NZIER's Shadow Board makes strong call for Graeme Wheeler to hold the OCR at 2.75%

NZIER's Shadow Board makes strong call for Graeme Wheeler to hold the OCR at 2.75%

‘Keep calm and don’t rush’, is the message the New Zealand Institute of Economic Research's (NZIER) Shadow Board is sending the Reserve Bank (RBNZ) ahead of its Official Cash Rate (OCR) review tomorrow.

The Board, comprised of nine economists and business leaders, is calling for RBNZ Governor Graeme Wheeler to leave the OCR at 2.75%.

Wheeler has cut the OCR by 25 basis points on three occasions this year, indicating in his September Monetary Policy Statement, “Some further easing in the OCR seems likely”.

NZIER senior economist Christina Leung recognises that while inflation is very subdued at 0.4%, the economy will receive a boost from buoyancy in the services sector, and global dairy prices moving out of their slump.

“The Reserve Bank has time on its side and doesn’t need to lower interest rates right now,” she says. 

“There have also been encouraging signs of improvement in activity over September and October. Businesses are reporting demand in their own business is holding up despite uncertainty about the New Zealand economy more generally.”

The Shadow Board’s average recommended interest rate is 2.70%, down slightly from 2.80% from before Wheeler cut the OCR to 2.75% last month.

All of the board members except for BNZ’s head of research, Stephen Toplis, and Victoria University professor, Viv Hall, have revised their recommendations down from September.

All the members are also firm on their view the OCR should be held at 2.75%, except for New Zealand Steel and Tube chief executive, Dave Taylor, who is split on whether it should be held or cut by 25 basis points.

MOTU and Auckland University professor, Arthur Grimes says, “There seems little reason to change the OCR in either direction at present, so a strong (and symmetric) status quo recommendation is shown.”

MYOB executive director, Scott Gardiner says, “Lack of confidence in the business sector and gloomy outlook in certain sectors may force a reduction.”

Meanwhile Toplis warns a cut may do little other than exacerbate Auckland’s hot housing market.

“Any further reduction in the OCR from this point probably won’t make a material difference to Gross Domestic Product and Consumer Price Index outcomes ahead, but would more surely exacerbate financial and asset market imbalances,” he says.

Hall says, “Downside global risks continue. But current domestic interest rate levels do not seem to be constraining increased real private consumption and investment, and growth rates of credit aggregates may be creeping back towards pre-GFC rates.

“Uncertainties remain for U.S. and Chinese economic growth rate paths, and for the timing of Federal Reserve interest rate movements. So, no compelling case for adjusting the OCR this round.”

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Target inflation = 2%
Actual inflation = 0.4%
Difference =1.6%
What is the point of the RB Act?
The target has been ignored and undershot for several years.
How much unnecessary interest has been skimmed off NZers for years?
A colleague in Europe is paying 1.5% on their mortgage!
Wake up NZers and protest. We are the financial Guinea pigs of the Pacific.

Between 2000 and 2015 inflation has been about 40% i.e 2.something percent pa. I would call that close to the target.

Good grief, why should we follow the bumbling Europeans? The real problem with too-low interest rates is that it misprices risk. And you get foolish market reactions like asset price bubbles. (Auckland house price stupidity.) I think the guinea-pigs are the Europeans, Americans and Japanese, not us. If anything we actually need slightly higher interest rates. Locally, that would keep the "mortgage belt" from making stupid decisions to take on ever more debt. It might even get inflation up a little.

ECB is talking about negative rates and more easing. its no good employing people and producing goods and services if the average joe can not buy them hence deflation. oil is a classic example of this, too much is being produced because of cheap credit but the demand is not there. raise interest rates the uneconomical producers will fail production will fall until demand outstrips supply, the price will rise and so will inflation. it would lead to short turn pain 1 to 2 years for long turn gain.

In addition to relatively high interest rates, the NZ Govt is on a tightening bias,so the economy is being hollowed out.
In addition to needing lower interest rates, NZ needs some form of QE, which would be easy for the Govt - fund the schools and hospitals etc so they could run properly.
NZ could actually learn from many European countries - actually make complex products and sell them, as opposed to tourism and export eduction.

You are missing the amazing improvements in energy intensity. Look at chart 2.2 on page 55 here. Most countries have made major progress in this area. That means permanent demand for oil will be lower, and prices will be weaker. Ergo headline inflation will be lower. But the overall impact is hugely positive. Oil prices will settle at a new lower level and after that, annual price changes will revert to a new normal (and higher) level. That is why policy makers should and do look past system changes like oil prices when assessing the background CPI rate. The focus on the headline rate is misplaced.

