The NZ Institute of Economic Research's "shadow board" comprised of leading economists, academics and business people, has had an overall marked change in sentiment toward the need for interest rate rises.
The "board", which offers its own view of where interest rates should be ahead of the Reserve Bank's decisions on official rates, is on balance, picking that rates should stay unchanged.
But there is a growing view that rates should rise, even though there is no widespread belief that the RBNZ is even close to contemplating rate rises yet.
Indeed it's universally accepted in the 'marketplace' that the RBNZ will tomorrow leave official interest rates at the 2.5% they have been at since March 2011.
The RBNZ has itself indicated rates will be unchanged this year and that it will begin to raise rates next year, with its own forecasts for about two percentage points of rate rises by 2016.
But at least some economists now believe there should be rate rises straight away.
Since March 2012 the NZIER has been running its "shadow board" exercise with these original goals:
- to encourage informed debate on each interest rate decision
- to help inform how a board structure might operate relative to New Zealand’s current single decision-maker model, where the Governor is responsible for making each decision
- to explore individual board members using probabilities to express their uncertainty.
The nine-strong board, consisting of a mix of economists, academics and business people, each separately gives a personal view of where they think interest rates should be ahead of the RBNZ's official decision.
Shadow board participants share out 100 points across possible interest rates to indicate what they believe is the most appropriate official cash rate setting for the economy.
For example, if a board member is mostly in favour of rates being 2.5% but also in part has a view there is merit in them being 2.75% they can allocate say 65 of their hundred points to a 2.5% rate and say 35 points to 2.75%.
Combined, these scores form a shadow board view ahead of each monetary policy decision. Participants’ show where they think interest rates should be, not what they believe will happen.
While the overall view of the shadow board ahead of this week's OCR decision was that rates should be unchanged, there has been a marked shift since the last rates decision in September.
Two "board members", the NZIER's principal economist Shamubeel Eaqub and BNZ head of research Stephen Toplis have shifted very firmly in favour of there being a rate rise now.
It was only a year ago that there was a strong inclination among board members to actually reduce rates.
RBNZ 'needs to act'
Eaqub said that an "overheated housing market" meant that the RBNZ "needs to act".
"They are currently using macro-prudential tools [principally through introduction of "speed limits" on high loan-to-value lending].
"I believe this is inviting political interference into central bank independence. It would be better to raise interest rates and manage the economic risks, or adjust bank capital requirements, as part of micro-prudential settings," he said.
BNZ's Toplis said that all the indications were that interest rates should be quickly returning to "neutral" given that growth was returning to "trend".
"The impact of LVR restrictions does, however, leave substantial risks to the outlook. Please note that our picks are definitively what we think should be the case not what we are forecasting."
Moving toward rises
While the views of Eaqub and Toplis have moved the most since September, five of the nine board members have moved more toward believing rate rises are appropriate - some just very slightly, while two have remained the same and just one, ANZ's chief economist Cameron Bagrie, is very slightly less inclined toward a rate rise now.
Professor Prasanna Gai from the University of Auckland is new on the board, but is somewhat more inclined toward a rate rise than his predecessor on the board Christoph Thoenissen of Victoria University was.
NZIER's senior economist Kirdan Lees noted that "most members" had recommended leaving rates on hold.
"Nonetheless the Board’s preferences are shifting, with more support than in previous months for higher interest rates. Auckland’s housing market is very bubbly, risking a costly downwards correction in house prices in the future. Two Board members recommend raising rates right now to start addressing this risk."
In addition to those already mentioned, the board also consists of Westpac chief economist Dominick Stephens, Victoria University Professor Viv Hall, NZ Steel & Tube chief executive Dave Taylor, Business New Zealand chief executive Phil O'Reilly and MYOB executive director Scott Gardiner.
61 Comments
Surely the overiding factor in the RBNZ's rates decision will be the level of credit (i.e. debt) growth. Things are OK or a little on the high side right now at about +5.5%; plenty of borrowers are heavily paying down debt, offsetting to some extent the Great Auckland Property Ponzi (TM)
If it hits the high single digits, caeteris paribus, we will be having a rate rise.
