BNZ head of research Stephen Toplis says the Reserve Bank's likely to cut interest rates this month - and it will be the wrong thing to do

BNZ head of research Stephen Toplis says the Reserve Bank's likely to cut interest rates this month - and it will be the wrong thing to do

BNZ economists are picking that the Reserve Bank's going to make a "mistake" later this month and cut interest rates again.

Most economists believe that the RBNZ will cut the Official Cash Rate again, following on from the reduction on March 10 to 2.25% from 2.5%. However, most are picking June as the time of the next cut, rather than April 28, which is the next time the RBNZ will consider rates.

But in this week's BNZ 'Strategist' publication, BNZ head of research Stephen Toplis, in an article headed: "Forecasting a policy mistake", says he's expecting rate cuts in both April and June.

"We are making a very dangerous assumption: [that] 'The RBNZ will hold a consistent line from one rate-set meeting to the next'. If it does so, then we believe it has little option but to lower its Official Cash Rate at its April review," Toplis said.

"At the same time consistency would suggest it also open the door to a further reduction thereafter. Accordingly, we are moving our expected rate track to include 25 point cuts in rates at both the RBNZ’s April and June meetings."

But while this was the BNZ economist's "central view", they were doing it "with only modest conviction - as RBNZ consistency has been lacking of late and our call is also highly dependent on the actions of the Fed, the trajectory of the New Zealand Dollar Trade Weighted Index (TWI) and commodity prices", Toplis said.

"And let’s make it clear, we do not believe for a second that this economy will benefit from further reductions in interest rates which, instead, will inevitably create greater economic distortions and volatility than we already have.

"But we are tasked with making a call on what will happen rather than what should," Toplis said.

He said the "major determinant" in calling a rate cute this month was the the ongoing strength in the New Zealand dollar and the direct impact this would have on the RBNZ’s inflation forecasts.

"Of course, it’s particularly dangerous to hang calls on currency spot rates as they have a tendency to move. Accordingly, we are quick to point out that if the NZD tumbles from its current levels between now and the April OCR review we will have no hesitation in backing off our call."

Toplis said one of the developments that the BNZ economists had thought might prevent the RBNZ cutting further was the tightness in the labour market as reflected in: the low unemployment rate; high participation rate; strong real wage growth; and heightened difficulty in finding labour (both skilled and unskilled).

"But a recent speech by Deputy Governor Geoff Bascand focused more on the disinflationary aspects of recent labour market developments than the inflationary ones. This despite the fact that the RBNZ’s own new labour conditions measure, released at the same time, suggested growing inflationary pressure."

Toplis said ongoing solid economic growth and accelerating house price inflation might also be reasons not to ease - but the RBNZ’s growth forecasts were already optimistic and unlikely to be surprised to the upside and the house price inflation forecasts were also high.

"Latest housing market data scare us to death but that’s been the case for a while and the RBNZ glossed over it in March. So why change now? What it does mean, however, is that the prospect of tighter macro-prudential policy is heightened."

Putting it all together, therefore, Toplis said it could only be concluded that "consistency demands" a near term rate cut with more to follow.

"Consistency demands it but (a) we don’t think it necessary and (b) we have little confidence that consistency will be the order of the day."

Moreover, Toplis said, the BNZ economists remained very wary of the potential pitfalls of basing a call heavily influenced by volatile currency and commodity markets, and mixed messages internationally.

"But to sum it all up the following is how we think things will evolve (with our convictions for such bracketed): – The RBNZ will cut in April (slight conviction); – There will be a cut by June (strong conviction); – There will be at least two rate cuts (moderately high conviction); – Cutting rates any further at this juncture will probably do more harm than good (very high conviction)."

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"Latest housing market data scare us to death but that’s been the case for a while"
meanwhile same bank is lending as quick as they can


Don't worry BNZ, the banks will largely ignore most of any OCR cut.

Is it the RBs responsibility to control immigration, property ownership and tax policy? Which is driving house prices

We all know where this ends. Rates at .5% just like the rest of the world. Why doesn't he hurry up and get it over with?

I agree OB. All part of the global currency wars. The big fear is when we go into global deflation. I think they will keep things pumping for a bit longer yet but when it does kick in it will be very difficult to stop.

