NZIER Shadow Board members cautious to support rate cuts over keeping the OCR on hold

NZIER Shadow Board members cautious to support rate cuts over keeping the OCR on hold

There’s division among some of the country’s top economists, business people and researchers over whether the Governor of the Reserve Bank (RBNZ) should cut the Official Cash Rate (OCR) when it's reviewed on Thursday.

While negligible inflation and falling dairy payouts are causing pressure for a rate cut to mount, 53% of the New Zealand Institute of Economic Research’s (NZIER) Monetary Policy Shadow Board wants the OCR to remain at 3.50%.

Yet the general consensus is that if the OCR is not cut this week, then such a move is not far away, as the average recommended rate among the nine Shadow Board members is down to 3.40%, from 3.42% in April.

NZIER principal economist Kirdan Lees, says, “The outlook for economic growth no longer looks quite so robust. Dairy prices continue to slide, driving down demand in much of rural New Zealand. Inflation is at zero, so there are plenty of reasons to cut the rate.

“The inflation outlook is much different to a year ago when the Reserve Bank hiked the OCR 100 basis points. Not only are the prices of imported goods falling, prices for domestically made goods and services are subdued.”

On the other hand, we have Auckland’s seemingly uncontrollable housing market, which doesn’t need rate cuts fuelling its fire.  

Yet the NZIER notes, “Ultimately the Reserve Bank is not responsible for the rate of growth in house prices, although it has a role to play in ensuring financial stability, which explains its recent policy announcements targeting speculative investment in Auckland”.

Experts revise rate recommendations down

BNZ head of research, Stephen Toplis, is a Shadow Board member, who wanted to see rates rise if they were going to move in April, but would now prefer to see the OCR remain on hold.

He says, “The macro data argue for the RBNZ to stay on hold – for now at least – but the case for a cut is building and there is a very real chance that the RBNZ will be bullied into easing by the threat that that New Zealand dollar will bounce if they do not.”

MYOB executive director, Scott Gardiner, and Business New Zealand CEO, Phil O’Reilly, are sitting on the fence between keeping the OCR as it is, and cutting it to 3.25%. Both were much more in favour of keeping the rate at 3.50% than dropping it in April.

Gardiner says, “Latest MYOB business monitor data suggests the majority of businesses are seeing stable future revenues. [There are] increasing calls to lower rates given challenges in some sectors – dairy in particular.”

ANZ National Bank chief economist, Cameron Bagrie, and New Zealand Steel and Tube chief executive, Dave Taylor, have stuck to their guns since April, recommending a rate cut to 3.25%.

Bagrie explains, “Headline inflation is low, core inflation has been receding, wage inflation is benign and 2-year ahead inflation expectations sit below the target midpoint (which we’ve never seen before).

“Of course there are flipside obvious risks too with capacity pressure in some areas, though that is not manifesting in inflation and some will say it’s just a question of time.

“But with growth moderating, economic risks such as a low dairy payout apparent, core inflation already low, and growing evidence there is an unexplained element to low inflation outcomes, the path of least regret looks to be a lower OCR as oppose to a flat-lined one.

“The RBNZ needs to be ahead of the curve not behind it.”

Westpac chief economist, Dominick Stephens, and MOTU professor, Arthur Grimes, would prefer to see interest rates remain at 3.50%, but are both more open to cuts than they were in April. 

Victoria University professor, Viv Hall, and University of Auckland professor, Prasanna Gai, haven’t changed their views since April, and are both firmly set on suggesting the OCR remain stable.

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Is the Auckland housing market/price levels actually the direct responsibility of the RBNZ?
The RBNZ have an inflation target. They are failing to achieve that target.

As long as the Govt have a liberal immigration policy, and set policy to fund NZ universities by International student fees and allow non residents to buy property, then Auckland housing is immune to any RBNZ setting.

So perhaps they can return to core business. And educate the public as to the real drivers of property booms.

they also have a mandate to regulate and insure the financial health of the banking system.
therein is the conflict do they do one while letting the other get out of control. if you have governments setting conflicting policies how are they supposed to achieve both.

ANZ National Bank chief economist, Cameron Bagrie, and New Zealand Steel and Tube chief executive, Dave Taylor, have stuck to their guns since April, recommending a rate cut to 3.25%.

I bet they are. Rating agencies estimate ~33% of NZ bank assets are dependent on foreign wholesale funding. Guess what? - the preferred RBNZ minimum funding time frame for this type of indebtedness just rose another ~3.0 basis points to 77.22 bps (0.7722%) from 0.5345% a year ago. Such significant cost increases have be recovered from NZ savers in the form of lower savings rates which are no where near commensurate with the risk level exposure associated with financing a leveraged house price bubble.