I like Dominick Stephens and Cameron Bagrie, but I can't get past their obvious conflict of interest here. Surely the important thing is that credit rises less than nominal GDP (thank you Cameron for explaining that to me) and that nominal GDP remains positive. It really is that simple.
Roger... can u point me to where Cameron talks about this.???
And yes... it seems to be that simple.... ( I learnt this from the Ray Dalio Videos).
Trouble is... to get to that point... we might actually have to "deleverage"... and that might require going thru some belt tightening.... ( and that aint going to happen )
It was actually in a talk he gave in Nelson back in 2009 that he explained it, saying he had been having discussions with his CEO over the preceding years that you can't just keep expanding credit faster than nominal GDP without causing trouble. Ray Dalio is great isn't he? Yes, belt tightening and debt repayment is needed it seems, but only at a pace that doesn't mess things up.
Cameron and Dominick are both much better in person where they can express their views more clearly and informally. Well worth turning up if either are in town.
The impact of even a small rate rise on the interest paid by highly geared property investors is huge ... a 1 % increase would add $ 10 000 for every million borrowed ...
... if you believe in backing up the Reverse Bank's new LVR limit , to squeeze some of the specualtion out of Auckland property prices , this would assist ..
Thankfully, most of these off market forecasters have no trading authority, within the institutions that employ them, hence they have little opportunity to add the heft of flow to realise the possible outcomes of their views.
An overnight spat in the US highlights the risk of nonmarket participants voicing their thoughts without an in depth understanding of the market dynamics undepinning current price discovery mechanisms.
If ever there was a few minutes of television to confirm the deep-seated disconnect between reality and the ivory-tower academics pulling the levers behind the curtain, CNBC's Rick Santelli just exposed it. For once, simple questions were enough to allow none other than Nobel-Prize-winning economist Eugene Fama to show Santelli (who did his best not to explode in incredulity) that the "smartest people in the room" just don't get it (just as they didn't get it in 2007). Santelli was gracious and polite as he asked what the great professor's thoughts were on QE... (and the entire brief clip is worth watching in its entirety) but his conclusion is perhaps the most stunning (and left Santelli almost silent)... when asked the impact of the Fed 'Tapering' or even selling down its $4 trillion in assets, Fama calmly says "it's basically a neutral event... It's No Big Deal!" Indeed, professor, that is so clear... Read more
Interesting link, thanks. As it happens, I bought into the ivory tower professor's arguments, while Santelli as usual did more interrupting than listening.
Assuming the professor is factually reporting correctly, then QE in the US is less of a big deal than the markets seem to think. The fact the markets think it is a big deal of course may be the driver for those markets.
The human aspect, fasinating. I find it sort of strange that when the Fed starts to talk of tapering because we are recovering that, the markets panic and run. Yet surely if we are on the upswing it should be the time to invest?
If indeed we had a so called rational market.
regards
wierd, its almost as if we have main street wanting to recover and wall street wanting it to be worse and acting to make it so.
***pop***
It strikes me that everyone in Wall street is in fact gambling that they can make huge profits on the bet but get out before everyone else when it implodes, and they know this. Strikes me as amoral....
It would explain what I see, I cant explain it any other way, but then my world is way simpler, or maybe the word is "honest".
regards
Exactly, but many have already taken the money and retired - new wide eyed entrants are queued around the block waiting their turn. Amoral - you must be joking. Goldman Sach's chairman claims to be doing God's work - you will have to try harder to dislodge him and his work from your "honest" existence.
LOL....
Reminds me of my Great Aunt, the biggest bible basher I ever met, also the biggest sponger and do nothing Ive ebver met, evil even. We often maintained she got to 94 because those upstairs kept asking God to keep her our for a while longer and those downstairs had locked the gate.
regards
yeah so did I....
