to be serviced and eventually repaid, which is increasing the risk of sovereign defaults.
Deleveraging is inevitable and it is a mighty powerful force, almost as powerful as compounding interest. It is actually a different form of the same thing. The Reserve Bank may have held the OCR, but the pressure is on from other sources to hike interest rates and reduce lending growth.
Here is ASB economist Nick Tuffley’s initial reaction.
As expected, the RBNZ trod a very similar line to the December statement (even going so far as to specifically note that). The key point was that events have kept the RBNZ comfortable with its assessment that “around the middle of 2010” is the appropriate timing to start unwinding the stimulus. There was no market reaction.
We continue to expect the RBNZ to start removing the stimulus in April: the medium-term inflation outlook will appear less “comfortable” over time. However, as we detail at the end of this note (please see “OCR Outlook”, below), we now expect the pace of OCR increases to be of 25bp instead of 50bp in the initial meetings. Some of the urgency for rapid tightening has dissipated with signs that the housing market’s rise is ending. But a key factor behind our view change is that the relationship between the OCR and lending rates is likely to be a lot firmer than we previously assessed. Early OCR increases risk being passed through fully rather than partially, given that the retail deposit war continues to rage intensely and wholesale funding costs are no longer benefiting from falling credit premiums. The likelihood of a large wedge remaining between the OCR and bank funding costs – even after the OCR has risen to more normal levels – also suggests a peak OCR of 5% will be sufficient to remove the stimulus short-term rates provide. Previously, we assumed the OCR would reach 5.5%
Our view on the timing and magnitude of future OCR moves is fairly close to current market pricing.
The RBNZ Governor is speaking tomorrow afternoon on “The crisis and monetary policy: what we learned and where we are going.” Given the “where are we going” aspect, it is possible the RBNZ talks specifically about its exit strategy. Last year the Governor implied 25bp hikes wouldn’t cut the mustard: the speech may give insights into whether the RBNZ has changed its mind or not. Our new view is that 25bp hikes will pack sufficient heat.
Here is the reaction from ANZ economist Khoon Goh:
Today’s OCR assessment had something for everyone, and was clearly designed to have minimal impact on the market. Judging by the market reaction, with swaps and the NZD largely unmoved, the RBNZ has been successful and can give themselves a pat on the back. The upcoming dataflow will remain critical as would be expected, and particularly relative to the RBNZ’s December projections. We continue to pay close attention to credit growth trends. Central banking in 2010 appears relatively straight forward: if credit growth picks up, remove excess liquidity. If it remains stagnant, maintain supportive conditions.
Here is the full statement below from the Reserve Bank.
OCR unchanged at 2.5 percent
The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.
Reserve Bank Governor Alan Bollard said: “The outlook for the New Zealand economy remains consistent with the projections underlying the December Monetary Policy Statement.
“Global activity continues to recover, helping push New Zealand’s export commodity prices higher. Economic growth is most apparent in China, Australia, and emerging Asia. However, sustained growth throughout our trading partners is not assured, with many still facing impaired financial sectors and overall activity still reliant on policy support.
“Similarly, the New Zealand economy continues to recover. Policy stimulus and improving export earnings have seen a pickup in household spending. That said, households remain cautious, with credit growth subdued. Business spending remains weak.
“Annual CPI inflation is currently at the centre of the target band, and is expected to track comfortably within the band over the medium term.
“The economy is being assisted by both monetary and fiscal policy support. As growth becomes self sustaining, fiscal consolidation would help reduce the work that monetary policy might otherwise need to do.
“If the economy continues to recover in line with our December projections, we would expect to begin removing policy stimulus around the middle of 2010.”
Tags: Alan Bollard, OCR, Reserve Bank of New Zealand
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January 28th, 2010 at 9:27 am
You’ll get some mileage out of this headline , Bernard . Expect QE to remain in place , worldwide , through all of 2010 . Economies are too weak to grow without another shot of central bankers’ ” cocaine “. ………… . Good cure for a crack addict !
January 28th, 2010 at 9:50 am
OCR most likely to stay where it is with 5.6% floating mortgage rates for the whole of 2010 – the international scene is sick, China trouble looming, Oil should drop in price due to lack of demand and it’s only a matter of time before the $USD collapses.
January 28th, 2010 at 10:23 am
Oil is at $74, once a real recovery arrives that’s going to jump…which will be like raising the OCR, money will be sucked out of ppls pockets….
@The BM…hmm yes the decision to stay floating looks better every day….I should locate my old spreadsheet and re-work the numbers, its beginning to look like I cant lose unless rates get to 13% within 3 years.
The Q is where is the pressure upwards suggesting a probable rise in June?….I cant see anything that’s more than marginally saying that……so it could be a lot later than June. We also have 4 months of US un-employment stats to ponder over, unless these show healthy signs….NZ employers have supposedly kept staff expecting a recovery, if thats yet another year away, will they wear that or shed staff?
