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Reserve Bank is indicating that it has now done with any further interest rate cuts unless the impacts of coronavirus prove more long lasting than it currently anticipates; dollar and swap rates up

Reserve Bank is indicating that it has now done with any further interest rate cuts unless the impacts of coronavirus prove more long lasting than it currently anticipates; dollar and swap rates up

The Reserve Bank has kept the Official Cash Rate at 1%, the level it's now been at since August 2019 and is indicating that it has now done with further rate cuts - unless the impacts of the coronavirus prove more long lasting than the RBNZ currently anticipates.

RBNZ Governor Adrian Orr (pictured) noted the emerging risk of the virus outbreak, but said the central bank was currently expecting the economic impact would be short term. However, it had time to adjust monetary policy if the impact proved to be "larger and more persistent" than currently thought.

A key change compared with the last OCR review in November is that the RBNZ has for now removed any suggestion of further potential cuts to OCR in future. As of now the RBNZ is picking an unchanged OCR right through to the March quarter next year and then the possibility of a rise in the June 2021 quarter.

In fact the RBNZ is now picking a full 25 basis points increase to the Official Cash Rate by the end of next year.

In an undoubted reaction to this shift in tone, the Kiwi dollar rose sharply, by about three-quarters of a cent to US64.75 cents. Wholesale interest rates rose sharply too with, for example, the two-year swap rate climbing 11 basis points to 1.19%.

The RBNZ finalised the projections contained in its new Monetary Policy Statement on February 5.

At this stage the RBNZ is projecting a 0.3 percentage point hit to New Zealand's March quarter GDP as a result of coronavirus. It is predicting 0.4% GDP growth for the quarter (so would have been 0.7% without the virus impact). This is actually a rather more benign projection of the impact than many of the country's economists have come up with.

BNZ head of research Stephen Toplis said taking everything into consideration, the BNZ economists see no reason to change their view that the OCR is on hold until the first quarter of 2022.

"Risks are two way. In the event the coronavirus gets really nasty, in a GDP growth sense, it is reasonable to assume the RBNZ would cut the cash rate in May or August. On the flip side, if the coronavirus’ impacts are short-lived and a fiscal easing is announced, at budget time [May 14}, then a rate increase in the first quarter of next year will look increasingly likely and might be accompanied by a more aggressive rate track thereafter than we have currently assumed.

"In terms of the next [RBNZ Monetary Policy Committee] meeting, 25 March, we think it unlikely that there will be sufficient new data, or clarity around the coronavirus, for the RBNZ to shift rates albeit that its views on risk may well shift slightly."

The RBNZ says its projections incorporate a coronavirus scenario where there is no substantial outbreak in New Zealand and the outbreak overseas is beginning to be contained by the end of February 2020.

The key assumptions underpinning the scenario are:

  • GDP growth is 0.3 percentage points lower than otherwise in the March 2020 quarter. Lower export volumes are partly offset by a decline in import volumes and higher inventories.
  • Service exports are 4% lower and goods exports are around 0.5% lower in the March 2020 quarter. Both gradually recover to their original levels by the December 2020 quarter. This is consistent with direct disruptions to travel lasting 6 weeks.
  • Export prices are around 0.5% lower over the projection period, mainly reflecting the recent decline in whole milk powder prices.
  • The New Zealand dollar Trade Weighted Index depreciated following the coronavirus outbreak. We assume it appreciates to 72 and remains around that level over the projection period. This is consistent with our assumption that the outbreak starts to be contained by the end of February.
  • Oil prices are assumed to be around USD 60 per barrel over the projection.

This is the RBNZ's media statement:

The Monetary Policy Committee has decided to keep the Official Cash Rate (OCR) at 1.0 percent.

Employment is at or slightly above its maximum sustainable level while consumer price inflation is close to the 2 percent mid-point of our target range. Low interest rates remain necessary to keep employment and inflation around target.

Economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade. The outlook for government investment is stronger following the Government’s announcements in December. There are also indications household spending growth will increase.

However, soft momentum in economic growth has continued into early 2020. Slower global growth over 2019 acted as a headwind to domestic growth. In addition, competitive pressures and recent subdued business confidence have suppressed business investment.