The professor was being rational and the commentator fruity loop (lets take something to an extreme to prove a point when in fact thats plain silly). Though one point of interest is the equilibrium thing....not minsky as an effect. Kind of points at the insanity of the markets IMHO.
regards
The Professor implies the Fed's activity is less of an actual market driver than the "markets " would have you believe . The revamp of QE , a coupla QE's back was all about targeted QE to get the economy moving at ground level (production wise) although as it turned out ,was a neutral exercise in more of the same.
The "Markets" or more correctly now Speculative Markets , probably the bigger portion of the now Global markets thrive on exactly that , speculative outcomes based on Big deal conclusions wheter or not those conclusions have any basis in fact.
When the professor says it's not a big deal, he means in terms of factual neutrality, he is not however saying the "Market" won't make it a big deal in order to futher speculative positions.
It is as the professor reflects even by his demeanor, an absurd world where the hype of something is the most expensive component , while having the least actual value.
Shame Santelli did not let the Professor explain the reasons for his ideas...
"without an in depth understanding of the market dynamics undepinning current price discovery mechanisms."
The FEd is .."god" ....in this regard... ( ie. they control the mkt )
The only thing that will throw a spanner in the works, in regards to the FEd unwinding its balance sheet.... in my view.... will be inflationary pressures that might force them to "unwind" when it least suits them..???
When they talk about ..."neutral event"...maybe the Prof is talking in a completely different context than Santeilli....
Shame Santelli did not try to quality what the Prof was saying...
What pussles me in all these endless discussions is why they feel there is a problem with the Fed balance sheet. The US gov has just bought some of it's debt back without destroying the bond market. Why is that a bad thing exactly? The US has overspent on wars of aggression and so is overindebted. They either have to pay back the debt, default or inflate.
I think the Professor nailed it...Santelli was so clueless that the Prof just didnt know how to deal with someone so ignorant IMHO.
"inflationary pressures" well if that is translated into actual inflation as opposed to pressure to have some inflation but there is none. Well being in a zero bound trap, we should be so lucky IMHO.
By Neutral I think the professor is looking at the assumption that one side balances the other so cancels out, Steve Keen and Minsky dont agree on that I think.
Then of course we have ratioanl economic theory and in the real world, well I dont know what we have but it doesnt seem rational to me. But maybe by ratioanl im expecting acts that are in the best interests of our global economy and society, as opposed to individual gain at the expense thereof.
Of course this is parasitic and its killing us here in main street, if we are not actually already "dead men walking".
regards
By Neutral I think the professor is looking at the assumption that one side balances the other so cancels out
Good luck with that, if and when the likes of Bill Gross ever authorise the Fed to sell the asset side of the ledger to neutralise the printed debit side.
As I was saying just above Stephen H...
When the professor says it's not a big deal, he means in terms of factual neutrality, he is not however saying the "Market" won't make it a big deal in order to futher speculative positions.
It is as the professor reflects even by his demeanor, an absurd world where the hype of something is the most expensive component , while having the least actual value.
I think these remarks sum it up..
• the official explanation for generationally low nominal bond yields is deeply flawed – The demand for bonds that has driven down yields is the product of bond market leverage, positive yield curve carry and forward guidance on policy interest rates, rather than a glut of global savings. Every attempt to tighten monetary policy is likely to be profoundly disruptive to bond yields in 2013.
http://www.economicperspectives.co.uk/home
The Fed is NOT alone in being the main protagonist in this drama... The shadow banking sector is playing its part too.....
Maybe the FEDs unwinding should be neutral... BUT... a house of cards can be blown over with a puff of wind..????
Roelof - you are not wrong.
Market participants were quick to reprice the T10 year notes the moment Bernanke first broached QE tapering.
POTUS thereafter kicked him to touch in favour of Yellen.
Just as the UK based Aussie mining executives displaced Rudd when he mooted the imposition of the mineral super profit tax. Read more
Good summation Christov.