Cheers, It would only be an issue if we were the only ones doing it. Not so bad when you simply following the pack. Deflation is no issue, just do what the US, UK and Europe have done..... print! It hasnt hurt them much because they are all at it. Wheeler is so late on this.

Late??! He's not even made a real start, as he's still stuck in the 90s and seemingly completely unaware of every other developed countries ZIRP conditions.

BNZ predicts....I stopped reading right there.

The Chinese want to chase the shonky money that has come into the Auckland housing market but John Key has refused to sign an extradition treaty. Crazy

See below from today NZ Herald

Xi's crackdown on corruption has extended to NZ's shores with a number of "persons of interest" being identified by China.

There are concerns bent officials may have spirited capital out of China to invest in NZ residential property and other favoured destinations.

Beijing authorities earlier signaled they wished to extradite a "reasonable number" of Chinese from New Zealand to face charges of financial corruption.

In late 2014, Key revealed that Xi had earlier raised the issue with him on his visit to New Zealand.

New Zealand has cited China's death penalty and has so far declined requests for an extradition treaty, but the issue will come up

.. I wouldnt worry Penguin, if the Chinese want an extradition treaty they will get one. We have zilch ability to deny.

This may appear very naive to most of you but the swarm of people buying rentals, I would expect, includes many people in my position who despite not wanting to be a landlord, are being pushed in that direction by the penalizing of savers under this credit mad world. At least it is bricks and mortar that can be sold eventually as opposed to taking a haircut when and if it all goes belly up. It is extraordinary how many middle to expensive houses in my area have no one living in them - presumably foreign owners who don't need a return. How is this helping offset the housing needs against
immigration levels?

Yes DiDi. That is the desired effect of Quantitative Easing(QE). Pump more money into the economy so it devalues the existing money in circulation. The governments are reliant on getting the electorate to spend more money to keep the wheels turning in the economy. Having property inflation does this nicely. There will come a point when the world will go into a situation as Japan did in the early 1990's and deflation kicks in. House prices fell around 70% from the peak and even after 20 years they have been unable to kick start the economy.
When it will happen across the world I'm not sure.It is coming increasingly likely but timing of these very difficult to predict. The Chinese population starts decreasing in about 12 years time so that is hardly going to help global growth.

One of the dangers of all those empty houses that are simply an apparently safe place to park cash, is that they are inflating the housing shortage. Hopefully at some point the supply of new houses will start to address the present shortage. When things change, as eventually they must, the empty house owners may well start wanting to sell, which could lead to downward price pressure and thereby panic selling from the other empty house owners. They are not natural long term house occupiers/owners so their behaviour would be more volatile. The consequence could like a very large number of new unoccupied houses being unloaded on the market. There is obviously a lot of pent up occupier demand, but it could still turn very ugly. I hope that it does, because the current mess needs to be reversed.

I agree it will be the wrong thing to do (lower rate) but for different reasons probably. It sends more money flowing into all the wrong assets, it makes the landowners richer and non-landowners poorer (higher rents), stifles startup business (higher leasing costs) and ignores the costs of basics that are allready overinflated. Now that housing is "too big to fail" and immigration an economic policy, all i can do now is watch and wait.. till the last factory closes its gates and money is worthless... Till then its all good in the nation of landlords.

Tell farmers (our primary export industry) rates are too low. I cant wait for rates to go to zero like everyone else. the NZD is too over valued and cutting rates hard gets it down where it should be.

Dropping the interest rate will not have the desired effect (lowering the exchange rate). Look how the last drop only had an effect for a few days. Bloomberg ran this article on the 13th

"The euro-area, Japan, Norway, New Zealand, and Sweden are the five major developed economies in which central banks have eased policy this year—and by some financial metrics, they don't have much to show for it. "

I suspect your enthusiasm for lower interest rates is more self serving than to help our farmers.

dropping the OCR will not effect the dollar much as you have to look at what is keeping it up and address that

It moved to 2.5-1 against the GBP in Sept while Wheeler was giving clear, concise medium term outlook statements to the market. Then he stopped making cuts, then threw one in when no one was expecting it so the market is taking what he says and does on a month by month basis. How can they price that in with action like that? He would have to be worse CB Gov in the world. If rates went to 0.5% (where they should be) the NZD would be exactly where it should be against the GBP and USD. The GBP is getting smashed over BREXIT fears at the moment.

