Slower than expected GDP growth, major bank capital changes, and a gloomy global outlook prompt ANZ economists to jump off the fence and forecast 3 OCR cuts by 2020

Slower than expected GDP growth, major bank capital changes, and a gloomy global outlook prompt ANZ economists to jump off the fence and forecast 3 OCR cuts by 2020

ANZ economists are downbeat on the economy, forecasting three interest rate cuts to bring the Official Cash Rate (OCR) down to 1.00% in 2020.

Keeping the OCR on hold at 1.75% for 14th time, Reserve Bank (RBNZ) Governor Adrian Orr in November said he expected the OCR to remain at this record low level "through 2019 and into 2020".

He noted “both upside and downside risks to our growth and inflation projections”.

However, ANZ economists have jumped off the fence, taking the view the downside risks carry more weight.

They see a 25 basis point cut coming in November 2019 – if not sooner if global risks materialise – followed by two more cuts possibly in February and March 2020.

The headwinds they see are around slowing global growth, global liquidity risks, the RBNZ proposing to require banks to hold more capital, a weaker outlook for tradeable inflation and a lack of economic momentum to boost inflation.

Their OCR view change comes further to September quarter Gross Domestic Product (GDP) figures today (Thursday) coming in much lower than expected by both economists and the RBNZ.

GDP was up 0.3% in the September – well below the RBNZ’s 0.7% forecast – reducing the likelihood of the RBNZ’s outlook for growth to accelerate to 3.4% in 2019.

ANZ economists say: “It is certainly not a case of us expecting that the economy is about to roll over, and it is ironic that we are changing our call just as business sentiment indicators are improving. But economic momentum is nonetheless a little softer.

“And equally importantly, upward revisions to historical GDP imply a higher potential growth rate of the economy. This suggests that the RBNZ will conclude that a stronger growth rate is required in the future to see CPI [consumer price index] inflation return sustainably to target.

“We don’t see that happening without further monetary stimulus.”

In other words, they believe the economy is strong enough, to see people spend enough, to get inflation to where it needs to be without lowering interest rates. 

Looking at the global economy, ANZ's economists note growth forecasts were downgraded last month for both 2019 and 2020.

They specifically mention China rapidly accumulating debt and being in a tariff war with the US.

“Soft commodity prices have proven remarkably resilient so far, but there would seem to be a great deal more downside risk than upward,” they say.

As for liquidity risks, ANZ economists recognise that quantitative easing (IE printing money) is giving way to quantitative tightening.

“Although the current account balance has remained relatively contained this cycle, it remains the case that we are poor savers and are reliant on foreigners to fund our borrowing,” they say.

“That funding is getting more expensive as liquidity dries up and lenders reassess risk of all kinds.”

Then there is last week’s news that the RBNZ is proposing that banks will have to hold between 20% and 60% more "high quality" capital, which represents about 70% of the banking sector's expected profits over a five-year transition period.

“This would impact both the price and the availability of credit to the broader economy,” they say.

“It therefore implies a lower long-run neutral OCR, but also an even lower OCR over the transition period, while banks are building their buffers.

“It is only a proposed change at this stage, with a final decision expected in June 2019, but is highly likely to go ahead in some form.”

ANZ economists conclude: “The economy is still performing well. But over time, we expect that it will become clear that the economy needs more of a leg up from monetary stimulus if inflation is to lift sustainably to target.”

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45 Comments

It won’t be 1%.
This time countries that ‘survived’ the 2008 correction, won’t.
There is no China this time. In fact, they could be the catalyst.
There are no interest rate buffers and monetary policy is, and has been, proven ineffective over even the shortest of times (10 years is short!).
So this time, as with last time, interest rates will harmonise amongst the countries of similar character. This time we won’t be outside the tent of financial pain, like Aussie was as well.
And last time that harmonisation was at; well, let’s call it 0%.

