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Economists in opposing camps about whether the Reserve Bank should again be forcing down interest rates; ANZ's Cameron Bagrie sees OCR cuts as 'recipe for an accident'

Economists in opposing camps about whether the Reserve Bank should again be forcing down interest rates; ANZ's Cameron Bagrie sees OCR cuts as 'recipe for an accident'

By David Hargreaves

Widely divergent views are emerging among bank economists as to whether the Reserve Bank should be reducing the Official Cash Rate from the current 2.5% in the face of weak inflation, with ANZ chief economist Cameron Bagrie saying that OCR cuts now could be a "recipe for an accident".

After the release yesterday of the latest Reserve Bank Survey of Expectations, showing a sharp drop in the expected level of inflation two years out to just 1.63% from 1.85% previously, economists such as those from ASB and Westpac (both picking that the RBNZ will have to drop the OCR to 2%) were quick to react.

ASB senior economist Jane Turner said the RBNZ would be "very uncomfortable" with the fall in the inflation expectations. 

"We continue to expect the RBNZ will cut the OCR again in June and August, with risks now slightly skewed to an earlier move."

RBNZ Governor Graeme Wheeler recently launched a strong defence of the current RBNZ approach to meeting its inflation targets and criticised those who argued he should cut the Official Cash Rate more aggressively to ensure headline inflation rises back into the bank’s 1-3% target range.

But nevertheless, developments since then have seen further voices raised in favour of cuts and Westpac has suggested the next OCR review on March 10 is very much "live" in terms of the possibility of a rate cut.

And today, HSBC's chief economist, Australia and New Zealand Paul Bloxham, and economist, Australia and New Zealand Daniel Smith said while they agreed that much of the very low current inflation rate (2015 fourth-quarter CPI inflation was 0.1% year-on-year) was due to temporary factors, such as oil and food prices, domestic price pressures were, "in our view", still too weak for CPI inflation to hit 2% on a sustained basis.

"We see an increasing risk that low inflation becomes embedded in expectations," they said.

"Although the RBNZ has exhibited reluctance to consider further policy rate cuts, we see further cuts as likely to be needed to get CPI inflation back to target and get surveyed inflation expectations back to 'near 2%'."

But against such views, BNZ head of research Stephen Toplis, recently said that in the current environment targeting inflation was "probably a waste of time".

And now today, ANZ chief economist Cameron Bagrie has weighed in strongly for the anti-cutting brigade.

 "While we are respectful of the general trend in some inflation expectation measures, we are coy about reading too much into recent shifts, particularly given the broader picture," he said.

Central banks were "whistling Dixie" trying to hit their inflation targets in the current global environment, he said.

There was "no doubt" the RBNZ was going to have continued problems hitting its inflation target "as will all central banks", Bagrie said.

However: "Cutting the OCR in the face of greater leveraging behaviour (credit growth in excess of GDP – we have that), solid consumption growth (booming in H2 2015), and double digit house price growth is the recipe for an accident," he said.

"We are seeing structural metrics such as household saving deteriorate and debt to income ratios rise, at a time valuations are stretched. That’s a potential Groundhog Day scenario of repeating nightmares. There are numerous central banks around the globe heading down this horror path, forsaking the long game for the short one. The RBNZ is thankfully not one of them (or is at least showing resistance to)."

Bagrie said New Zealand had to forget about "a rigid fixation with fighting inflation" (which had generally not been the case here anyway). The central bank reaction needed to be far more medium-term focused.

"Thankfully we to have a central bank in the same mind-set. It was only two weeks ago the Governor played down a mechanistic approach to fighting inflation, preferring flexibility. That is entirely appropriate.

"We don’t expect too much concern within the RBNZ over the recent dip in 1 and 2 year inflation expectations."

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The real problem is the inability of the economy to grow tradeables fast enough and increasing deficits and overseas debt. There needs to be a sustained increase in the price of tradeables to increase the profitability of exporters. Until that happens this economy will sit where it is - low growth if any per capita.
The key factor holding up the exchange rates is high real interest rates. The RBNZ can cut real interest rates in the current environment - why don't they?

Because the cohort most deeply in debt will attempt to capitalise their interest bill with greater debt, irrespective of their incomes. Admittedly, that is the template central bankers always had in mind when they embarked on their wealth redistribution crusade. Unfortunately, while the poor just got poorer first, indebted overproducing commodity producers are next in line. Bond traders, however are winning all the time this social/wealth re-balancing nonsense retains traction.

Because the RBNZ profit from the carry trade, and an overvalued NZD based on our higher paying interest rates to foreign investors helps them do this. They make a profit for the government using this method. But they basically screw over our exporters

Bagrie is probably right , but its perverse version of Hobsons choice for Wheeler , there are downsides to whatever he does or does not do.

Then, how is Australia coping with a 2% OCR, Cameron Bagrie?
I don't see any evidence in Australian reports that your ANZ Australian colleagues are wailing and gnashing their teeth and predicting the end of the world because their country's OCR is 2%.

Surely it is just timing. AU would be in recession now with NZ interest rates. NZ probably will be in 12 months time (perhaps with or without IR cuts). How much longer can NZ migration continue at current levels? How long until dairy impacts are seen (materially) through the banking system? How long can NZ spending beyond its means continue without insane house price increases backstopping them. I think the answer to these questions will tell us when NZ heads into it's next major downturn.