Think OBR transforming depositor's savings into equity to cover insolvency where return hungry bank capital is inadequate to cover such contingencies in a northern hemisphere sourced rising interest rate environment. If Aussie banks want 19% return on their capital - what should depositors be seeking on theirs? - certainly not 3.5%.

Stephen, I have some sympathy for your views, except for the exchange rate effects of keeping a relative to other countries, high OCR. In a separate post you rightly pointed out that Janet Yellen is sitting on her hands in this respect longer than would seem healthy. My view is that while the Fed is at 0.5%?, we cannot afford to be at 3.5%. The US starts raising, then I personally would be happy enough we followed soonish after, assuming the effects on the exchange rate ended up being roughly neutral.

My view is that while the Fed is at 0.5%

The effective Fed funds rate is a quarter of that rate. View chart As you will note, and I have mentioned this, Fed Funds is a moribund measure since collateralised borrowing reflected via repo rates is preferred because industrial funding is typically sourced from money market funds and dark money pools such as Apple - all of which I have highlighted elsewhere on this site.

You will note the USD in index form has risen roughly in lock step with the referenced one year libor rate. View 1 year graph Libor reflects the global eurodollar unsecured interbank funding medium.


Re: OCR cut and it's dairy effect/cause.

Is movement in the OCR actually going to hit anywhere important? You're talking about a shift in internal interest rate when there is a good chance much of the debt (ie the stuff actually pay interest on is already locked into Fixed term, or hybrid loans.)

A few point movement will stimulate which parts of the economy? As it's a "printing" effect it's bump the exchange rate up or down. But beyond that the few points, in areas isolated from the cause, aren't going to heat the cold spots in your economy.

Better to address reduction of costs to affected areas and isolate the cause of diviculties such as provincial shrinkage. We need those people in the provinces to be able to spend, to keep them improving their houses and children and thinking, so to keep the factories and taxes flowing. Your economy is in hypothermic shock, all the life sustaining liquidity is rushing to core organs and central portion and your limbs are dying. No point in waiting until the shakes and shivers stop....

The RBNZ HAVE to stick to their Inflation Targeting when assessing the OCR, right? WRONG! Open your eyes, and have a look at all the other "must do's" in the global financial marketplaces that are being ignored. Historically and intuitively, the worse an entity's credit standing gets, the higher the interest rate they should pay to refinance themselves. The opposite applies today in any part of the World that is looked at. So....Why pretend that the RBNZ HAS to stick to anything? ( never mind about the fact that 'inflation' is actually showing up in all asset classes that are conveniently left out of the "CPI" calculation).
So...... RBNZ? Do what's right for your country for a change. And low(ering) interest rates.....isn't it.

Liquidity trap. RBNZ may be wary of falling into.

Why are these people refered to as EXPERTS?
If they are experts we are geniuses.
They are only just catching up to what we have been saying for ages.
These, so called, "EXPERTS" were calling for increases to the OCR not that long ago.
They were also warning us to fix as interest rates were going to rise.
Experts hahahahahaha

welcome to my world. I start getting worried when people start finding some of my discussions are ringing true...because if some of them do, then some of the more dire predictions aren't too many chess-steps ahead.

Hey Mike I love to see your posts where you forecast that the oil price and diary pay-out would more than halve, or are the "experts" mean't to be more like soothsayers, whilst you're just a plain genius? There are no experts or geniuses when it comes to forecasting in financial markets, just risk managers and non-risk managers, and those that foolishly think they know, and those that are smart enough to know that no one does...experts..hahahaha

Glenn Stephens also admits that the Sydney house prices are crazy and now outside of his control, immune from interest rate hikes/cuts.
"Mr Stevens said Sydney's housing boom was not simply a result of record low interest rates"


Earlier in his speech, Mr Stevens signalled that the Reserve Bank remained open to a third interest rate cut his year, but also flagged serious doubts over its efficacy in anything but further pushing up household debt and property prices.

But hey, not a problem for the poor to endure a round of ANZ rates hikes.

Unheralded, ANZ have raised their Personal Loan interest rates by +2%, upping their <$10,000 rate to 18.95% and the >$10,000 rate to 17.95% Read more

Oops German term rates are rising as well.

The German bund yield reached 1% today

Yes, that is a significant turn around for a security which was yielding 0.049% back on 20 April this year. That is equivalent to 864 bps of capital loss, an unmitigated disaster given the annual coupon is just 50bps.

"Paper losses over the last three months have reached $1.2 trillion Yields have jumped by 175 basis points in Indonesia, 160 in South Africa, 150 in Turkey, 130 in Mexico, and 80 in Australia." (Telegraph)

Graeme Wheeler....You almost had it,Son. You were almost out in front of the whole pack. Now, you've condemned New Zealanders to be trampled by the herd as it turns.