Pressure on the Government to do its bit to stimulate the economy likely to increase, with the Reserve Bank expected to cut interest rates even lower

Pressure on the Government to do its bit to stimulate the economy likely to increase, with the Reserve Bank expected to cut interest rates even lower

By Jenée Tibshraeny

The Government can expect to come under the spotlight as much as the Governor of the Reserve Bank (RBNZ) this week.

The RBNZ’s Monetary Policy Committee (MPC) is widely expected to cut the Official Cash Rate (OCR) by 25 basis points on Wednesday to a new record low of 1.25%.

With the review to be accompanied by a Monetary Policy Statement (released quarterly), economic observers will be looking for hints as to the Committee’s next move.

Central banks around the world have cut interest rates since the last OCR cut and Monetary Policy Statement release in May, and the state of the domestic economy has deteriorated. So the focus will be on when the MPC will cut again and how many cuts are on the horizon.

Economists less than a year ago thought interest rates were going up. But further to ANZ’s chief economist Sharon Zollner raising eyebrows before Christmas by forecasting cuts down to 1% by 2020, her counterparts at other organisations have slowly changed their tunes.

Now economists from most of the major banks see Wednesday’s cut being followed by another one in November, if not earlier.  

There isn’t enough fire power in the economy to boost prices to the RBNZ’s target inflation range. And while the labour market (a lagging economic indicator) has been tight, the outlook isn't great.

What’s more, if the RBNZ doesn’t to some extent follow a similar trajectory to other central banks, there’s a risk the New Zealand dollar will shoot up, making New Zealand goods relatively expensive, and thus harming exporters.

ASB economists noted the reason the dollar hasn't been higher, particularly after the US’s Federal Reserve cut interest rates last week for the first time in 11 years, is because markets expect the RBNZ to likewise trim rates.

As the RBNZ uses the monetary policy tools it has to stimulate the economy, the Government should expect to come under further scrutiny over whether it’s doing its bit to boost growth.

Question marks over extent of capacity constraints

Finance Minister Grant Robertson allocated more money to new spending initiatives than expected in Budget 2019 while sticking to his Budget Responsibility Rules.

Unsurprisingly, he was criticised by those in the “quality over quantity” (largely National Party) camp for not allocating money to the right areas.

Meanwhile he copped flak from others for not making better use of the low interest rate environment to borrow more to invest in infrastructure needed to boost growth and improve productivity.

Robertson leaned on capacity constraints - IE low unemployment and the RBNZ’s output gap measure showing the economy was largely producing everything it could - to swat away some of these claims.

Motu Economic and Public Policy senior fellow, Arthur Grimes, was among those to make the argument that Robertson couldn’t borrow more because he’d struggle to get the money out the door.

However ASB economists questioned whether there was in fact more slack in the labour market than the headline figures suggested.

“The Reserve Bank of Australia recently changed its view about the degree of slack in the Australian labour market,” they said.

“It’s lowering of the estimated ‘full employment’ rate to around 4.5% implied there was much more spare capacity in the labour market than previously thought, given the prevailing unemployment rate of over 5%.

“This was key in the RBA’s decision to lower its cash rate 50bps over June and July.”

Scrutinising New Zealand’s June quarter labour market figures out on Tuesday will therefore be crucial.

If the RBNZ gives a stronger indication than it did in its May Monetary Policy Statement that there is in fact more slack in the labour market, then the focus will turn back to Robertson.

Yes, there are capacity and capability pressures, but should the Government up the ante on the borrowing front, do more to over-ride planning rules stymying development and bring in the labour required to get the job done?

Should Robertson look past the political fallout that would ensue if he broke his self-imposed budget responsibility rules and brought forward the broadening of his net Crown debt target to a range of between 15% and 25% of gross domestic product from 2021/22 to 2019/20?

Robertson avoided putting his foot in it ahead of seeing the labour figures, when interest.co.nz on Thursday asked him whether he believed there were more people available to build roads, railways, etc than the figures would suggest.

