Governor Adrian Orr reveals scenario where the RBNZ would be forced to dramatically cut the OCR and outlines some details of a potential quantitative easing plan

Adrian Orr cartoon by Jacky Carpenter. © interest.co.nz

Reserve Bank Governor Adrian Orr has outlined a scenario in which the Central Bank would cut the Official Cash Rate (OCR) to below 1%.

He also says the bank has a quantitative easing plan, in the event New Zealand faces a very large economic shock.

In its August Monetary Policy Statement (MPS) the Reserve Bank revealed a scenario in which the OCR would be cut 100 basis points (1%).

“Growth is expected to recover in our central projection. However, with surveyed business confidence falling and continued softness in the housing market, GDP growth may not recover as expected.”

In a scenario where this unfolds, and annual GDP growth stays below 3% over 2019 and it's clear growth is not picking up as expected, “the OCR would need to be reduced by around 100 basis points” by mid-2020.

That would take it down to just 0.75% based on the current 1.75% OCR.  

The Reserve Bank’s GDP growth projection for 2019 is 3.3%.

But Orr is confident this scenario requiring 100 basis points of cutting will not eventuate and says the bank’s central projection – that the OCR will not be moved until September 2020 – is the most accurate.

Speaking to MPs in the Finance and Expenditure Select Committee on Thursday, Orr said the Reserve Bank was providing what he calls “what if” scenarios.

The scenarios are to explain how the bank would react to different situations if they were to occur.

It also has a scenario where higher than expected inflation would force the Reserve Bank to hike the OCR to 2.25% by 2021.

“We have put in our publication ‘this is how it would work, this is our thinking, and we think we would be ready for it,’” says Head of Economics John McDermott.

Although in today’s economic environment a 100-basis point movement in the OCR seems like a lot, Orr says when he was last working for the Reserve Bank 10 years ago – “that was almost a daily movement.”

Quantitative easing is being looked at

These planning scenarios also consider unconventional monetary policy – “which I actually believe is more conventional monetary policy,” Orr told the committee.

McDermott says a scenario where such policies, such as quantitative easing, would have to be adopted by the Reserve Bank is “not on the horizon”

“But, you can never say never and things can happen in the world that you can’t control and you can’t anticipate.”

If New Zealand were to be hit by a large external or global shock – “we think as an institution we need to be ready for it, just in case,” he says.

“It’s during good times that you should prepare these types of stories, which is why we put these things out now,” Orr added.

In May, the Reserve Bank published a paper on unconventional monetary policy where it said the possibility of needing unconventional monetary policy tools is "higher than it ever was in history."

Finance Minister Grant Robertson says he does not believe GDP growth will fall to the level to which the Reserve Bank will be forced to cut the OCR by 100 basis points.

It’s the same story with the use of quantitative easing, which he agrees with McDermott that it’s very unlikely the Reserve Bank would need to go down this road.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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91 Comments

And mortgage rates of 3%

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In theory!
The carded rate might say 3%. or so, but just try accessing new debt at that level. In fact, just try refinancing or moving bank lender at those levels, and see how your new "Financial Health Checkup" goes! An OCR at 0.75% shows two things: (1) The NZ economy is in deep strife ( it already is and has been for nearly 10 years if anyone really wanted to see it. (John Key actually did with his "House Prices and Immigration" solution. It was all there was, and it has/is failing) and (2) Money is tight, so tight that bank new lending will dry up. ( Credit-worthy customers are going to be few on the ground)
0.75% OCR? The game is nearly up....

if we get to that banks will up the LVR to 40-50% to protect themselves for any asset depreciation
credit will tighten beyond anything we have seen, and your friendly bank manager will show their true nature

That policy would benefit thise with low debt long term property owners, not fhb, so I hope they would exempt fhb and still allow 20 percent and lower deposits

Dp

Dp

I feel like you keep regurgitating the same thing!

Or is it stuck in your craw?

