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Top economists, business people and academics see a reduced need for negative interest rates ahead of the Reserve Bank's latest monetary policy review this week

Top economists, business people and academics see a reduced need for negative interest rates ahead of the Reserve Bank's latest monetary policy review this week

Top economists, business people and academics see a reduced need for negative interest rates ahead of the Reserve Bank's latest monetary policy review this week.

The RBNZ is expected to announce details of a new Funding for Lending Programme (FLP) on Wednesday (November 11), through which banks will be able to borrow cheaply directly from the RBNZ, and may or may not give further indications on whether the Official Cash Rate - currently on 0.25% - may go below zero in the New Year.

The NZ Institute of Economic Research has a panel of business people, economists and academics it styles as the 'Shadow Board'. And the Shadow Board members before each RBNZ monetary policy review share their expectations of what the RBNZ might do and comment on the situation.

The NZIER says that ahead of this week's review board members "once again saw a reduced need for a negative OCR and further QE [quantitative easing] over the coming year.

"The expected implementation of a Funding for Lending programme (FLP) by the Reserve Bank was highlighted by some Board members as an influence on their view about the need for further stimulus," the NZIER says.

"The aim of the FLP is to reduce borrowing costs for households and businesses in order to encourage them to borrow and invest. Shadow Board members continue to highlight the challenges facing New Zealand as it navigates the post-Covid recovery. However, members generally remain sceptical about the effectiveness of a negative OCR to stimulate the economy."

Negative rates 'very likely'

BNZ head of research and 'shadow board' member Stephen Toplis thinks it is "very likely" the OCR will go below zero over the next twelve months.

"However, we do not think that it is necessary," he says.

He notes, however, that the "big deal" in this monetary policy review is the Funding for Lending Programme not interest rates or QE.

Fellow 'board' member and Kiwibank chief economist Jarrod Kerr says the focus this week is purely on the FLP and how the RBNZ signal their next move - "most likely a 75bp cut to the OCR to -0.5% in February".

He goes on to say: "There’s a big difference between what I think they should do, and what they will do. I’m negative on negative rates."

Running out of bonds

And board member and Westpac chief economist Dominick Stephens says the RBNZ is "already on track to run out of bonds to buy under the QE programme", so QE probably can’t be expanded beyond the $100 billion already announced.

"This means that the RBNZ will need another method of keeping interest rates low. So we conclude that over the coming 12 months the RBNZ will introduce a Funding for Lending Programme and reduce the OCR below zero, while simultaneously slowing purchases under the QE programme."

Board member Viv Hall of Victoria University sees "still no case" for further monetary policy loosening.

"New Zealand's core CPI inflation continues to be low and stable. Immediate and foreseeable paths for employment and unemployment will not be materially improved by even looser monetary policy. Financial sector policies should be focussed on ameliorating asset price inflation, maintaining financial stability, and ensuring financial market liquidity."

'Key indicators below pre-Covid baseline'

The NZ country manager of software and business management company MYOB, Ingrid Cronin-Knight, (another board member) says several key indicators in MYOB’s Small Business Health index remain below the pre-Covid baseline for New Zealand’s SME community.

"Notably, according to our latest data, both cashflow (0.7% below 1st March baseline) and invoicing (16.5% below 1st March baseline) activity reveal that local businesses are still feeling the impact of Covid-19 and its related economic pressures.

"While we believe the RBNZ should avoid - and preferably publicly discount – moving towards a negative OCR, it remains likely that local SMEs will continue to look out for further fiscal stimulus, particularly after the Christmas and holiday periods."

And rounding out the comments from the NZIER shadow board members, environmental planning and design consultancy Boffa Miskell's chief executive Kerry Gupwell says there is a sense that the economy is rebounding quicker than expected from the last shut down.

"...But there are still some fundamental challenges as we continue to confront the effects of Covid.

"As the rest of the world continues to struggle with 'yoyoing' there are growing concerns over supply side issues for NZ, labour and imported items, which may hamper a recovery. The election result has given the new government a mandate, how we manage the border and help different industries transition into the next normal will be critical, and that will need to be more than just 'funding'.

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32 Comments

Lower interest rates for households don't stimulate investment in anything other than housing. Just cut the middle man and give people the money directly.