“We’ll look at what the participation rate figures are, and clearly I think there may be some. But equally we know that if we’re going to be able to meet the needs the government has, that will be a mix of us training, re-training and migration as well,” he said.

Flogging a dead horse 

Kiwibank chief economist Jarrod Kerr believed the “austerity” approach taken since the 2008 global financial crisis wasn't doing enough to truly get economies out of the doldrums.

He said interest rate cuts are meant to encourage public and private investment, but a lack of fiscal stimulus had drawn out the recovery.

Kerr said you didn’t want to wait for people to be laid off before recognising there is free capacity.

“Where there’s a will, there’s a way. Where there’s a problem, there should be a solution,” he said, singing very loudly off the, ‘We need more fiscal stimulus’ song sheet.

While Infometrics economist Brad Olsen isn’t as much of an advocate for more government spending as Kerr is, he noted: “There’s a lack of pass-through of the OCR to retail rates, with May’s 25bps cut only taking the floating mortgage rate down 12bp.

“The gap between the floating rate and the OCR continues to increase, highlighting the reduced effectiveness of lowering the OCR.

“Even though retail interest rates will continue to fall if the OCR is cut lower, a) it’s not all going to be passed on and b) it’s not going to make much difference to decision-making anyway, with uncertainty holding back business investment, rather than borrowing costs.”

While RBNZ Governor Adrian Orr is known to sport an undone top button, it might be Robertson who gets a bit hot around the collar this week.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Excellent piece Jenee, and good to get commentary from the best economists out there in NZ

I wonder if the reserve banks around the world are creating interest rate deflation effects by constantly tinkering with interest rates and constantly implying they will move them further down. Why borrow and spend now when the RBNZ is telling us there are more drops coming?
Maybe a big 1% drop would be better than 4x0.25% drops.

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Rate cuts are essentially the monetary equivalent of doctors using leaches back in the day. It will never fix what they are wanting it to because it can’t, but they will still use them out of ignorance.

“The Reserve Bank of Australia recently changed its view about the degree of slack in the Australian labour market,” they said.

Because the figures have always been BS, since about the 80s: https://duganotherhole.home.blog/2019/07/15/unemployment-stats-are-a-myth/

The question for me is about timing rather than the use of fiscal stimulus and what fiscal measures might be helpful to dampen the effects of the deflating property bubble.

Essentially there are only two measures the government can take ~ additional infrastructure spending and tax cuts.

To be effective the infrastructure spending would need to soak up the demand in the construction sector so a huge building program of state housing should do the trick.

Re tax cuts, if those measures are targeted at the lower rate tax bands then everyone benefit and proportional to income, the lower paid folks get more.

But it needs to be done in the context of allowing house prices to still deflate to a reasonable multiple of earnings and without ballooning national debt.

Somewhat of a conundrum.

Agree

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What difference do interest rate cuts make to the growing number of people who do not own their own homes, it is hardly going to stimulate any activity among them.

Trickle down from current borrowers and cheaper debt if they want to borrow.

I've said it before and I'll say it again, the only thing that trickles down is warm and yellow

Clearly haven't tried eating raw chicken. Think you point still stands though.

I suspect most "trickle down" goes overseas. Maybe we need to set up an Audi factory?

The cuts are coming and we know it and there will be many, thats why the spending isn't filtering into the economy...just wait till its even cheaper then act i.e. after the next cut or maybe the one after that... Funny thing is its exactly what Japan has been doing for over 30 years...such a forward thinking people...

If Labour run a deficit they will not be voted back in. They know it, National knows it, and the electorate knows it. Why don't political commentators know it?

Not sure about that. If they have a good rationale for the deficit, and people understand that it's to retain jobs etc.
But I see your point.The problem of course comes back to politics. A deficit is like an admission of failure. Even though it's not necessarily failure - because as we all know economies are subject to a lot of factors other than govt policy

... people snarled up in Orc Land traffic jams will be more resentful of this government for cancelling the roading projects that promised to free up congestion ...