January 28th, 2010 at 10:55 am
“Reserve Bank data on credit card billings for December, which are the first useful figures from the key Christmas retail sales season, show sales fell 1.3% on a seasonally adjusted basis”
What about the earlier retail card sales figures. Core electronic card spending was up 0.4% seasonally adjusted in December. When automotive is included it was a 0.7% rise.
These figures include credit card spending as well – so the credit card sales figure is mainly a subset of the electronic card spending figure. However, the credit card figure also includes AP’s on things like rates and the such which aren’t part of retail sales – and as a result that number looks even more volatile.
January 28th, 2010 at 11:32 am
Matt,
Fair enough. But do you think the Christmas sales season and consumption generally is that hot? My feeling is no.
cheers
Bernard
January 28th, 2010 at 11:46 am
Steven:
“I should locate my old spreadsheet and re-work the numbers, its beginning to look like I cant lose unless rates get to 13% within 3 years.”
Yes please do I for one would appreciate the feedback/information. Some of us come here to learn about the different options available to us… (being arguably less informed) around should we stay floating or fix.
Unfortunately what we mostly get are people gloating about how they got it right and fixed for 5 years (last year – well done but the world keeps turning and what do people do now!!!)
Cheers
January 28th, 2010 at 11:48 am
“Fair enough. But do you think the Christmas sales season and consumption generally is that hot? My feeling is no.”
Before the figures, I didn’t expect it to be. But November and December sales appear to have been stronger then I was looking for.
Electronic card spending is in many ways a better indication of retail sales then the retail trade survey. The interesting thing is that debt levels seem to be easing (that can be seen in the credit card numbers – and in the monetary aggregate numbers which will be updated today) but spending is rising. If anything this seems like a positive turn of events – as it must mean that income growth ain’t too shabby.
January 28th, 2010 at 12:17 pm
Matt,
“If anything this seems like a positive turn of events – as it must mean that income growth ain’t too shabby.”
I can’t talk for the people you know, but all people I know, are talking about how to make their current income stay the way it is and not disappear on them suddenly. (and if it does, what to do then…)
And I should add that most people I know are self employed or in some very good jobs. To me it seems more a case of spending rising shows that inflation as measured by ‘official’ numbers is so flawed that other stats may be misinterpreted until reality shows it to be what it really is!
Chris
January 28th, 2010 at 12:32 pm
@The Bank Manager: “Unfortunately what we mostly get are people gloating about how they got it right and fixed for 5 years”
At what rate? and the 5 years isnt up yet….if they fixed at 7.5% for 5 years, will they be impressed if floating stays at 6~7%? bet not, what if they lose their jobs and have to pay penalties to move? did they factor in that? It isnt over til the fat lady sings…. What I see is ppl looking at the last 5 and thinking the next 5 will be similar…I dont think it will be…I mean look at Japan and its lost two decades, it didnt sort its issues and stayed comatose….can anyone logically tell me now with a Global meltdown we are not going to lose 10 years or more?
My spreadsheet is pretty simple….it gives me an idea, I just wish I was knowledgeable enough to do something really accurate…I wrote it a year ago, the trick is now to find it
:/
regards
January 28th, 2010 at 12:39 pm
@ stephen
“The Q is where is the pressure upwards suggesting a probable rise in June?….I cant see anything that’s more than marginally saying that……so it could be a lot later than June.”
I agree with you. I can’t see anything on the immediate horizon – as in next 3-4mths – that is going to cause it to spike up? Can anyone advise what they “realistically” see hitting in the next 3 months to cause Bolly to increase the OCR?? (by “realistically” I’m not after maybes like oil doubling in price or something silly). I think things are still too sick in the world economy.
January 28th, 2010 at 12:43 pm
@The Bank Manager: “Unfortunately what we mostly get are people gloating about how they got it right and fixed for 5 years”
I tire of those people as well – people who fixed @ 5 years in the 2-3 week window when it was so low. Good planning? bollocks!! Good luck? Maybe but watch that fat lady. I suspect we won’t know whether they were “lucky” for another 6 months or so – lets see.
January 28th, 2010 at 12:43 pm
“I can’t talk for the people you know, but all people I know, are talking about how to make their current income stay the way it is and not disappear on them suddenly. (and if it does, what to do then…)”
It has nothing to do with people I know – it is merely an interpretation of card data that says sales growth is up and debt accumulation is down. Given that we spend out of income, and borrow when that spending exceeds income, the only way this adds up is if income has gone up.
January 28th, 2010 at 12:45 pm
Rates going up in OZ soon?
http://www.stuff.co.nz/business/world/3271031/Aussie-house-prices-up-12pc-in2009
January 28th, 2010 at 12:56 pm
We fixed for 5 years at 5.95% in February 09 after buying our house in Dec 08. The plan was to fix at under 6% for as long as possible. Unfortunately we didn’t need to borrow much as house prices had bottomed out and we paid $100K under GV and $50K less then we expected. If only we could have borrowed more. Then I could really rub it in your faces.