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And guess what they will do with it?
Unless desperate Kiwis who think, they've missed the boat are discouraged from leveraging up whatever handout they get and splashing it down a risk-based asset, then that is what they will do.
The future is about better disposable income, not more of the same, and the $ amount that people get/earn isn't as important as what it will buy them.

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Straight up buy Bitcoin, I dont need more cash...

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Seriously.
Why does anyone, including many of those quoted above, think that current RBNZ is going to do anything but cripple the New Zealand economy in both the short and the long terms?
This is it.
Wednesday will tell us all whether we have a viable route out of where we now find ourselves, or not.

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From a personal perspective it is comforting for me to have my NZ wealth equally split between property/shares and TDs/bonds. Using this strategy of negative co-efficiency means however badly these baffoons continue to mess things up it is extremely hard for them to do me too much financial damage regardless of their (continued) lunacy.

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Well said. Same here.
Diversification is all the more important now, to defend against the lunacy and incompetent irresponsibility of these RBNZ buffoons.

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Let's go to zero. The economists think its necessary. Nothing to lose. Can always go back up if necessary.

BTW, Liam Dann was carrying on about the Japanese and their NIRP / ZIRP approach. He said the big difference with is is that the Japanese have private savings. This is a problem. The grey hairs sitting in their million dollar+ houses with barely 2 sticks to rub together.

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Grey hairs?
We are going to end up with desperate young as well, who have just raided their Kiwisaver funds and who are sitting in million dollars hovels; not able to afford the gruel that's leftover from the dustbin of the local takeaway the way we are going.

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WT. I say, let's go to negative 2.75% hell we've got inflation below 1%, and this is clearly below the mandated target of 1-3% (just please never mentioned the housing inflation, told you it's not part of the CPI) - My grey hairs already shed now more into bald, as I could not comprehend how easy it was to predict RBNZ moves, they're a bunch of easy to guess .. very predictable bunch as oppose to creative, mystique, unpredictable moves, which will instill the prudent moves of their audiences.. but what do you expect in NZ? herd of a sheep? or a shepherd?

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Isn't Grant meeting Mr Orr for a little pow wow today? Would be interested in knowing firstly, what the readers would like him to say and secondly what the readers think he will actually say.
After all, just as the picture attached to Keith Woodfords excellent article last week depicted perfectly, Grant is responsible for and in control of our direction.

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I want him to say "Are you out of your goddamn mind?". What he will say instead is some lukewarm BS about having to think about maybe considering to perhaps start planning on slowing down a bit 30+ months from now.

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BNZ head of research and 'shadow board' member Stephen Toplis thinks it is "very likely" the OCR will go below zero over the next twelve months.

Priced already?

This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:

"[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low."

When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Link

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"Top economists, business people and academics"

Accuracy please. You mean economic academics.

Otherwise known as 'peddlers of ignorance'.
https://consciousnessofsheep.co.uk/2020/11/06/the-narrative-problem-aft…

"And like so many modern scientists, once they had discovered that economists are – with a few notable exceptions – complete imbeciles"

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Six months ago a mate said to me "you should be an economist". Haven't spoken to him since. Might forgive him one day.

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Sick of hearing talk about the government being given a mandate. No, they weren't given a mandate. A mandate is when you say you'll do something and either do it or get held to account.

Unless I'm completely wrong none of those things happened and the only thing that actually happened is they got voted in with basically no policies.

Grrr, mandate... Kerry should know better.

And so should Chris Trotter from his article. My understanding is a mandate is endogenous not exogenous so it can never be bestowed by another.

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Correct. They haven't been given a mandate, they've been given political capital. And now it is incumbent on them to do something with it.

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This reality caused me not to vote in the recent election. And yet it was clear all major political party contenders upheld the current monetary policy actions of the RBNZ. This further inflamed my desire to not endorse lame political acceptance that depositors have to be thrown under the bus to further establish the failed policy of setting lower and lower interest rates to "stimulate" GDP qualifying economic expansion.

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Watch out, you'll get the old "you have no right to opinion because you didn't vote" from the flock.