Those projects were a good rationale for a deficit , 'cos they would have improved our efficiencies , and made us feel good .. the alternative we're being pushed towards is public transport. . Ha ha .

Gummy - take a wee looksy at these stats and let me know if you think building more roads is going to solve 'Orc Lands' traffic jams.

https://en.wikipedia.org/wiki/Modal_share

Or if you think public transport might have a better chance.

Check out the difference between Auckland and Osaka.

... the economies of scale for public transport tilt towards large metropolitan areas such as Osaka , 19 million people ... versus tiny towns , as Orc Land is ... 1 and a half million ...

That is true, but - you didn't answer the question...

Is building more roads going to help ease Orc Lands congestion?

presumably it does? is there controversy about that?

If you run a deficit in the short term in order to run a surplus or at least balance over the long term surely thats a win? Anyway with fractional banking any government can issue virtually limitless debt although the global financialists wouldn't like us doing that because we wouldn't pay back the debt we already owe them....

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Part of the reason why it is difficult to stimulate the economy is due to still having an excessively high cost of living within our main cities (Auckland and Wellington). This makes it difficult for companies to recruit staff, since they have to give them much larger wages so they can afford to live. This is particularly bad for the tech sector which is vital for any modern economy to grow.

So countries that were thinking they were doing so well, attracting lots over overseas money in to their housing markets and massively over inflating them are now left struggling to build "real economies" since a lot of companies had to move out due to folding from the high cost of living.
Here's an example from Canada with wages similar to ours in the tech sector for Vancouver: Better Dwelling article - Vancouver’s Tech Scene Shows Just How F**ked Up The City’s Real Estate Is
https://betterdwelling.com/city/vancouver/vancouver-tech-scene-shows-jus...
Here's how they're doing now: Canadian Household Debt Tops $2.2 Trillion, But Growth Drops To 1983 Levels
https://betterdwelling.com/canadian-household-debt-tops-2-2-trillion-but...

It's a very good point, although one we have known about for a long time.
Pity politicians around the world have paid lip service to it, ey?
We've been taken for one big ride

Yep very true, though I would give credit to our current government for trying to put the breaks on the 'false economy ' of overseas money pouring in to none performing assets = housing market which massively increases cost of living. Now we need to focus on rebuilding our 'real economies ' particularly in technology and entertainment that can bring in huge revenues to NZ. Such as the new $1.5billion Lord of the Rings TV series that will replace Game of Thrones, is currently being filmed in Auckland. There's and even bigger revenue generating tech industry called Computer Games, but sadly that gets little to no support within NZ. Did you know that the Games Industry makes more money than Film, TV and Music industries put together. https://metro.co.uk/2019/01/03/video-games-now-popular-music-movies-comb...

The governance of this country between 1990 and 2017 left a lot to be desired. Note this includes Labour led governments.
It was usually about short termism and kicking the can down the road. It's all catching up with us now

We did get kiwisaver, superfund, kiwibank during this period, all rather forward thinking? I do agree with your comment though. How do you get a government to think long term if they are only voted in for 3 years?

I agree with the sentiment, but that article on the Vancouver tech scene has bogus average tech worker salaries so isn't credible.

.. over the past 2 decades our governments have been prudent in keeping their debt levels low ...

The slack in the economy has been taken up by the private sector . . with the generosity of the Aussie banks we have borrowed hundreds of billions ... and piled it into creating a housing bubble ... and a dairy industry river of white gold ...

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Economies that live by Houses will die by Houses...

Spot on, guess who is teetering at the top! Bloomberg article: These Are the Countries Most at Risk of Housing Bubbles
https://www.bloomberg.com/news/articles/2019-07-12/canada-new-zealand-sh...

Fox business news raises the possibility of abolishing the US Federal Reserve Bank - Video Link- 5.10 mins/secs

I cannot say I disagree. - I would gladly encourage the transfer of short term money price discovery mechanisms to market participant control, and therefore beyond government entity diktat.