Mtp just so you know, I don't have a problem if the banks want a high deposit because we can afford it. My point is that the thousands of fhb may not be too happy about 40 to 50 percent deposit. They would be complaining along with the interest.co moaners. For now I am on your side, so just be happy

Houseworks, if you only made your first purchase in Hamilton 13 months ago, is it a little premature to preordain any equity as sufficient deposit on a second? As you know, banks are tightening their lending standards.

Retired poppy, well now you love to comment on what I have done and misconstrue it at the same time. I hope you feel like you have achieved something because by your own admission you have done nothing more than hand over some cash to someone else to make a return for themselves.

Houseworks err-umm, no. Its you that loves to comment lots about what you haven't actually done. Its left to others to keep you in check. At this uncertain juncture, it's perfectly understandable for some commentators to be antsy towards those who have term deposits.

Enjoy your evening.

It must be really Fustrating (did you see the jacinda-ism yesterday) for you now. Never mind, when your money dries up you can wipe the egg off your face and still have a snack.

Dp

An OCR of 0.75 does not indicate deep strife, it indicates weakness though. You are overstating the problem.
An OCR of 0.75% is no where near the end of the game. That leaves 0.75% of cuts before QE even touches the bond market and after that there is the ability for the Reserve to buy stocks and then whatever they come up with after that. The end of the game... At 0.75% its not even the end of the beginning.There is no end in sight to the madness of central banking.

You are understating the Problem. Have a look at the rest of the World who went that low. Open your eyes.

I wholeheartedly agree with you, if we go to 0.75 the country will be in deep strife. Adrian Orr is just reiterating the economic state of the Country.. His comments are for all Politicians attention.

If the interest stays at 0.75% where do you think the bank will get the funds from?

These guys (see post below):

https://www.bloomberg.com/quicktake/negative-interest-rates

The world is awash with spare cash looking for a home and more will come online when Trump fires up the printing presses. He'll have to fund that trade war with China and that real war with Iran somehow.

HeavyG.. An article form March 2017, which was actually just after Chinese capital controls started . You need to step forward from then a bit and stop listening to Andrew King and tony Alexander..... anyone know if those two chimps have sold out yet?

@Chairman Moa, Overnight from the reserve seems the obvious place to start...

This would be great, It happened in some EU countries couple years ago and is a blessing for families with mortgages as they will start saving thousands every year on interest rates, money which can be used for better life style of their family members instead of being paid out as bonuses to banks chairmen. Landlords will start making good profits as well and properties will become very sound longterm investment. For example Czech Republic have not seen any interest rates higher then 4% for more then 12 years. 1,5 years ago before the economy started booming interest rates dropped to 1.97% with 10 year fix. Now with good economic growth again interest rates hiked to around 2,6% with 10 year fix. Local banks as like as NZ ones need to get money from overseas to cover the mortgages and they have managed to do so without any issues even with OCR being low. So I am sure there will be no problems to get money for NZ market as well. NZ banks are in general ripping people with mortgages off with their high margins, which will need to stop with OCR below 1%. On the other hand this will force depositors to invest into something different as they will be getting almost no returns on their term deposits like it has happened there and the best will be to invest into property.

What a lot of garbage Deadcat

his is based on experience, garbage is your comment lol

More great news for those trying not to get into debt and saving...

I am not sure why the two scenarios are unsymmetrical.
For the low growth one, he has the rate reduced from 1.75 down to 0.75 by mid 2020. 1% drop.
Whereas the high growth one he only has it rise from 1.75 to 2.25 by 2021. 0.5% increase over a longer period.
Sounds like its much more likely to go down.

I am not sure why the two scenarios are unsymmetrical.

Why would you ever assume them to be symmetrical?
Seems like a silly assumption to me when we consider what we are actually talking about.

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Sigh. It's not an if, it's a when.

And this must be known in high circles. When is a MSM journo going to go after memos re the end of growth on a finite planet? It beggars belief that such don't exist. (Of course, having read this, the keepers of same might change that!).

We are watching the whole world retreating from a high-water-mark of globalism, and it's a rapid retreat. Trump, tariffs, Brexit, refugee streams, repression of democracy (Trump is making FF extraction a matter of National Security - no protest allowed. He's right, in that the US can't survive in present form without...). Atop that we have the ever-reducing quality of resource options, indeed all options. And perpetually record-setting weather events. And a never-bigger debt-overhang.