The global economic environment has shown signs of stabilising and trade tensions have receded somewhat. However, the COVID-19 (coronavirus) outbreak is an emerging downside risk.

We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020. Nevertheless, some sectors are being significantly affected. There is a risk that the impact will be larger and more persistent. Monetary policy has time to adjust if needed as more information becomes available.

Meitaki, thanks.

Summary Record of Meeting - February 2020 Statement

The Monetary Policy Committee noted that employment was at or slightly above its maximum sustainable level while consumer price inflation was close to the 2 percent target mid-point. The Committee agreed that low interest rates had helped to get employment and inflation to around their target levels.

The Committee agreed that recent developments were consistent with continuing to meet their inflation and employment objectives, but the coronavirus situation was a complicating factor given how quickly it was changing and the limited information available.

The Committee discussed the reasons for an expected pick-up in growth over 2020, including monetary and fiscal stimulus and the high terms of trade.

The members noted the Government’s announcement in December that it plans to invest more over the projection period. The Committee discussed that the impact of fiscal stimulus could be greater than assumed. This risk was balanced by potential delays in implementing approved spending and investment programmes.

The Committee noted that household spending growth was expected to accelerate due to lower interest rates and rising household wealth. Some members noted that the increase in consumption growth could be more persistent than projected.

The members noted that the high terms of trade has partly offset the effect of slower trading-partner growth on the New Zealand economy. Some members noted that export prices could ease by more than projected given some of the temporary factors lifting meat and dairy prices.

The Committee noted the strong labour market, and agreed it was an expected outcome of monetary stimulus. The members discussed the contribution of the tight labour market to wage pressure and any flow on to consumer price inflation, and noted the effects of recent minimum wage increases, pay equity settlements, and large collective agreements in public sector. Some members noted the potential for further upward wage pressure.

Although GDP growth was expected to rise, some members noted downside risks to near-term production.

The members noted the signs of stabilisation in global growth and that trade tensions had receded somewhat. However, they noted these signs were early and tentative and they agreed the coronavirus outbreak was a risk to global growth in 2020.

The Committee discussed the challenges facing the rural sector and the impact on the rest of the economy. The members noted the changes to environment policy, tightening credit conditions over 2019, recent dry conditions in parts of the North Island, floods in Southland, and the coronavirus outbreak. The members discussed how these challenges could dampen economic activity.

The members discussed the business investment outlook and noted that business sentiment remains low despite its recent improvement. The members noted that stretched capacity in the construction sector could see government projects compete resources away from the private sector, but they also noted the opportunities that new infrastructure creates for total investment. The members noted upside and downside risks to the business investment outlook.

The Committee discussed the initial assumption that the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration. The members acknowledged that some sectors were being significantly affected. They noted that their understanding of the duration and impact of the outbreak was changing quickly. The Committee discussed the monetary policy implications if the impacts of the outbreak were larger and more persistent than assumed and agreed that monetary policy had time to adjust if needed as more information became available.

The Committee discussed financial stability risks from ongoing low rates. The members noted the Bank’s assessment that marginal changes to the OCR would not materially affect these risks at this time.

The members discussed the better mix of policy stimulus in the projections, given additional fiscal stimulus is reducing the burden on monetary policy.

The Committee discussed alternative OCR settings and the various trade-offs involved. The Committee agreed that ongoing low interest rates were needed to keep inflation and employment close to their mandated targets.

The Committee reached a consensus to keep the OCR at 1.0 percent.

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We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020.

A rather broad assumption. Nevertheless, these are our people 'in high and important places' and we bow to their collective wisdom and good judgment.

and proven track record....

Yes. Important to remember that in Anglo Saxonia central bank policy always seems to work how it was intended (well Greenspan admitted his weaknesses but we've moved on from there).

Hi J.C.

Would you rather the DGM ran our central bank - given their track-record in forecasting?


If an actual DGM ran monetary policy we’d be at negative interest rates already, which would cause house prices to inflate ever further. So what’s your point again?