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Bloomberg now raising risks talked about here (but not elsewhere in NZ media fixated with housing & immediate issues not consequences):
"Japanification Stalks New Zealand Debt That’s 37% Owned by RBNZ"
https://www.bloomberg.com/news/articles/2020-11-09/japanification-stalk…

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I believe that we are only seeing the start of this whole post Covid effect
here in NZ. As time goes on it is becoming more and more clear that Covid will
have some long lasting outcomes, both economically and socially.
Here in NZ in the Covid era it seems that kiwis did what kiwis do in a crisis, or
any other event for that matter, and they buy property like there is no tomorrow.
Helped by the Govt and Reserve Bank this has reached insane levels. Part of
this equation is the fact that people are supremely confident that mortgage
interest rates will not be going up any time soon (or ever). So happy days.
I have noticed in recent times however a very real shortage in consumer
products across the board caused by global slowdown/shutdowns in
production, material shortages, logistical problems etc etc etc all caused by
Covid (thats not going away any time soon). Now if we start to see large scale
increasing of prices due to low supply/high demand is that not going to sooner or later meet
inflationary targets set by the Reserve Bank? And if it does are they then going
to have to finally say “Sorry, the OCR will not move as the CPI is only a
‘Guideline’”, in other words our job is to protect the housing market i.e. the NZ
Economy.

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Agree. And I'm going to go a step further, lay down the gauntlet here and assert that the kick off in house prices we're seeing is only the start of the new reality. Not the peak of a bubble but the start of one but also a fundamental structural change to our economy. While I know folks holding out for a big price crash so they can buy a first home they put off buying 10 years ago because they thought there'd be a crash, I don't think we'll get one. Too much stimulus, too much political interference in the market. For this reason I'll be joining the thousands of other hapless punters and soon buying a couple more overpriced houses. Overpriced from the point of view of quality. If you can't beat them join them as the saying goes.

The big question is, if down the track we ever get inflation how will it work with rates and the massive debt people hold? If rates can't be increased are we going to see more policy intervention to manipulate the market so the people don't go broke and lose their homes? I think we will.

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but look at the bond market, it's talking to you.

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Agreed, point taken, but are bonds paying 10% because that's what you can get from property.

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you are not listening hard enough

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Yup, with a pretty graph too...
"Japanification Stalks New Zealand Debt That’s 37% Owned by RBNZ"
https://www.bloomberg.com/news/articles/2020-11-09/japanification-stalk…

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Let's face it, we the people are all being farmed, have been for decades now, best part of a generation. Every business, individual, borrower is the farming stock of our masters, the farming bankers. People know this yet have no choice but to continue to be farmed, milked for our toil. Investors make a reasonable fist of turning the tables and trying to farm the farmers but the real farmers still end up farming them. I just don't know how this ends. Maybe it's not meant to and never will and that's OK too. There was no point to this little soliloquy. The end.

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You are totally right - I'm a retired banker and took the decision to never be in receipt of fiat currency in return for effort expended after twenty years of employment. I am now 68. I have no problem being in receipt of unearned income despite the perennial crash in it's purchasing power, especially assets in a falling interest rate environment. Riots cannot be far off.

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As long as the NZ housing Ponzi continues, everybody will be happy (well, apart from the new generations, which are clearly expendable, by looking at the current RBNZ's policies).
I don't think that they will riot - the smart and skilled ones will vote with their feet and simply leave NZ as soon as things normalize overseas, leaving us to happily keep flipping houses to each other, felling smarter and wealthier in this fool's paradise.

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I would suggest the alternative scenario is that Labour might throw the immigration gates wide open post-COVID to get more people into the market, propping it up that way. Starting with the regions to which Auckland investors' money has flowed.

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I agree, probably the only move we have left.

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'Top economists, business people and academics..' who would have thought?.. the vested interest lobby (includes the Banks)..seems to be against it now. Hmn, let's see: Surely, as some stated here that Mr. Orr & his team are all expert, so we should all go with their independence decisions. Put all the party participant: Govt, RBNZ, RE investors, FHB, Banks, Renters, Landlords, Economist. Ask each one for Yes or No on these lego bricks: CGT, LVR, DTI, CAR, QE/LSAP, FLP, Wages/flexi income subsidy, interest free loan, OCR, TD guarantee.. tabulated all their responses.. & voila!

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