Of course its self serving. Im a kiwi living in London. :o)


Re-framing history

If I recall correctly - at the time of the last OCR cut last month the NZD immediately rose 100 pips against the USD and exploded 200 pips against the AUD

Got any better ideas?

You dont recall correctly. What charts were you looking at? I cant give you a bloomberg grab but this will do.

The kiwi dropped against the Aussie too on the 10th of March. Go have a giggle to that.

Why isn't house price inflation included in inflation figures? Surely one reason the CPI is low could be because people are pouring all of their money into property. While people are becoming asset rich this is not filtering back into the economy .

Because the system is flawed. Very flawed.

When you have runaway inflation such as this, the Bank of England has a responsibility to quash it, usually by putting up interest rates. But – and here is the great sleight of hand – the Bank has seen fit not to include house prices in its measures of inflation. So, throughout the 90s and 00s, they could then “prove” inflation was low or moderate and interest rates meandered lower. Meanwhile, more and more mortgages were issued, and so more and more money was created, and it pushed up prices. The government didn’t mind.

The problem in Auckland is that houses are affordable not unaffordable. A hot market with houses selling quickly and for high prices suggests affordability. Reducing interest rates will make mortgages even more affordable.
One thing I have noticed is a lot of people are holding onto their houses when they move to a new one - especially 'new Kiwis'. It is actually quite hard to move house in Auckland. My neighbour was telling me the other day about some friends of theirs that were convinced to sell their house by an agent, lured by the prospect of high dollars, only to find they had to then endure living in a motel for months while they desperately sought a new place to live. "Never again!", they said. It is not easy to sell in Auckland and then buy the same quality of house for a similar price. Even down-sizing is not easy to do.
One problem I see is that bridging finance is expensive and banks seem reluctant to do it. If bridging finance was seen as competitive by the banks it might make moving house easier giving people the time to market and sell their existing homes.
A mortgage is easier to get if your income is high. A couple, both working and with no mortgage, are prime customers for banks. This couple want to move house but bridging finance seems hard to arrange. The temptation then is to sell the current house to an LTC and plan to rent it out thus increasing an already high income for the couple with rental income. This then gives them the opportunity to rearrange mortgages and calmly buy a new house at auction as cash buyers. Thus a Landlord is born. Is Auckland a Landlord making machine?

The 4% charged by estate agents is also a factor, in the UK you can get this service for 1.5% or less in some areas. Why would you want to sell if you are giving 4% (plus legal costs) away.

sorry Zac, houses in Ak are NOT affordable. especially for the average kiwi on the average income of $55K, and lets not talk about the median income of $38K. But if a bank will lend to you, anything can be bought, it is just a question of how long you take to pay it all off. This debt model and continuing to buy into the free market model only goes to show that you have no new ideas, and are not particularly creative in your thinking.

Similar issue in main provincial cities. The cost of selling and rebuking are so high and risky with no decent family rentals for short term use that many families are keeping their old house as a rental and buying a new house to live in. They are quite surprised how easy that is compared to the horror of selling first then trying to re-buy.

Rebuking = reselling. Love predictive! Or was it machine-driven slip?

The bank may even give them 5K to do it as well. No agent fee of 20K plus 5K from the bank, stress free and the prestige of becoming a Landlord and a company director. On the way to becoming a tycoon. It is mighty tempting.
Add to this a revolving credit facility and good property managers and it becomes too easy - I'm giving too many secrets away!

We are in provinces and when we buy next house at the end of the year will rent current home out. We could sell easily in current market but there is very little to buy. We don't want to be in the situation of buying 2nd best to what we actually want because there is so little available.

The Accidental Landlord: A NZ phenomenon

Zachary you are spot on. I am one of those unintentional landlords you talk about. Early 30s with a young family on a single income. Moved to be in the right school zones. Basically it was just a nightmare to sell then buy as the market is moving quite quickly, I may be waiting too long for the right house while prices climb beyond my reach. Also didn't want to take the risk of buying before selling. Did not want to be in a situation of renting for a while moving multiple times with a young family.

