ASB economists don't believe the recent mood shift in financial markets and say the economic evidence points to a need for the Reserve Bank to make further interest rate cuts

ASB economists don't believe the recent mood shift in financial markets and say the economic evidence points to a need for the Reserve Bank to make further interest rate cuts

Ignore the recent market chatter. The Reserve Bank WILL cut the Official Cash Rate next week and follow up again with another cut in February, according to the ASB economists. 

And Kiwibank economists say they still believe "the path of least regret" for the RBNZ is to stimulate now, as it's easier to tighten later.

"Waiting and hoping has proved ineffective in the post-GFC era, and as the RBNZ Governor noted, doing more now should mean doing less later," Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman said.

Until a week or two back it had seemed a sure fire thing (according to financial markets pricing) that the RBNZ would follow its monster 50 basis points cut to the OCR (taking it down to 1%) with another cut of at least 25 bps when it next makes a rates call on Wednesday, November 13.

But some recent more benign economic news and some reported comments from the RBNZ have suggested maybe a changing mood. Westpac economists officially changed their call last week and said the RBNZ would hold fire next week. 

BNZ economists said recent RBNZ comments had injected uncertainty into what the central bank would say and do next week.

In ASB's Economic Weekly publication, chief economist Nick Tuffley said he had attended a speech at the CBA Global Markets conference in Sydney by RBNZ Assistant Governor Christian Hawkesby last week. The speech was entitled: “Speaking, listening and understanding: The art of monetary policy communications”.

"An irony of this speech is that it showed how different listeners interpret the same communication," Tuffley says.

"Having listened to the speech in person and read the text later, my interpretation was that there were few implications for the market’s view of what the RBNZ would do in the future.

"However, one local bank said the speech made it wonder if the RBNZ was now less committed to a 25bp OCR cut this month, and that if it was unhappy with the (then) deep pricing of a November cut then it needed to more explicit about fact. Coincidentally (or not) another bank delayed its expectation of an OCR cut from November until February. All up and for various reasons, market pricing of a November OCR cut moved from 22bp before the speech was released to 13bp by the end of the week – implying a 50:50 chance."

Tuffley says a key line from the Hawkesby speech was as follows:

“In this scenario there is a danger that markets end up paying too much attention to our communications for what we have said ‘we will do’, leaving no one left to analyse the incoming economic data for what ‘we should do’. As a central banker, I am far more interested in listening to what ‘we should do’.” 

Tuffley says at the "risk of sowing further confusion", here is his interpretation of the comments:

"The RBNZ signals a particular course of action with its statements and forecasts. But, if the subsequent flow of events suggests the RBNZ should instead adjust its outlook, then people need to focus on the implications of those events rather than stay fixated on what the RBNZ has implied in the past it will do."

In other words, Tuffley says, don’t blindly follow what the RBNZ has said in the past it will do, be sure to update your view based on events. A different RBNZ decision may have become more appropriate instead of what has been previously signalled.

"So what do we think it is appropriate for the RBNZ to do?

"Keep cutting the OCR, by 25bp this month and in February."

Tuffley gives the following points in support of his reasoning:

  • Business confidence is overall weaker, particularly businesses’ view of their own activity outlook, since the RBNZ last published its economic growth forecasts;
  • ASB economist's growth forecasts have been pulled down considerably since the August MPS and are substantially weaker than the RBNZ’s, and other forecasters have similarly slashed their forecasts;
  • Although Q3 headline inflation was marginally higher than RBNZ expectations, some of the causes were increases in government charges and a surprisingly sharp lift in domestic airfares;
  • The RBNZ has yet to factor in the economic impact of its increased bank capital requirements, which even by its own calculations will impact on bank customer interest rates by 20-40bp. 

Tuffley says much of the RBNZ’s upcoming decision will depend on the extent to which it revises down its own growth outlook.

"The more it does, the slower the build-up in inflation pressure, and the greater the need for more stimulus."

Tuffley says there's also labour market data releases to get through this week (Wednesday, 6th), which could alter the balance of risks.

"But, given the wobbliness of the surveys, the RBNZ is likely to be careful in placing too much weight on them."

However, Westpac economists on Monday reiterated that they don’t think that there is enough "accumulated evidence" to prompt a further rate cut at this stage.

"However, the RBNZ will keep the door open for further easing, and we do expect a cut in February next year based on a renewed deterioration in global conditions."

BNZ senior economist Doug Steel said the BNZ economists don’t think there is any need for a rate cut "at this juncture".