January 28th, 2010 at 1:30 pm
Matt,
Sure. Could you then consider the reduced debt servicing cost (due to lower debt growth) as ‘income growth’? Maybe some people sell assets (maybe financed…) too and reduce their load on outgoings that now can be spent? Does retail spending data show also any tourist generated sales? (I don’t know)
Would that add up for you? I guess you really would need to look at rate of savings increase/decrease and maybe some other indicators as well to ensure you draw a reasonably accurate conclusion from said data. Besides, I tend to be cautious when looking at ANY data that gets bandied about, as it is so incredibly difficult to work out just how accurate, reliable or interconnected it really is.
But then, what would I know, I am not an economist.
January 28th, 2010 at 1:32 pm
@ Shorts,You underline whats gone wrong with this country!You have got a good deal,but why do you have to gloat?Enjoy your new place,we are all pleased for you.
January 28th, 2010 at 2:48 pm
Chris
One thing that Bernard and other commentators did say back in FEB/MAR last year was that 5 year rates under 6% was extremely good value. I think Bernard said in his brother in law guide at the time that 5yr rates would not go lower than 5.5% and now was a great time to lock in. So not luck just reading the blogs and making a decision.
January 28th, 2010 at 2:56 pm
what would be the ultimate gloat then,instead of a 300k mortgage at 5.95% maybe mortgage free and 300k in laddered bonds?
January 28th, 2010 at 3:15 pm
The gloat in getting it right by fixing, was only if you weren’t going to sell… those that decide to sell in that period will have the bank gloating on break free.. And there are many who should be selling while prices are still high.
January 28th, 2010 at 3:23 pm
B – The bank will pay you to break a 5 year 5.95% fixed loan if you ask right.
January 28th, 2010 at 4:38 pm
“Sure. Could you then consider the reduced debt servicing cost (due to lower debt growth) as ‘income growth’? Maybe some people sell assets (maybe financed…) too and reduce their load on outgoings that now can be spent? Does retail spending data show also any tourist generated sales? (I don’t know)”
Yes, yes, and yes.
However, it doesn’t change the conclusion that, with the data we have, retail sales have been surprisingly strong in December. And it also doesn’t change the fact that this has occurred while people have been paying back debt.
I like your point about tourism – as this would increase sales without people here spending. But tourist number growth has been pretty weak as well, suggesting that this isn’t really what’s driving it. As a result, for some reason, income growth appears to be stronger then many people would have expected.
“Besides, I tend to be cautious when looking at ANY data that gets bandied about, as it is so incredibly difficult to work out just how accurate, reliable or interconnected it really is.”
Agreed. But it is better to use the data and recognise the issue then to work off conjecture. When I commented I was stating that the electronic card series is a better, and earlier, indicator of retail sales then credit card sales.
January 28th, 2010 at 4:51 pm
RE Interest rates to fix or not fix.
This from Bernard’s nemesis:
Over the next two years our forecasts for the official cash rate imply sitting on the floating mortgage rate will
give an all up cost of about 7.2%. The two year fixed lending rate is exactly that. Once again I might toss a
coin between the two.
Over the next three years – well frankly forecasting for the floating rate average gets into pure guesswork
territory. But if our forecasts prove correct (lol as they say) the floating rate will average about 8%. The three
year fixed rate is currently 7.95%.
This is actually quite cool! For all three terms the fixed rate equals the forecast floating rate cost. So, if I were
a borrower contemplating a mortgage I won’t be paying off for many years what would I do? Personally I
would float and use the cash flow benefit to get the principal down on my mortgage as much as possible
before the floating rate kicks up. I am near 100% certain nothing will push me to fix three years or beyond
over the next 2-3 years and fixing two years is also very unlikely given the rate jump from floating that would
involve. BUT, I would keep a close eye on where the markets are going and see a strong probability that I
could fix one year or even 18 months sometime in the first half of the year if we are close to the floating rate
starting to rise and if I could lock in a fixed rate at current levels.
January 28th, 2010 at 6:12 pm
5.95% fixed for 5 years with the BNZ early last year looked like a good move but their Total Money floating rate is only 5.59% so for the first year there was no need to fix. But had you waited until now to fix for 4 years it would cost you 8.4% and 5 years now would cost 8.75%.
What will the next 4 years hold if you are still fixed at 5.95% – will floating stay under 6% for the next 2 or 3 years?
If so property prices will probably rise and those who are fixed at 5.95% will be pretty pleased.
January 29th, 2010 at 8:32 am
Ian – Actually you are what’s wrong with this country – no sense of humour with a generous helping of envy.