So I did my figures and worked out I could actually finance a 2nd mortgage. That's what I did and it worked out ok. I didn't start off with the intention to grow a property portfolio leveraging property upon property, so yeh here is a story how an unintentional landlord of 2 Central Auckland properties was born.

Low unemployment in NZ is a warning sign. We had very low unemployment prior to the 1987 crash and the sub-prime crash. We aren't down to those 4% levels but we seem to be heading in that direction.

RBNZ will cut sooner or later and it will have little effect. The building industry is busy but can take on more work. The effectiveness of the previous rate cuts hasn't fully set in either. More debt and higher house prices aren't the answer.

One minute I am reading about low unemployment rates being a problem then I read about migrants taking all the jobs. Both can't be correct.

If migrants are taking all the jobs then why is unemployment going down, it would be going up and continuing to go up if that was the case. Although you'll find neo nazis tend to complain about migrants taking their jobs when they already have a job as a professional thief or drug dealer.

The economic problem with migrants is that GDP per capita decreases making everyone slightly poorer with each new person arriving.

I'd like to know what % of landlords are leveraged to the 70%-80% range, not to mention the mortgage on their own home. What will they do when mortgage rates hit 10%?
Can't happen you say?
Zirp/nirp policies will end with a risk re rating.
Get rid of your debt before the banks have you by the balls

like this farmer debt free, sees the gold takes on debt to expand prices drops POP lost it all
will be plenty of property investors in Auckland have the same happen if we have another GFC or interest rates start to rise.

Looks like he got the wrong advice. He should have hired an engineer to help target the responsible party for the bore collapse. Only getting a lawyer is a poor choice. I have no doubt the regional council would have stuffed him around with the resource consent. Nothing unusual with their bad behaviour.

Too bad he let the debt get out of control though. It can easily crush your finances.

just means those of us with plenty of cash in hand can be waiting in the wings for a flurry of cheap property to be available when it pops...

Oh dear...keep dreaming.

There are people who did that after the 1987 crash. Some purchased large multistory office buildings for a considerable discount. It took years for the buildings to be reoccupied and reach a decent value. Those that did this made many millions.

With residential property people hold on as long as they can, but there would be deals that would be snapped up after a bubble bursting. That is if credit is still available. Cash is king in those scenarios.

High interest rates use to reflect higher risk in the old days. If that were the case we would not get bubbles getting to a point of too big too fail

I do not agree, or can you quote sources please? From what I can see the OCR has not reflected risk of loss since the 1970s? but on how inflationary or not the economy is.

ie it has nothing to do with the risk of loss at all.

Then there is private risk/interest.

The finance debacle also reflects this, ie people were happy to get 0.5%~1% over the bank rate even though the risks were far more significant as we found out.

The problem was that depositors were not told how risky the investment was which is why many directors were sent to prison. Those investments should have had returns of 20% or more which would have been a huge warning sign.

Indeed, however the depositors should also have done due diligence when they invest their capital.

many of the prospectus were fraudulent hence the directors went to prison.
second they were paying many advisors a fee to push there clients into investing.
hence why i guess many people have flocked to bricks and mortar

I don't disagree, however that doesn't mean you as the investor don't do your homework. I do think we should have tougher rules, however my understanding is these were rejected in the late 80s, I suggest we have been paying for it ever since.

Steven, bank interest rates should always reflect risk, hence with bigger deposits and collateral get better rates. Irresponsible lending got us here to a large degree.

The man is ignorant and delusional. OCR is what it is - the Overnight Cash Rate. An interbank wholesale rate which would skyrocket if the local banks began to mistrust each other's creditworthiness.

Wholesale markets currently account for about a third of funding for the country’s biggest banks, and the cost of issuing bonds has risen amid resurgent market turmoil. The average yield premium over the swap rate on financial company bonds in Australia reached a 2 1/2-year high of 114 basis points last month compared with 73 at the start of 2015, according to a Bloomberg AusBond index. The measure was at 105 on Tuesday. Read more

I notice we are mixing OCR and bank interest rates, which do you want to duscuss?