Because in Australia they have banks themselves monitoring risk on lending. i.e all property not owner occupied has to pay higher interest rates, also their mortgage rates are not cheaper than here

Recent talk from the RBNZ in defence of the RBA (1989) is just so much fluff, words are cheap- look to what they do. And since 2003 they have cut at every excuse and near trebled the money supply encouraging debt galore, all to serve their clients: banksters and parasites. I have no doubt they will end up at zero like all their scungy overseas cobbers. This modern love-in with inflation and free money is a sick manifestation of alchemy.

Bagrie's comments have a desperate note that makes me think he didn't come up for air until he finished..........are the structural metrics he talks of actually the banks business lending and operating habits that he is concerned about? the leveraging behaviour that of the banks or that of the banks customer.?..........after all one can only borrow what the other one is willing to lend!........."valuations stretched".......maybe the most important words muttered by an economist ever!!!!..........if we can't get inflation then maybe we have hit a ceiling........and the only way to get inflation will be to build another story.......and there is stuff-all to squeeze out of the OCR.....and what can be squeezed will be squandered in more valuation stretches..................we must be getting closer to some form of deregulation........exciting times indeed!!

Oh no! The governor in all his naked glory cannot whistle up the fresh winds of inflation, what shall we do? Oh woe, woe I say. What shall become of us?

The question I have is what are they trying to achieve by lowering interest rates....

Theoretically reducing the cost of money gets more into circulation, stimulating inflation. An old over-worn, past its use-by date economic mantra that demonstrates that the banks and economists have no idea how to fix the mess they have created. There will be much blood on the street before this mess is over.

The last couple of decades or so global growth, including NZ growth was driven by an increasing amount of debt. Correspondingly interest rates have been in a declining trend. Now we have reached Zero and Negative rates in many countries, in NZ we have interest rates at extraordinary low levels for NZ.

The consequence of this is that addressing structural issues in the economy can be avoided. As a result asset prices have inflated to a level where there is no cushion for a down turn. See the dairy industry in NZ as an example, Additionally the tremendous growth of the financial sector here and globally has leveraged up to the point where if these financial institutions where to fail the damage to the wider economy would, in the short term be too painful for politicians to even contemplate allowing this to happen.

We all think Central Banks are non political and that maybe true. Except that the mandate for Central Bankers is to maintain price stability, effectively capturing them to react to inflationary signals no matter what the cause of price instability. If a government implements policies that have a negative impact then Central Banks are bound to react. If inflation falls and GDP growth slows then Central banks loosen monetary policy effectively hiding the negative impact if bad government policy.

As a result structural economic impediments have become embedded in the economy. So great has this problem become, and so mush burden on Central Banks to support the economy that we now have a falsification of interest rates resulting in market signals distorting investment decision which compounded the problem.

If we try to reverse course the price of assets only need to decline a relatively small amount and many loans would be underwritten by assets that are valued less than the loan against the asset. Many of the financial institutions that hold these loans as assets are highly leveraged so declining asset prices can easily make them insolvent.

Compounding these problems are the professional egos of Economists at the heart of Banks and Central Banks making it unlikely that they will ever admit their mistakes until the market forces it on them.

In my opinion that is where we are at today. Deflation is upon us, asset prices are starting to slide and Central Banks will do all it takes to avoid that. Even if the risk of their action brings down a bigger collapse than 08. I think the next step will be to ban cash and lock saving in banks to be used to bail out banks. Effectively imposing a tax on savings via negative interest rates. It may not happen in NZ but it is beginning in Europe.

The question for NZ is do we take the pain now or put it off till its forced on us?

NZ will try and kick the can down the road..... The pain will be forced on us, kicking and screaming

this is a problem caused by greedy self severing central banks who are over leveraged with loans on assets that are over valued can't wait for the inevitable collapse...We have had 100yrs of the US fed coinciding with 100 yrs of war and the world over indebted (enslaved to banks) the US Government is trying to lead the world to war as the so called mightiest nation in the world is 19 TRILLION in debt and can't pay it back. Do not feel sorry for the banks squeeze them for every % point you can...I don't even know why we need central banks...

um, there is a difference between a central bank and a retail bank. "I don't even know why we need central banks" well why is well documented if they did their job properly and ditto Govn. PS we have had thousands of years of war and no Fed, ergo your logic is a fail IMHO.

Time to cut the rate again, ours is still too high and we need to keep the "Rock Star Economy" on a roll. Party on now and pay for it later, that's what the rest of the world is doing, why not join the club ? when it all goes bad for them its going to go bad for us on dude.

"Cutting the OCR in the face of greater leveraging behaviour (credit growth in excess of GDP – we have that), solid consumption growth (booming in H2 2015), and double digit house price growth is the recipe for an accident," he said.

Here's a self-confessed admission of the dangerous exploits of Mr Bagrie's own employer.

"Central banks were "whistling Dixie" trying to hit their inflation targets in the current global environment, he said." indeed they need to be ensuring we dont get deflation/recession, which they are failing to do.

why do central banks need to ensure we don't get loving it

Because when businesses lose money that means they close and jobs are lost which then becomes a negative feedback process and that can spiral into a depression.