If the people TP is referring to were running the central banks they never would have tried to use monetary policy to borrow from the future to avoid the natural market cycles. Thus houses would be more affordable and zombie companies back in the grave.

The question is whether the monetary policy approach that has been used can actually work in the long term or whether the piper has to be paid.

Well put Rick.

I always listen to government wisdom, rather than internet trolls selling clickbait fake news.


"The Committee noted that household spending growth was expected to accelerate due to lower interest rates and rising household wealth". Translation: as long as house prices don't tank, we should be able to keep this thing on the road. So the New Zealand economy gets a new WOF..

But no mention of the economic benefits of more tens of thousands of immigrants? Surely there are benefits? They had a good look under the bonnet? Nothing firing there?

Why don’t we ever question the 2% inflation target more regularly? Like let’s just pick a new number like 4% that will keep capital asset values a bit lower, debt lower, unemployment in the long run shouldn’t be impacted if the right signals are made by Government/Reserve bank (according to Phillips Curve theory...)

Didn’t Don Brash just have two beers one night and thought two percent will be about right? (and the rest of the world followed our 2% inflation target)?

A higher inflation target reduces asset values, run that past me again????

Everything you have written is garbage.

Inflation isn’t flowing through to wages - but it is to prices of assets (shares/houses).

If inflation is higher, interest rates are higher, debt able to be serviced is lower resulting in lower asset prices.

How expensive were houses in 1980’s when inflation was high?

Take a look at M1/M2 money supply and correlation in house/share prices. Driving down inflation reduces interest rates which drives asset prices up

I can see your reasoning however it's wrong.

To get inflation to move up to 4% the RBNZ would have to cut rates to -0.5% and embark on significant QE - as a minumum. They would need to crash the currency basically - generate both imported inflation and stimulate local non-tradable inflation via pushing up asset prices. House prices would soar.

The world is a very different place to the 1980's.

houses prices are not included in the CPI

That's irrelevant to the debate. They hypothesis was moving inflation target to 4% will reduce asset values and that is not the case.

Or what would happen if oil prices for whatever reason go up significantly, rapidly increasing CPI well above 2% target? Like back up 4-5%. Reserve Bank hasn’t increased money supply/reduced rates, nor QE, yet inflation has increased, so interest rates rise, amount of bank lending decreases, asset prices fall as people can’t service large mortgages at the higher rate.

Things are only different now because we’ve decided we want 2% inflation meaning banks can lend a stack load of money for companies to finance projects and home buyers/landlords/speculators to buy the same houses at much high prices. If interests rates were far higher, those same houses would be selling for far less - regardless of what CPI is being measured

So just to chime in, as house prices / inflation is what I look at all day long (for what it’s worth)

Correlation of house prices to broad money growth is exceptionally strong. Broad money up, property up. Higher inflation target of 4% would just push the currency down, and property prices upward, especially commercial prices as they respond higher to tradable inflation inputs.

The reason property rises over a 30 year cycle has a lot to do with demography (not talking about immigration)

And it has a lot to do with credit - broad money being a component of that

In an upturn you see actually a compression of tradable inflation, and strongly rising property prices + credit. In a downturn, you see weak credit, higher tradable inflation and flat property prices

The reason being a few, one of the more intuitive ones is that foreign entities create claims against NZ banks, which pushes up the currency. Then they leave let’s say, which pushes down the currency. The foreign aspect of financing the credit for property in an upturn actually acts as a reservoir of tradable inflation that is released in a downturn

If you wanted to raise the nominal economy, reduce asset prices and increase inflation, well my suggestion would be a high debt to income ratio, very constraining LVR, and fix the exchange rate to a ceiling that is well under what would be fair value. Imo that’s the only way to do it

Or even better, just lower the retirement age and print money.

It could be done but you wouldn’t want to once you started

Asset prices don’t really trade off inflation figures other than just “too much money in the system” - look at the real returns of resi in the 1980s period, 0.5% p/a in real terms, 20%+ in nominal

Exports drive property price directions - compression of yields (from increased credit) drives the amplitude of the property price cycle


Mr Orr's original forecasts in 2018, saw an OCR at 2 percent by December 2019, absolutely no reduction and GDP cumulatively running about 1.4 percent higher. It would be wonderful if the external members could sit at the head table during the press conference, and be questioned on their forecasting abilities.