I'd be doing a few 'what if's too. But I'd go further. I'd be planning for the collapse of global trading, and for the need to go it more or less alone. That requires more than just Reserve Bank participation - it would need redistribution of city-adjacent food-producing land, maintenance of essential services, law and order.....

.

Hear hear! Never a better time to learn how to grow a few crops in the 1/4 acre back yard!

Its called Subsistence. Time we took a leaf out of Donald Trumps book and started our home gown industries like we used to have no importing Overseas labour

You know what might help to facilitate that? The demise of plastic packaging.

The problem is that human behaviour is what has led, or is leading, us into the mess, so my question is why do you hold onto hope that this behaviour will change?

The highwater mark of globalism is a lie. China is a trade cheat and so is the EU, the only way to stop the abuse is for someone to punish them and the USA is the only nation with the market power to do that. The trade war can be stopped any day China comes to the table with fair trade practices.
The claim that severe weather is increasing is also unclear as the rate of global storms and hurricanes has not changed in 50 years and the the sum of flooding, fire and drought has been falling since 2000.
AR5 states that the link between climate change and extreme weather is unclear and may result in a net reduction of storms and hurricanes as the average temperature difference between the equator and the poles reduces the chances of high wind speeds may decrease.
Population probably maxes out at around 11 billion and consequently the exponential curves many apply to resource use are deeply flawed.
Im sorry to be the bearer of bad news, but the world probably isnt about to end.

If we don't do something about not reaching 11 billion, then we truly will have a disaster that will be equivalent to the end of the world. We absolutely must, now, not some airy fairy day in the future, curb growth, both in our population and in economic growth. It is head in the sand stuff to ignore it any longer. We are already well and truly into overshoot and as far as climate change goes, it is already acknowledged that is far worse than previously thought. And it is happening NOW!

laminar,

One of the rapidly dwindling-like glaciers globally-band of GW deniers.

let me just put a few things to you. As shown by the Keeling Curve,atmospheric CO2 has been increasing steadily for many decades now and stands at just over 400ppm. It is well established in physics that higher levels of CO2 means a warming of the lower atmosphere ins inevitable. You might wish to consider the stefan-Boltzman and Wein radiation laws and the work of Arhennius in the late 1900s.
Whether oyu wish to acknowledge it or not,glaciers are retreating globally.
let me give you a quote from the US Climate Change Research program; "Evidence for climate change abounds,from the top of the atmosphere to the depth of the oceans,Scientists and engineers from around the world have meticulously collected this evidence,using satellites and networks of balloons,buoys and other observing systems. Evidence of climate change is also visible in the observed and measured changes in location and behaviour of species and ecosystems.Taken together,this evidence is unambiguous;the planet is warming and over the last half century,it has been driven primarily by human behaviour.
Figeures from the major global reinsurers-Munich and Swiss Re show that the costs of natural disasters are increasing,not falling.
You are right in one thing-the world isn't going to end,but sadly for my grandchildren large areas of it are going to be severely affected by GW and that will have global consequences.

double post

.

I can't see 3% growth next year. However, I don't think that means the RBNZ needs to get into QE.

One man's meat...etc. With the Kiwi on its way down buying some USD could help out. Thanks Jackshinda, I knew I could count on you to trash the NZD.

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Dropping the OCR is a sign the economy in trouble not the other way around. All low interest rates have given us is high asset prices and what looks like falling growth.

Thoroughly agree

How long do you think the immigration ponzi will hold up once the economy is in recession (as is inevitable under this Labour government)? Immigrant workers will head off to greener pastures, and Kiwi's will jump the ditch to Australia. Once the whole cycle starts to reverse, the Great Unwind will be of a greater magnitude than NZ has ever seen.

Governor Orr's forward guidance is going to work wonders for the export market. Can't see growth above 3% happening any time soon so prepare for the big slide in the NZ dollar. I bet he wishes that rates were a bit higher now, to give him a bit more leeway, but hey it is what it is.