QE is largely a nonevent, because the goal which its supposed to serve, that is to boost economic activity is based upon a flawed monetary theory (monetarism).
http://pragcap.com/why-didnt-qe-cause-high-inflation
http://pragcap.com/milton-friedman-misunderstood-quantitative-easing
QE is largely a nonevent, because the goal which its supposed to serve, that is to boost economic activity is based upon a flawed monetary theory (monetarism).
Who told you that? - I firmly believe it was to recover the losses taken by those privileged enough to qualify as primary dealers - they have certainly done quite well as far as I can tell from endeavours undertaken by the Fed. Why else did Goldman Sachs and to some degree General Electric scramble to gain bank status despite a loss of certain freedoms post 2007/8?
That is the basis upon which QE is being sold to the querelous public in the UK, US and now Japan with the emerging new policy regime being marketed as Abenomics though its nothing more than a tarted up variation which the BOJ has been trying unsuccessfully for years. They're now insisting that trust us, we just haven't gone far enough.
Stephen H , I was not qualifying the Professors comments , simply putting in context the point of view he holds is based in the factual ,that does not include unintended consequence or other such forces that react to the equation he is asserting.
I'll point out again as the risk of being borish....the Markets will make a big deal out of any utterances let alone activities from the Fed and it will be largely to suit the agendas the Markets hold in interest.
My own opinion is that the Speculative has over recent years sweamped the Market place where hype is paramount and productivity secondary.
i don't have your credentials but I think it's a fair comment.
Stay Well.
I'd hardly call it a non event... $85 billion a Month.
FEd balance sheet has expanded to almost $4 trillion ....
This is the biggest.. "Non event" ..I've ever witnessed...
No doubt, there will be a few unintended consequences... ( but I suppose we will blame the "mkt" for those )
I think that the unwinding of this will be problematic...
I read the articles that your links provided..... I only agree with some of the things he says
I don't know why the author was kicking Freidman in the balls... friedmans ideas... just like Marxs and Keynes..et al.... have been twisted, misused and mis represented..
Roelof,
Its to be expected that the Feds balance sheet has grown when it was forced by the GFC to absorb financial assets which couldn't be priced by the financial markets, which were then in turmoil and to buy UST bills in order to support their efforts to meet their Fund Rate Targets, though thy've failed even in this.
Sure they will have, but Friedman's views on monetarry theory are justly pillored, because they're based upon a fundamentally flawed understanding of how the monetary system works.
His views are premised on the Central Bank being a Godlike figure in the sky dictating the quantity of money available in the economy, rather than an impersonal economic actor, who responds to credit demand by the private banks, though intervening to determine the price of money through its discount window.
Its to be expected that the Feds balance sheet has grown when it was forced by the GFC to absorb financial assets which couldn't be priced by the financial markets, which were then in turmoil and to buy UST bills in order to support their efforts to meet their Fund Rate Targets, though thy've failed even in this.
You may wish to fact check your assertions? Read More
His views are premised on the Central Bank being a Godlike figure in the sky dictating the quantity of money available in the economy, rather than an impersonal economic actor, who responds to credit demand by the private banks, though intervening to determine the price of money through its discount window.
The truth is that Central Banks are.."Gods".. Together with Governments they represent the 2 most powerful economic/financial forces.
Do you really think that a Central Bank is an impersonal economic actor ??
Keep in mind that it has been the assumption by Central Banks that "rational Man" would only borrow money prudently...and therefore the actual quantity of credit creation was unimportant... ( obviously a false paradigm )... in their world bubbles couldn't really exist.
This underlying paradigm/philosophy is what has lead us to 2008 ..
I actually think freidman was onto something by suggesting that money supply should be increased by x% every yr...yr in and yr out.
Let the business cycle play out.... let a recession run its course..
By Central banks intervening with interest rate cuts to stimulate an economy during a recession..we end up with a bigger..more dramatic longer term debt cycle.
we end up where we are today.
If u want to read a great book that foresaw many of the problems that culminated with the GFCin 2008...read this
the Point I'm trying to make is that Freidman had some very..very good ideas... and that by lumping him under "monetarism" and calling that a failure .... you discouage others from finding out more about his stuff..