The lower oil price means more $ are held by households. The data is clear. But this effect is is more than just with energy. Many other costs are lower as the app society widens. Household capacity to buy is higher now. There will always be some who don't share in the benefits, but the evidence is that most do.

Not sure this is true globally. There are still hundreds of millions of people in India and Africa joining the global middle class, buying cars, building houses etc. which all use up a lot of energy.This will probably at least stablize demand. But the peak oil panic was probably overdone, to a lot of people's surprise.

On the other hand, digitization of every aspect of our lives has just started. It took 20 years or so until the paperless office became a reality. Non-central work i.e working a lot more from home and not everyone huddling together in AKL will probably take much less time. I.e substantially less commuting, more homogenous population distribution, maybe even the return to the veggie patch and chook pen, as there will be space for it plus its recreational value.

I am also optimistic about the future, although a lot of peoples expectations will probably be shattered by the pace of progress.

Well said DC. and yr earlier point re who in their right mind would want to imitate those countries with zero interest? Theres nothing intrinsically good about inflation but all thrift is.

thrift" not in economics, a nation's economy is not like a household's economy.

A cut in interest rates is like a tax cut to the workers. Why would you begrudge this of the struggling families in New Zealand? It is also an assistance to struggling companies giving them more incentive to invest and in the longer-term create jobs.

not even invest, simply stay in business.

......and a knife into the heart of-those NZers who dont have a mortgage (the vast majority) such as retirees living on fixed interest and pension funds who are increasingly underfunded globally and taking increasingly more risk etc. Plus the added bonus of pushing house and other assets prices higher to indebt even more young NZer making them increasingly vunerable to the inevitable blow off of those assets and subsequent major losses that will accompany that - yeah great idea

Actually, "energy intensity per unit of GDP" so if you make less real goods and more services (which takes less energy) it looks like there is an improvement. If however the "services" is much financial wizardry its smoke and mirrors then I am not so sure. There is also some comment of discretionary energy use and how it can decline when energy simply becomes too expensive. So the US traditionally had a "driving season" where more petrol got used as ppl went on vacation etc. On top of that just where has growth gone? so sure we are now using less, the consequence of that is little sign of real growth.

Demand for oil maybe lower but as the supply declines to zero by about 2050 the assumption that the oil price will be lower for long is dodgy IMHO. The iterations are however very complex, this gives some idea,

"That is why policy makers should and do look past system changes like oil prices when assessing the background CPI rate" hence core inflation which excludes energy is probably the better metric.

So we have a bunch of right wingers and vested interests who dont want a rate cut, hardly surprising.

Lets look at some fundamentals,

a) it is asymmetrical in nature. ie if inflation eventuates (and after 7 years it has not, in fact we have had long term dis-inflation) then the fix is pretty easy. Raise the OCR and that can happen quite quickly if needbe. If we get a recession and deflation this is extremely hard to counter and once set in can be self-perpetuating.

b) The downside with allowing 0.4% to continue is the hard time the sectors that are balancing the other side of the 0.4% by being in deflation. Wages are rather sticky, ie they do not drop until ppl lose work and then find they cant get a job, or their new job pays less, that translates into higher WINZ costs, less Govn PAYE tax and less spending (and less GST). " Any further reduction in the OCR from this point probably won’t make a material difference to Gross Domestic Product and Consumer Price Index" that is because ppl cannot pay more, what it does do is ease the inputs into the economy which is the other side of the coin when you cannot raise prices."

c) Is the Auckland market really driven by a low interest rate? The point of any business is to make a profit so if my costs are 3% or 2.5% when my profit is perceived to be 20% really that 0.5% doesnt matter. "Toplis warns a cut may do little other than exacerbate Auckland’s hot housing market." so hardly a surprising statement (let alone foreign cash which requires no NZ mortgage anyway)

d) Trend, we have been well below the 2% target and staying there for a disturbingly long time with no real sign of an upturn despite what the talking heads think.

e) vested interests eg hardly surprising the banks dont want the tide of the OCR to go out leaving them exposed to the wrath of the voter.

We are NZ's . We get boned over for everything... it is our destiny..

The interest rate pattern is very similar to the pattern after the 1928/9 depression , when rates were very low for 10 years .

We may actually be in the early stages of a deflationary spiral.