"This should come as no surprise to our regular readers. But, by the same token, if the RBNZ sticks to the decision making framework it has made plain, we think it will feel compelled to ease policy further." 


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Hasn't worked yet but it'll work next time.

Death by a thousand cuts.

All this cheap money is bliss......

Bring it on!


Yep. More and more cheap debt....lovely! What could possibly go wrong? (PS: You reckon what we see today is cheap? We ain't seen nuthin' yet...The further down the debt hole we go, the worse The Reckoning is gonna be...)

So to be clear here it is peoples choice to borrow "insane" amounts at the new "normal" ie there is no law or regulation that says you have to borrow so we (well not me) choose to walk down the path. Of course when a reckoning does occur those such as myself who chose not to have debt right now will be ensnared in the losses brought about by such stupidity.

Ahum, you might want to read this:

ANZ "stress-tested" its Australian home loan book to see what would happen over a three-year period if consumer spending and business investment were to slump sharply, leading to eight consecutive quarters of negative economic growth.

Under ANZ's parameters, real growth would slump to zero in year one, and then the economy would contract by 4.7 per cent in year two, and by 0.6 per cent in year three.

Not surprisingly, the souring economy would devastate the labour market, with unemployment climbing to 5.5 per cent in year one, 9.8 per cent in year two, and 10.5 per cent in year three.

Under the ANZ scenario, this sharp deterioration in the labour market would result in a savage slide in housing prices, even though official interest rates would fall to zero.

According to the ANZ stress test, house prices would decline by a shocking 32.3 per cent in year one. The deterioration would continue in the second year, with the cumulative fall in house prices reaching 38.8 per cent. A modest recovery in house prices in the third year would leave them down by a cumulative 31.7 per cent.

Yes, it refers to Australia, but can easily apply here.

they are lying, house prices only go up, irrespective of the situation...

That's a probable prediction of what could happen in case of an economic downturn.
House prices in Perth are 22% down from its mid-2014 peak.

Low to mid-range properties in urban WA have seen smaller falls while higher end, inner-city properties (apartments) should bear the majority of brunt of a collapse.

Do you want to have your assets priced in something cheap?. Soon we will have negative interest rates, so it will be more transparent that we have been be valuing assets in money that becomes worth less the longer you hold it, so time considered is fundamentally worthless. This is a currency crisis.

Its not cheap money, its cheap debt, and it may only be cheap for as long as your rate fix lasts..

TTP you do realize you're championing the complete disintegration of the financial system in exchange for some can kicking in the mid term?

Luckily we have the Banks ASB and ANZ and the other Capital makers running our Country, so they can get away with others graft and the charges will never stick. Quite why we have anyone being payed when others dictate is a complete waste of time and speculators desires. Cash conjurors one and all.

It used to be a crime manipulating things in ones favour, but it must be that Mr Orr is just favourable and doing the bidding of the Aussie Banks, long term. Second guessing what is going to fail and fall is a House of Cards, but some hold the Aces in a stacked deck and a leaking OCR bet.

I am curious, the alternative is?

Bull run to its climax, responsibilities comes later or just do a runner.

Bleed it until we die ay?
Old Man: "I wish I was 40 years younger with mortgage rates the way they are."
Young Man: ''I wish I was 40 years older with house prices the way they are.''
Listening Child: ''Stop bitching the both of you & get back to work.''


Lessons in economics should include learning about lemmings. Would any economist like to point to a nation where continuing cuts to already low interest rates is stimulating growth? Surely there's an example to use. Or is this theory all there is in the text book?

Exactly!!! - the US being a prime example.

The Federal Open Market Committee (FOMC) judges that an annual increase in inflation of 2 percent in the price index for personal consumption expenditures (PCE), produced by the Department of Commerce, is most consistent over the longer run with the Federal Reserve’s mandate for maximum employment and price stability.

And the latest release is 1.3% for the year ending September 21019- courtesy of the BEA

"The definition of insanity is repeating the same mistakes over and over again and expecting different results,"

Yes and it shows you have never opened a book on economics nor studied history.

What you should be asking is, why is it that such a standard response is not reversing a decline in economic growth let alone actual growth.

DONT! Even fed funds rate is higher

Do it! Even the ECB rate is lower.

Is there a reason the ECB is lower ... ?

Yes, apparently:

Finally, for those curious if the authorities will stop at anything to destroy the currency and send rates to even more negative levels if it means kicking the can on a global, populist uprising, by just a few months, weeks or days, here is the answer: "We should be happier to have a job than to have our savings protected," said Lagarde.