Anarkist,...
Here is an article by Peter Warburton....written in 2001... its very good ( and u can measure the relevance of his point of view by the investment recommendations he made)
It is,partly, a quick history of inflation and Monetary policy thru the 1980s' and 1990s'
( addresses the ,seeming, paradox of disconnection between Money supply and CPI inflation )
http://www.gold-eagle.com/article/debasement-world-currency-it-inflation-not-we-know-it
his book is a cult classic
I think its an assumption the professor makes when he constructs a model, where one man's debt is anothers credit so overall the effect is zero/small. I suspect that par for the freshwater school. At least that's what I think he's saying.
I dont think its reality however, Steve Keen/Minsky says this anyway I think if nothing else.
"good luck with that"
We are both in the same test tube...
regards
Interesting view point....of such are revolutions made.
Sure, take south africa, want to live in an armed compound surrounded by security guards? think that will work long term? most leave if they can.
"backward glance" no ive glanced back for 7+ years now. In effect I dont think it can be "solved", except by Nature.
regards
NZ will not experience inflation again. That is not to say we will not have increases in prices and interest rates. let me explain.
Back in the seventies, New Zealand, as did other countries placed taxes, called Tariffs, on imported goods. Placing restrictions on the supply of goods without similar restrictions on demand puts the supply and demand curve out of equilibrium resulting in inflation. And boy, we sure had inflation back in the seventies.
Today we have done the complete opposite to the seventies in that, through Free Trade Agreements, we have opened our borders to a substantial increase in imported goods. To some extent this has been matched by banking deregulation and increasing debt. So long as people can borrow to spend, then the economy looks OK. But debt is unsustainable and eventually the economy stops to allow people to pay off debt and start all over again. It is no longer the buisiness cycle is is now the Debt Cycle.
A further dampener to the demand (money) side is that we have also moved into a low wage economy, meaning that, without borrowing, people have less money to spend. As we have less income and limits to our borrowing, we now have weakened demand, while at the same time we have increased supply with unrestricted and unlimited imports of goods. When supply outperforms demand you have suppressed prices and NOT inflation.
Even in a recession we have price increases. Those that are able, and willing, to screw us do so. The likes of the Utility Companies with price increases in Electricity and Water charges, Councils and Rate increases, Telecommunication companies, and so on. Of course banks do not wish to be left out of the price gouging so they make up stories to increase their rates.
Greed, it seems, still rules
Another factor you could have added Mike B is the effect of the Digital Revolution. We have grown so accustomed to it that we overlook its impact. The accounts payable/receivable , payroll section of a medium sized concern in the seventies could have a roomful of salaried employees. Same job now probably handled by 1 or 2 people. Whole big factories with robot arms welding and painting instead of lots of unionised workers ready to strike at the drop of a hat.
Information gathering that used to take lots of time, money and shoe leather now gleaned in hours rather than months or years. RIP inflation. We didn't like you and don't miss you.
Wasn't it Henry Ford that said, when showing the Auto Union boss a new automated welding rig; how are you going to get that thing to join your Union. Union boss " how are you going to get it to buy your cars"
Man's industrial history has been all about an increase in the supply of labour and it's equivilents (mechanization, fossil fuels, outsourcing, women workers, immigration) and a reduction of labour content. I don't know there's much left to monetize but I'm sure the globalist corporations will keep on squeezing.
Totally agree with prior comments re the likelyhood of inflation.
Yeh and Gen Y folks like me aren't happy about it either, especially when the Babby Boomers aren't cognizant of the full dimension of the changes they've wrought.
http://brennanmcdonald.com/blog/skills-market-labour-market-young-peopl…
Broadly, yes I agree. The final nail is energy getting expensive. In the 70s we swapped from making things that took energy and jobs to financial make believe things employing fewer. Now as energy gets more the ppl in the "low wage economy" are under even more pressure....
Quite why ppl cant see something has to give and in a big way at some point, mystifys me.
regards
LOL, really? thats impossible for anyone. Mkae your own mind up and place your bet.