It may be necessary to cut rates to stimulate growth and spending

We have also now got an oil glut so big that prices could collapse , with dramatic knock-on effects

the RB just needs to bring in LVR of 30% for all property and loan to income ratios,
I would have progressive L to I for investors i.e first 30% second 40% third 50%,
ban non citizens buying
then they could drop the OCR all the way to 1 %

We continue to focus on investors for the increase in house prices. Investors do not push up prices. Investors want to buy as cheaply as possible. Why do we continue to attack Mum and Dad investors who are protecting their future in retirement and removing themselves from the risk of being a burdon on the state and their own families.

Investors add to demand, extra demand pushes up prices.
If all investors exited the market right now and 40% of Auckland's housing supply went on the market for fist time buyers to snap up, I'm sure there would be a gigantic drop in house prices!

I should have quoted Mark Twain last year with all the "exaggerated talk" of inflation .

What is amazing is that this time a short year ago , the RBNZ was signalling inflation , and had everyone panicking about the OCR going up .

I must tell you , I was not fooled by this widespread panic .

I could see that the things we buy, the administered costs we pay and services we use were coming DOWN in cost :-

1) Our weekly food bill at Pak 'n save came down ( including imported beer and wine )
2) Our cost of filling the cars ( Petrol and diesel) came down by a significant sum ( we run a fuel-card account )
3) Our rates ( an administered cost ) on the North Shore came down by 8% after the Supercity , and have stayed down ( they have not gone back to 2011 level yet)
4) Our electricity and gas account came down 3% from 2013 and has bounced around but is down a little
5) Telephony and internet has become a minor expense ,and that's with UFB to the house ( years ago the monthly phone account was a dreaded problem )
6) Bank fees have not moved at all in years
8) ACC on vehicle licences ( another administered cost ) came down in July
9) Clothing is now cheap , and online its even cheaper
10) Interest rates have fallen since 2008 , and stayed there
11) Airfares and holidays are now really cheap , even beneficiaries can afford a 5 day break in Fiji

4) I think spring time is when the electricity company and the line company will review the costs with a view to charging you more.
5) Yep I saw a huge drop 2 years ago from $200+ a month to <$140 for more. I doubt however that this will drop much further.
9) Yes, and with many NZ shops not wanting to hold "odd" sizes it is just as well.
The thing to predict/hope for is the exchange rate "improving".
11) Jet A1 is down, as long as oil stays that way so will it. Interestingly there are all sorts of differing predictions from down more, to up a bit to up a lot on oil, who knows short term. Demand/consumption for oil is apparently growing. Debt levels of course have not changed and are high.

Ipso facto a bunch of economists agreeing completely with each other, it must be wrong.


Worse, when most economists didnt see the GFC coming and this bunch is of the same ilk, listening to them strikes me as wanting a beating second time around.

Where is the evidence that low interest rates increase growth and spending.

Pretty standard economics, so evidence abounds on the Internet, google is your friend.

10 June 2015 - ...It’s a line call but NZIER’s Shadow Board says leave the OCR at 3.50%...

Empty vessels...loudest sounds....

LOL, nice....

Isn't the number one mandate of the RBNZ to keep inflation at 2%? They haven't managed to achieve it in years, and even though no one can see any inflation coming, they still don't want to lower the OCR!

If there is a good reason to keep inflation lower than 2% then maybe they should ask to have their mandate changed. Otherwise they should focus on doing the job they are paid to do.

I think the No1 is financial stability, then inflation control. I must admit I am "confused" when the inflation is clearly worryingly close to zero that the RB is not responding to that and trying to get it backup. I am hoping their reason is really profound and not simply pig headed dogma. Sadly I have yet to see it as anything but the latter.

But is the OCR a tool used for financial stability? Surely the tools for that are the likes of loan to value ratios.

How do you, 'get it back up'? It's not like there is some type of Viagra for the economy. China has stockpiled massive amounts of raw and processed materials, this will be deflationary as it passes through the system, compounded by slowing demand in the West.
Just like the dairy stockpiles building in the Northern Hemisphere, eventually you have to meet the market, whether you like it or not. We have a huge amount of debt that will weigh on our economy, it's not going away in a hurry.

Do I have to add the glaringly obvious, that if all measures of existing house prices weren't removed from the CPI in 1999 we wouldn't have 0.4%PA inflation at the moment!

And before the "asset prices can't be in the CPI" brigade start moaning, please answer why it can't be included...

Because housing costs are the largest monthly payment for most households, and the fact that most households don't buy a house in any given quarter or year is no argument for not including it.

Why do we include the price of TVs and washing machines in the CPi (which are bought as infrequently as houses) but we don't include existing house prices??

Some things have simple solutions.

The problem with us having such high interest rates (yes they are high by international standards) is that it pushes our NZ$ up as foreign capital looks for the high returns in NZ