I agree on the OCR, ergo I cant be as you claim, however the OCR does not reflect long term issues merely how the financial parasites feel this morning. Bank interest rates however do not reflect long term risk.

Steven you're the only one bringing up the OCR. I never mentioned it

True, but higher depositor interest rates did not reflect risk, they reflected the OCR plus a bank margin, they didnt and dont reflect risk at all.

So really if you as an investor think the risk is too large for 2% return (and I agree even 20% is a wonder) then dont put your money in a deposit account, very simple.

And the bank margin reflects what?

Two things spring to mind.

There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.

When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.

and so? I can quite accept the return is inadequate for the risk, but this is because deposits are acting like a commodity, just like oil in fact. ie when we get a downturn and no one (or too few) wants it the cost of it drops to where it clears. So the thing is as a depositor do you want to rent your money out or not? Second is there an actual risk of immediate substantial loss today, or this month? or within 6? No I dont believe there is. Is there a risk of a substantial loss inside of a decade? yes, I think its certain but as a tax payer I dont want to be covering others money, thanks.

But those same depositors are covering everyone with a mortgage since the advent of OBR, thus they need to be rewarded - the current structure authorises state enforced wealth transfer from one cohort of society to another for not much productive gain or return to those bearing the risk.

Furthermore, banks create these deposits when they lend money and are currently encouraged to do so by state agencies - the latter need to exercise restraint by raising interest rates, not lowering them.

No bank interest rates are in effect wholesale to retail, ie you can only get out "wholesale" what ppl will pay "retail" minus the banks %.

In effect it is a commodity.

Irresponsible lending i will agree with, but that has nothing (driectly) to do with the interest rates. ie you can lend responsibly at 1% or 30% or not.

Party on while the music is playing and keep the drinks flowing. Drinks = bank lending. Just keep an eye out for the next Northern Rock or similar, it will start going haywire overseas before it gets here.

Italian bank stocks are down around 35% since the middle of last year. ANZ the same.

Lenders are already feeling the pinch from regulations designed to prepare them for a possible downturn and they’ll have to ensure that their balance sheets are adhering to rules on the proposed net stable funding ratio over the next year and a half. While Commonwealth Bank of Australia is poised to meet NSFR requirements, the next three biggest lenders could need to raise a combined A$41 billion in additional term-debt by 2018, according to an estimate from Macquarie Group Ltd. Read more

@ ObeseBallerina: Yes totally agree with you that the NZD is over valued and way too high at the moment. This is having a negative affect on our export markets, plus it's very difficult to get new international business to want to invest and setup new companies here in NZ due to the dollar being far too high.

We've been trying to get computer game publishers interested in supporting small games companies here in NZ and they're not interested due to the high dollar. The same reasons why the Australian games industry fell apart several years ago. Plus they weren't doing any cutting edge tech work, so there was little incentive for Publishers to invest in Oz.

So we really need to get the NZD to drop if we're to help boost our exports, tourism and business investment for New Zealand. That should help support our capital growth without relying on the house price inflation.

If your business needs a low exchange rate, you are in the wrong business. If you have something special, the fx rate won't matter.

No-one is going to support any business plan that needs government officials to act to support it, including by taking policy actions to lower the currency.

The NZ tourism industry is exhibit A. It is booming despite the NZD level and will do so whether it its high or low. What it offers is perceived as high value by its clients and they are happy to pay. The NZ education industry is another. Manufacturers seem to yet another these days judging by the elevated PMI results. Those manufacturers who bleated about the currency a few years ago either had to adapt or they gave up. Those that can adapt their offers to their clients are thriving and they are the ones left.

"The Reserve Bank has some explaining to do.

The annual inflation rate is 0.1 per cent, way below the bottom, never mind the mid-point, of its 1 to 3 per cent target band, and below the 0.4 per cent it forecast a year ago."

Time to start raising rates to stop this hyperinflation in property, restrict foreign investment , stop immigration. Are we running an economy or a property ponzi? Are we deliberately trying to collapse the economy? World leaders should face criminal charges in the future for how they are running the world economy. At some point when you swallow more and more medicine it becomes poison.

Rates are going down to 0.5%. You've had your turn with high interest rates. Its our turn now. Take your medicine.

It aint over till the fat lady dances:)

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