If I knew such specifics, in such detail in such a complex organism as the global economy at a specific time, well I'd in the position to "win" when it happened.
Reality, no one knows specifically what we will see and when, or how big, or how long all we can say is what are the fundimenatls that will win in the end.
Take the market crash that started in 1929, if the brightest ppl of the day didnt know when in such a relatively simple economy v today's, what hope has someone today.
And yes its 5 years...if nothing else it will be the falling off the peak oil output plateau that does it...latest reasonable estimate is 2018.
regards
How then do you know that "ppl" don't "get it"? If you don't know what is to be done about "it", how do you know that "ppl" aren't already doing it?
"Something's going to happen sometime" admittedly has the advantage that it can't be disproven, but it is no basis whatsoever for decision making, either by individuals or by the Government.
Predictions made in 2008, approx 5 years ago...
http://www.stuff.co.nz/business/opinion-analysis/8446593/Solid-Energy-Elder-thrown-overboard
"In 2008 for the first time since oil was discovered, oil and energy . . . demand exceeded supply . . . and as a result prices reached US$150 a barrel," it said.
The recession released the pressure, but "we do not expect this balance to remain as demand quickly increases, based on a recovering world economy".
How'd that work out?
Which prediction btw?
The banks have been forcasting recovery and huge inflation for 5 years now, how did that work out? I was the opposite, Im still floating, I would have lost quite a few $k if I'd fixed....
Some Govns of the world went for expansion through austerity, how did that work out?
The gold bugs predicted $3000 even $5000 an ounce, how did that work out?
Oil is running at $100US a barrel despite us wavering in recession.
Oil was predicted to go to 130MBPD, how did that work out?
All the above seem to have worked out quite well and predicted from following the ppl and economics models I prefer to watch.
You are right in one respect, it was expect peak oil would be more peaky, ie the drop would be more substantial by now. Instead by spending vast sums and using every rig in existance we have managed more or less to keep the MBPD output about flat.
Besides which you know you are free to act in your own interests, make your own decisions, based on the information out there.
Shooting the messenger? why not simply ignore what you dont like?
regards
Well, if I remember rightly, Don was talking up oil going to 200US a barrel. And I guess that number sitting in some spreadsheet set Solid Energy on a trajectory towards gearing up investment with the expectation that we'd all be able to pay that sort of money for energy. My thought at the time was there's no way oil is going to 200 a barrel, simply because as it creeps upwards, the pressure it puts on economic activity suppresses demand. My guess is Solid Energy assumed otherwise. I put my bet on that at the time and so far it's working out well enough for me.
It was simply an observation on an interesting example of where we get to look back at how things played out. When one business ran with a prediction that with hindsight we can pick apart a bit.
Yes, some said $300, $500, a barrel. Some said for the USA when energy gets to 6% of GDP the US goes into recession. The latter have I think won that argument, sort of.
"sort of" As I think Jeff Rubin says, its what we can afford to pay, so many ppl wll be exiting the highways in the next decade. The problem going forward is the marginal cost of new oil is heading north of $100. The 6% of GDP is probably $120USD a barrel...(maybe less) So once the marginal cost gets to $120 whos gong to extract the oil no one can afford to buy?
If we say get an emergnecy, say invasion of Iran and teh strait shuts yes we could see $200 a barrel....for as long as it takes for the World's economy to shudder and collapse....aka July 2008.
Solid Energy also wanted to extract lignite to synth-deisel, that went bust as an idea, for now. So even businesses now see there is a problem with the projections of sky high prices...
Which brings me back to, if the remaining 1/3rd of oil is >$120 a barrel, will we ever extract it? I dont see how we can afford to.
Maybe a stables and horse is more realistic in my life time than I thought.
regards
Timing is what is needed MortgageBelt, there are about to be external outcomes that should influence the Governor as much as concern over the internal property bubble.
He will watch the RBA's current line of thinking to see if they follow through with their signaling , so in the meantime..... may well hold.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.