Could be some smart jawboning to get the Kiwi down.

The QE talk is what worries me. How dull. There's something really wrong in our understanding of economics if NZ is deemed "Japanified" and requires below zero interest rates to function. Traditional relationships have clearly broken down, and one would think Orr would recognise the folly of the last decade in assuming that QE actually fixes anything. Oh well, should inflate some nice asset bubbles. Lever up everyone!

QE..."We're going to take a tactic that has not had great results overseas and try the same thing here."

A bit unfortunate to institute a tactic that has only inflated asset values and dramatically reduced the chances of the lower and middle classes: https://www.bloomberg.com/view/articles/2018-08-08/many-americans-still-...?

So obviously true that you would almost suspect they didnt care about the middle class :-)

Bringing the OCR rates that low would place the Reserve Bank in a very unsettling predicament should unexpected shocks occur and no "ammo" to react. Unless you want to go negative. Now that would make headlines....

The prospect of lower interest rates is a welcome development for debtors fortunate to have jobs and speculords with tenants who have jobs.

Hi RP.

I genuinely don't believe that rates will go down, it would leave us far too vulnerable to an external shock and in the short term would collapse the dollar and bring rampant inflation. However the canny Mr Orr does need to keep suggesting that they 'could' go down so as to achieve a steady and more manageable decline in the NZ dollar, which assist our productive sector re-balance away from the misallocation of capital to households. Doing this also allows him to maintain the powder of a cut in the event of a shock. What he really needs is a bit more inflation over the next 12 months to allow him the excuse to raise next year (to calm it) and provide more leeway should a larger shock occur.

So far he's doing a wonderful job of saying everything but doing nothing, I wonder if he's had a few conversations with Mark Carney at the BOE who is an absolute master with 'media subterfuge.'

Nic, fair call. I cannot see them falling unless there is a shock. In which case, it could all morph into a global race to the bottom!

If Mark Carney is the unreliable boyfriend what does that make Adrian Orr?

Bagpuss!

Couldn't help myself.

I know that sounds a bit unfair, but I think you'll get the similarity even if no one else does.

Nic, So this is the NZ own QE we talked about in another article. And see how the NZD tumbled :-(

Should have bought some USD last week itself.. I never thought NZD could fall this quick.. Orr could have been bit more tight-lipped.. Just make his statmement and go , instead of predicting what could happen

Hi Greg

Not quite QE but yes the NZ dollar can and often has been hammered very quickly in the past. The challenge we have is that our currency is open to trade and is one of the top 10 currencies traded on the planet. Sadly our economy is no where near the top 10 in terms of overall GDP. I would best describe us as a 'speculative plaything' for bigger nations with excess savings who seek a return on our generally higher interest rates. We aren't offering enough of a difference to make the play worth the risk now (and Adrian is cleverly suggesting that we won't be worth the gamble for interest returns for some time) .. Throw into the mix that we are heavily reliant on houses, farming and tourism, two of the three appearing to have turned a corner and all of a sudden we're a 'risk off' bet that if you are a foreign speculator you want out of before your interest gains are overshot by capital losses.

US in my view would still be a good bet as it wouldn't surprise me at all if this ended up at US 50 cent to our dollar within the next 12 months. Which is a nice return when converted back in NZ. 20% in a year towards your house deposit. It is a risk but life is too short not to have some fun and property ain't going anywhere even if it doesn't play off to quite that extent. Take a look at the chart and see what happened in 08/09 and again in 2014/15. That's why so many people play the NZ currency, its marvellously volatile and from my understanding being heavily shorted at the moment.

https://www.macrotrends.net/2557/new-zealand-us-dollar-exchange-rate-his...

Dp

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Just a casual observation.
Interesting noting the change in the focus of the articles and comments/debate on interest.co. Are they indicative that we are/have entering a new economic period?
Less talk of hyperinflation of house prices and their consequences; more articles about the state of the economy including GDP uncertainity, economic uncertainty and declining business confidence, state of the dollar, outlook for interest rates which all indicative of this change in focus.
A need to note for those who still think that it is same old same old stable economy (for what ever the reason) and "get rich through property investment" for the past decade.
A need to reevaluate and rethink where both one and the wider economy are at?