Nobody can be held accountable to unforeseen circumstances in the day and age. And I'm not just talking about coronavirus.

You are not too great with the track record of your predictions - remember?
You are fond of sitting back and criticising in hindsight - you assume that this means that you are particularly clever. What you don’t seem to understand is that forecasting is not an exact science; they are based on the then current factors and expectations and that these are forever changing.


1% OCR to RBNZ is like the last piece of cloth to a stripper.

there is not much to cut down or to strip....

The stripper must start shaving their head for negative rates then lol.

Brazilian economic policy?

The Committee noted that household spending growth was expected to accelerate due to lower interest rates and rising household wealth.

Only if the banks continue to lend up to sixty percent of total loans to one third of households for leveraged residential property speculation. And as long as the rising present value of freshly discounted forward liability cash flows doesn't overwhelm these practitioners of GDP non-compliant casino economics.

Banks engage in asset collateralisation, because each bank assumes it cannot influence the price level of the collateral asset. However, if a large proportion of a country's banks engage in increased realestate-related lending, real estate prices will be pushed up according to (4). Due to the fallacy of composition - individual banks take land prices as given, while in effect all banks together influence land prices - there is an externality in the banks' behaviour. Land prices, although driven up by the collective behaviour of banks, are seen as good reason to extend further land-related loans by individual banks. A land 'bubble' is the result. The process is triggered by changed bank behaviour: When a shock renders banks keen to expand their loan books, they can do so by focusing on collateralised loans. As banks raise the loan/valuation ratios (see Muellbauer, 1992, on the UK ), credit constraints are alleviated, collateral prices pushed up and speculative borrowing demand rises. This represents a kind of 'Say's law of credit'; credit supply creates its demand via appreciating collateral values Link

The very underpinnings of trickle down economics.

You do realize what you are saying is basic stuff. 99% of people in the industry understand or already are aware of arguments you present routinely (as if they were your own too I might add).

People aren't as naive as you assume them to be, and its not professional nor polite to be criticizing all the time in this industry. You make no change for the better and simply isolate yourself.

Present a well reasoned case with evidence and then people will really listen and consider, the majority of people in finance are open minded about two ways to think, some people fit in nicely to balance any one-sidedness that can occur, that can be you if you wanted it to be.

But at the moment linking papers that everyone has already read, adds nothing to professional discourse.

edit - stop watching Princes Of Yen too, its obvious thats where all your views originated.

Your name isn't Sheldon is it?

Change the monetary policy "stimulus" songbook and I might change mine.

Since when did I mention monetary policy being a stimulus?

Are you referring to the 50bp cut or other MP concepts the RB is exploring?

I wondered where he got all the editorial he posts, is that where it's from?

I have never viewed Prof Werner's videos or read his books, but I am a student of his academic papers - publications tab

Yes, it’s all from a YouTube video styled conspiracy about monetary policy in Japan.

Its pretty clear this is where Audaxes sources all his work if you look back at all the topics he brings up, he’s just re linking things they talk about there

That’s why I always challenge him on it because he’s just re referencing someone else’s papers that are basically unrelated to the topic at hand.

Watch it and see

Whoa - calm down - I have a wealth of securities trading experience - even my order error /legal slush fund demands an annual veracity confirmation from the bank's auditor.

I personally think you seem motivated only by the desire to appear smart to those who aren’t involved in these areas. Ego

Hence why you just re link others work and palm it off as your own knowledge

I do actually remember your original postings and you tried to sharpen your act by quite a margin right after Te Kooti and I think myself or someone else called you out over basic errors. I believe the topic was on basis swaps at the time

There is a very good observation in finance that when someone who makes money or has some success, and doesn’t know what they’re doing, they then brag about it to others. Your comments just confirm this

A bit like The Man 2 eh?

I obviously catch your attention and demand your analysis of my intentions. That certainly serves my purpose of alerting the elderly and infirm depositors that they are underwriting banks' credit creation schemes and yet they remain deeply under rewarded for the risks taken.