Whoa. Hold on. Did you say the US Federal Reserve Bank is a government entity?

So where do these crazy so called stimulus programs end. Zero interest rates ? Printing vast sums of money ? Cash handouts which must be spent within a limited time frame? We are so far down the slope with this its become almost impossible to reverse. We will eventually destroy the moneyness of money. Economies have recessions and always will the further the can is kicked down the road the greater the ultimate pain

. sub zero if you live in Japan ... they give you back less than the capital amount you loaned ...

WTF ! .. we're on the cusp of 100 % pure economic insanity . ..

Its not insanity if you are willing to accept a new paradigm. If you asked your grandparents in 1936 if the believed the government would sell nearly all the countrys public assets by the end of the century they'd have thought you bonkers. Our limits to addressing financial difficulty are only limited by how we think to solve them...

Insanity and people believing in it are not mutually exclusive.

Maybe we should just give people lots of money and houses. Sounds like a new orthodoxy. We're almost there...we'll soon be pushing them to take money.

So I guess we can just have fun in predicting the pass through to the consumer. If the next rate cut is 0.25% then I recon about 0.05% actual effect on the floating rate. When the OCR gets to 1% then thats the end of the line, no ammunition left so this current government better come up with a better solution for raising poor confidence in the market.

Yeah so those hoping that ocr cuts may prop up housing might be a bit disappointed

If nations continue to reduce interest rates to zero and negative and debase their currencies, may be cryptos will be seen as a better alternative ? Is there a crypto lobby emerging ?

Why not introduce some kind of DTI ratio for property investment while cutting interest? That way they don't have to worry about inflating the housing bubble, but can still cut further if needed.

Tax cuts.

Yes on Tobacco, that money injection would reduce poverty and flow through to the real economy.

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Are we not trying to create wealth, long term prosperity. To do that we need to make, grow or mine stuff. Why is our productivity so low?
To get that production up you need investment in productive assets not speculative bets on housing.

So all you have to do is make creativity and innovation pay, for that you need low entry costs. There is always the risk of failure, which is why we always stick with houses because you never lose on houses, try borrowing for a business with council regulation/compliance, overpriced rents, and banks who want your house a s security.
We need to go though some short term pain as assets correct but with the potential for long term gain. Low interest rates are keeping the mal-investment alive but killing the rest of our economy. We are after short term gains with long term pain.

Remember Monty Pythons " the Meaning of Life " .. as you recall the enormously obese Mr Creosote waddling into the French restaurant , imagine that he is the great Kiwi borrowing public , the gluttons , full of debt .... reaching the point of not being able to take anymore ...

" Go on " cajole the Aussie banks .. " just a little more , one more loan ... a small sliver of an extension to your line of credit " ... and how does that scene play out ... hmmm ?

Plenty of room for more debt, its how the whole monetary system works and keeps going. Look at the USA, they just keep kicking the debt can down the road. Should it somehow all end, its going to end really badly and will affect everyone. I try not to think about it, which is precisely what most people are doing, living in hope its life as usual.

As usual the refrain will be..'This time it is different' ?

The Americans keep kicking the sovereign debt can down the road - the personal debt can I believe has been shrinking.

What Jenée Tibshraeny fails to mention is that New Zealand consistently runs a trade deficient. As a whole lower interest rates, the weakening of the NZD is bad for MOST New Zealanders.

Yeah. But, cut they will.........
????

Not only are RBNZ interest cuts ineffective in this very low range, we should cease this incessant waffle about fine tuning the rate to somehow 'manage the economy'. We should let it be and let the economic signals work.

Mmt is of course outrageous voodoo macro but you know, governments should really use fiscal policy as monetary policy is pretty useless...

First they ignore you, then they mock you...

The OCR targetting is far too myopic. Imagine if the CPI went up 20% in a year - there's be all round panic and stupidly high interest rates. Yet housing increases 20+% and all is well - interest rates are lowered even more. So basically creation of currency (i.e. inflation) is perfectly ok if it pumps up asset prices. See anything wrong here?