That's a fair call Printer 8, seems some of the regulars here are AWOL today.

...visualizing many property bulls with fingers in both ears today.

I have TDs and I’m screwed for the forseeable future. Maybe foreign currency deposits is the answer.

You could buy a few bitcoins..

Yeah, nah.

good advice.

Don't forget me brother in your prayers! I'm feeling your pain too.

......visualising term deposit spruikers coping with deposit rates halving. Oooops.....

I think we all knew that given a choice, the decision makers would choose to support borrowers. Let’s face it, many baby boomers are comfortable and averse to spending whereas borrowers are active economic participants. Who would you turn to help when the going is tough. Luckily I have it all maturing in March next year. Wtf I do with it after that is the big decision. All asset markets are expensive, including houses.

...in January I locked in a Term Deposit of 4.27% for five years, interest paid monthly. I certainly made a wise move. Ex Expat, do you have Kiwisaver?

RP, luckily you are only managing your own money. Look up ‘Duration’ and you’ll see that if you were managing others Super funds you’d be cleaning out the Governor’ bins not sitting in his seat.

Yes, I have KiwiSaver. Got the ‘free’ $1,000 and stick $1,043 per year to get the ‘free’ $521. 8 more years until I can withdraw it.

I've also been in Kiwi saver from day zero. I've just recently moved it all to a cash fund. I want to see how all these lofty valuations play out. Low returns don't worry me as I'm grateful for the years they were double digits!

Low interest rates are good news for property bulls, i thought !!

Hi Greg

'Low interest rates are good news for property bulls, I thought!'

They are if they are not overleveraged and can access the available credit in the market.... (as we've discussed before).. and a tougher economy means more provisions for losses and less availability elsewhere. Fonterra today are stopping a dividend because they are sitting on a pile of debt and probably realise that paying a dividend and weakening their cash position is probably not going to do them any favours when re-financing time comes around... Finance availability is about to become a beauty parade for households and businesses.

Google - Mothercare, Carpetright, Countrywide, House of Fraser, Debenhams when you have a spare ten minutes to see how access to funds can effect businesses that have overleveraged.. All UK examples, but all very recent. 15 minutes of your time to see how the banking beauty parade works. have a good weekend.

Good point p8, although "get rich through property investment" has worked for the last 30 years, not just the last decade

Dp

Yes, and property is still a great investment but the nature of property investment is going to change to that of the past decade.
Property investors are going to need to refocus on yield as the return rather than capital gain. At the moment average yields are south of 5% (interest.co) less all expenses on current property values. So a potential investment property is going to need characteristics to show a better yield than average.
More care is also going to be needed in selecting a property below market value; i.e. the astute investor is going to be looking for properties that are "forced sale", deceased estate, mortgagee sale, "vendor has purchased elsewhere", auction (which will be terms not commonly used recently). Dedicated astute investors will also be looking for potential in capital gain but not through house price inflation, but rather subdivision or significant alteration (e.g. splitting a house in two) to increase yields.
Oh, and yes; make sure that investment property will meet the increasing demands of the Government's health homes requirements - or have a significant budget ready to do so.
I am out of property (for the moment at least), but I found it interesting during and after the peak in 2003-2006. The character of the local PIA branch changed from dowdy brown cardy and grey trouser long term investors with an influx of younger smartly dressed new investors. As the boom passed, the younger smartly dressed new investors disappeared. During that boom period the language and discussion as above disappeared but returned again once the boom was over.
So property will continue to be a great investment; but what was a really great - actually the best and longest ever - summer is over and to continue in property is going to need a mind shift from that experienced over the past five to ten years.

Did nobody listen to Winston on Coalition Night? Winter is coming. This Labour Govt will turn NZ back into the basket case it used to be under the last Labour Govt. When all the businesses and top taxpayers flee to Australia and beyond, leaving behind a country full of welfare recipients and nothing else.