"I think that it is in this spirit that monetary policy has been decided by my predecessors and I think they made quite a beneficial choice." Link

In other words, the ECB is confident it's made good progress in ruining the 1000s of successful community banks that ensured job creation & growth in Europe in the past 200 years, but it hasn't quite finished them off. (Soon to come, when ECB bursts its property bubble in Germany Link

She is correct, maybe try and fathom what she is saying and her fear of where we could go.

Yes, if that's the calculation it's the correct choice. Mass unemployment has worse consequences than eating into the savings of the wealthy and retirees does.
Unless you end up with the mass unemployment anyway...

Is there a reason the FED is higher ... ?

Cut will only make bubble bigger. We just need to sort the rotten apples from the good ones, but probably they all rotten now, no apple is staying okay for that long. Unless they in a can.

I still dont understand why they are reducing interest rates ?

The economy is at almost full employment , GDP is growing , inflation is benign , and there is already too much debt around in the private sector .

Why cut ? Just watch this and it might help you understand

Boatman - As I see it they feel they need to cut as business intentions of investment are so bad future growth rates will suffer. Rightfully or not business does not trust the COL, they see them as naive, anti business, driven by ideology and a social agenda. Greenies and Lefties with NO understanding of business.

Consumer confidence has bounced and is riding high. Business confidence is on the turn so just a matter of time for investment intentions to do their thing. (Adrian Orr) there is no need to cut interest rates ... giving an addict more drug does not cure the dependency.

Yep, this global disinflation is definitely happening because bankers around the world don't trust Jacinda. For sure. The ECB carefully consult NZ Greens policy on waterways before deciding whether to go deeper negative on rates in the next round...

Shoreman, central banks are cutting rates worldwide, which makes your point somewhat invalid. I do agree that the Greens have no understanding or regard for what pays for our infrastructure, healthcare and so on. Julie-Ann Genter and Chloe Swarbrick are two very good reasons to hope National can find an effective leader.

The OCR is rendering itself useless against interest rates hikes

and why do we care what a foreign owned bank promotes in its own self interest in order to siphon of more disgustingly exorbitant profits out of NZ????

I have more faith in Adrian Orr to get it right, than past Reserve Bank Governors or for that matter the prostituted economists who work for the overseas owned banksters.

For what its worth, the rate is going nowhere. While importers are suffering, exporters I talk to are doing fine. Remembering that we are an exporting nation, those in charge should be looking after our exporters first and foremost.

Real estate may not be doing so well, however that was to be expected with such a long bull run. Time to pay down debt while interest rates are low, rather than being enticed into more debt by these banksters; who care only for their profits.

This wont be so good news for term deposit holders, as interest rates continue to reduce to keep the banking system in business. The good news is this will reduce the banksters margins, and coupled with their increased capital requirements should see their return on equity come back closer to what it should be.

Might be time for term deposit holders to start spending, and a useful tip would be existing investment maintenance and/or assist your relatives by taking on their debt where appropriate and internalising profits, which would otherwise flow offshore.

Not sure how we are an export economy when almost every year we import more than export

We grow food for 20million people while only having 4.5million people.

Ah cool someone capable of thinking.

The biggest problem for term depositors however is they are typically retired and living off that capital and any interest earned, so spending your "food money" is a bit, well dodgy. Now spending some of that capital to get a bigger return makes sense, eg I just bought an Nissan Leaf EV, I am saving over $4k a year in petrol and maintainance while forgoing about $100 per year in interest from the bank deposit. Next stage is solar panels, if I can get my $200 a month power bill down to say $50 then that's a huge saving also. Of course I am buggered with the rates bill etc, cannot avoid those at a 5~6% growth per year with inflation at 1~2%....

For a few decades there's been a (justified) expectation that retirees with a good nest egg of capital will get substantial income from it.
Is that actually normal, historically speaking?
I realise that people have planned their retirements around this income, but is it actually a reasonable expectation to make risk-free capital returns in a society where wages are not increasing for those still working? If wage growth is say 2%, and safe deposit rates are 3%, the distribution of wealth overall will continue to skew towards those who already hold capital and away from workers without capital... anyway, his name is a curse for most around here, but Marx had a lot to say about *exactly* the situation we are in now (and please don't take that as a naive endorsement of Communism).

So, Banks are on to pressuring RBNZ to cut rates again and again ?
What if he raises them next week ? That would show them who is Boss, aye.

Let's just wait for Wednesday. Everything else is supposition.