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

Disclosure: I am elderly and a bank depositor.

Yes but you assume you are right in your moral conquest.

That sounds about right JLM. Many of his posts are actually off topic and, if challenged, his understanding is quickly exposed as puddle deep. He seems pretty harmless, though I can only assume his motivation is to present himself as a financial wizard. Even AUDAXES is an industry term for traders who have A$ risk to clear and he's no trader.

so we can expect a .5 cut next meeting

I thought the conference was pretty reasonable. He made good points about the limitations of monetary policy in this situation.

What good will a half point interest rate cut do for a tourism operator who has lost 2 months of forward bookings?

But may they not need to stimulate other parts of the economy to compensate?

Houses. Always houses. Definitely.

I think they are underestimating the virus's economic impact. That could, however, be intentional so as to promote economic confidence.

China is highly proactive in limiting the spread, many that contracted have now recovered, death rate is low in china and even lower outside china. Probably conservative economic estimates but rightly so.

Virology expert reckons the virus will burn out around May with the warmer weather.
Hopefully so, and that will limit the economic damage to first half 2020.

The definition of assume.....making an ASS out of you and ME. What I want to know is what happens to the rates when this virus toasts the international economy. The impact is going to be huge, it will be if its not already huge this is no short term problem. Until a vaccine is found which could take 12 to 18 months we are not out of the woods till then.

Their downplaying of the crisis is just the same as the WHO's of this world. They know it's worse than they are making out, it's all about reducing panic

I doubt Orr is fudging but he is wise to downplay the potential losses... theres nothing that spreads faster than fear. The two "kiwis" stuck on holiday on the cruise ship cant wait to get back to nz ... ironical. Lots more non-NZ nzers are also glad to be repatriated here. Higher immigration eat your heart out PA

Houseworks: the two "kiwis" stuck ship etc

Deja Vu:

Good link, thankfully scientific knowledge and tech have advanced since then and we are not relying on just external observation. A couple of years ago there was mico plasma bovis in rural nz, against the odds we managed to beat? (Fingers crossed) that one.

Career Bureaucrats are generally terrible at dealing with crisis or the unexpected - group think, inertia, pathological fear of looking radical or wrong and not wanting to rock the boat are the foundations of their worlds, and they are frequently not great thinkers in the first place. Occasionally radical, abrupt and dramatic policy changes are needed, and for a 1-in-100 year pandemic like Wuflu is shaping up to be business as usual is the worst option. it is better to over-react in the early days and walk it back when clarity is to be had than to flounder in managing an out of control epidemic that kills tens of thousands.

Keeping the powder dry, even though for an old, out of date gun is a wise policy.

Brexit. Virus. Trump 4more, complete disconnection between US stocks earnings and value, China continues to build bases. What could go wrong?

Dow is well over 29000 but ten years ago was around 6000. In 2010 my uni professor mate told me that the market was still falling .. so of course I ignored him haha

None of us can predict with any accuracy how this virus will play out. What is clear however, is that we can expect little or no transparency from the Chinese authorities.
We were suitably impressed by the speed at which they could build 2 hospitals, but as the Guardian reports today, One, with capacity for 1600 patients, has 90, while the smaller, with capacity for 1000, is not yet full. Why has the army not erected a single field hospital?
It is so easy to be critical of NZ governments and I am happy to lob brickbats at them regularly. However, I recognise that they have an incredibly difficult balancing act to perform, in attempting to maintain good relations with both China and the US. We occupy a room with 2 very large, aggressive and increasingly unpredictable elephants. Under successive governments, we have sought, 'successfully' to increase our exports to China, to the point where we risk becoming a vassal state,in fact if not in name. That's a little scary.

The absolute aversion to CPI deflation (as opposed to money supply) needs reviewing in today's global economy. Efficiency makes things cheaper. Manufacturing can be outsourced to cheaper countries. And failing that, we can import workers from overseas willing to do the job for less than the local residents.

When you look at why we have low CPI inflation, the response (low interest rates, cheap money) starts to look completely disconnected. And we have to then deal with a whole lot of other unforeseen consequences (asset bubbles, too big to fail).