Gotta love the piss poor attempt at revisionism. The last Labour govt left the economy in pretty good form really. Low debt, good gdp growth until the gfc hit. Blind tribalism is not a useful thing.

Did nobody listen to Winston on Coalition Night? Winter is coming. This Labour Govt will turn NZ back into the basket case it used to be under the last Labour Govt. When all the businesses and top taxpayers flee to Australia and beyond, leaving behind a country full of welfare recipients and nothing else.

I guess I got the answer to my question of yesterday straight from the horse's mouth:

by Yvil | Thu, 09/08/2018 - 09:50
I forecast for 2019 that inflation will be above 2% but GDP growth will be sluggish at under 2%. This will leave the RBNZ with a tough choice: prioritise inflation and hike the OCR or prioritise business activity and employment and leave the OCR as is

They will go for growth every time. Also, Inflation has been under target for so long that they can credibly tolerate above target inflation for an extended period.

I'm not sure how growth stimulating lower interest rates and QE could possibly be at this point. Households are already up to their eyeballs in debt. Low interest rates and QE certainly helped pump up asset bubbles round the globe, but with high debt and peaked assets... will consumers have the stomach for yet more debt?

There hasen't been any real dire consequence for all that debt yet, so yes I think people will stomach more debt until the real hurt comes. That's human nature

Sadly, you're probably right. No beautiful deleveraging on the horizon if we go down that route though.

Some households are up to their eyeballs in debt.. plenty with no debt at all... We can keep this train going until everyone has a 6 figure debt. Then prick the bubble and see how loud the bang is.

...I gather you mean the 10% who own 40% of the debt. With such high concentrations of leverage, it's not going to end well.

Hi Gingerninja.

Good to have you back... you ask the question 'will consumers have the stomach for yet more debt?' I would pose an alternative question given current situations unfolding in the Aussie property market, 'will the banks have the stomach for yet more debt?'

Both I think are very valid questions, but unlike Oliver Twist, I don't think either will have much of a stomach for 'more!'

Consumer does not need to take on more debt. Interest rates down, net disposable income to debtor households increases. As per post GFC, with tepid economy and falling interest rates, households on net retrench and pay down debt. That is the reason the banks were so keen to throw money at investors from 2012 on, as households were knuckling down paying off debt. You can stimulate an economy by lowering interest rates with falling debt levels. Mortgage rate down 1%, 500K debt an extra 5K after tax in the hand, could spend or pay off debt principal. Lower rates would be good for the NZ economy as less money being shipped offshore in form of interest, with more household income staying in NZ.

Governor Orr's monetary policy/speak is reckless, the idea of negative interest rates in NZ is repugnant. QE for the rich no doubt too, while the poor pay double-digit-rates (sometimes triple) on loans.

Shocking statements from Orr's this week, he is out to destroy confidence in the NZD to prop up Fonterra and reckless mortgage lending. This man is against price discovery and meeting the market.

If it was up to Governor Orr, the agrarian blacksmith industry would still be a thing. Also, if this did happen - enjoy higher construction costs and land prices.

I was somewhat surprised by the degree of forward signaling but not the intent. To have any semblance of functioning financial markets Orr can’t be seen to precipitate a ‘reset’. It’s business as usual for the asset owning classes. What did you expect?

I expected this, as such I haven't been holding NZ cash/term deposits for quite some time. The NZD has been one of the worst preforming currencies in the OEDC. Also, even with Gold's recent fall, it's still precipitously high against the NZD - up 5.32% year-to-date. That's down from 11% before Gold's recent declines.

The best thing Orr could do right now is INCREASE the OCR 1-2 percentage points and flush out all the bad debt, then maybe, maybe we can talk about lowering rates in 2020.

What do you mean by bad debt? Is that a judgment based on a financial or accounting definition? It may be my confirmation bias but I sense it’s more a desire to see someone suffer, akin to Rick’s consistent urge that people pay tax on capital gains.

One day they will start taking debt seriously. Meanwhile it's 'unconventional monetary policy' but whats it's all about is debt, eating tomorrows lunch, it's looks like tomorrow is about to turn up and he's hungry.