Agreed.
A cautionary tale of uncertainty for both the global and NZ economic horizons worth being noted by those who have only known eight years of the NZ "rock star" economy and a global economy propped up by QE.
While not necessarily all doom and gloom, hunker down a little; pay the mortgage down and don't misbehave at the office Christmas party (especially by being fueled by drink and telling the boss what you really think of her/him).

bw, well said. I think anything below zero would risk people stuffing their mattresses. There's little room for stimulus next time around and it's easy picturing an unusually prolonged and painful slump.

even a 1% OCR would likely mean savings/on call rates of zero - perhaps even negative rates (ie a charge to bank the money).

TD rates would be sub 2% I imagine - as they are in many parts of the world.

With additional capital requirements and increase in RWA, unclear on how much would flow to retail floating mortgage rates...

Go along with that as usual RP. A co segment on here today identifies the national economic cost of an elderly population when their ability to take care of themselves is inhibited coupled to deteriorating health to be expected from seniors. As an entirely simplistic example. Low earning from investments means less cash in hand, visits to the doctor are foresaken, then illness not caught in time, more cost to the health sector.

Hi R-P,

I take it you would give up recommending term deposits if/when interest rates go negative??

TTP

Agent TTP, if deflation is running at say -2%, a term deposit of -0.5 means you're still ahead anyway! Would you stop recommending FHB catch falling knives in such dire economic conditions that would warrant such rates?

Oh that's right, you'd still be cut and pasting the market is stable - lol!

The central banks are unlikely to just give up and concede failure and will pull out all the stops including more QE and putting cash directly into people banks accounts it was discussed last time not that its likely to work the'll definitely go down fighting.

I’ll gladly take some money in my bank account!

"Putting cash directly into people's bank accounts" is fiscal policy. The government needs to do that via a tax credit or cut or transfer. Good idea under current deflationary conditions I say.

No-one ever seems to think about the effect of the government's ongoing surpluses on gdp growth, but is seems logical to me. Government saves. Foreigners save. Private domestic sector goes into debt to maintain growth. Which has its limits as perhaps we are now discovering?

https://en.wikipedia.org/wiki/I%27m_Forever_Blowing_Bubbles ;)

Welcome to little Japan: Slowing growth, cratering interest rates, ageing populations and a disenfranchised younger generation who are working more, earning less and reproducing at below-replacement rate as a result. Never mind, capital gains be sustained by simply importing population pressure. Far easier than addressing the structural issues at play.

Yes, but Japan never got their bubble party back. However, they did get probably the world's best infrastructure; low-cost goods and services; and unexpected industries such as inbound tourism.

As a result I don't think you're going to see a populist backlash in Japan like you will in the EU and the US and probably here too. Perhaps it will be the one country in the world where things remain calm and orderly? A steady-state economy growing in per capita rather than absolute terms with a decent social wage.

Lower OCR to come.
Lower mortgage rates to come - back under 4% (after the latest small blip upwards).
If you're on floating & waiting/scanning - then wait for lower short-term fixed mortgage rates in the new year.

This looks very interesting. I'm on 3.95%, along with all my friends and colleagues (we all switched penalty free just weeks ago). I wonder what the rates will be in a year's time - 3.5% maybe?

-1%? You just never know! ( as the Danes found out not so long ago)

At the risk of being alarmist (who me?!) if you have a mortgage - get rid of it! Sell the asset(s). It's not the cost of money that's going to get cheaper that matters, it's the price of the underlying asset(s).
I know that's not practical if it's just the one; your home. But that's' what keeps people in the wrong market - sentimentality. Anyway, good luck everyone with what they've decided to do. We've all had enough time to get ready!

Who cares if your house value plummets? If it means your mortgage interest rate plummets - then that's better for your cash flow. Maybe your kids may miss out on some inheritance, but that's a future issue.

You're assuming everyone keeps their jobs when the credit driven bubbles burst. They don't.

MortgageBelt, the downside to house values plummeting is that the debt value soars!

Hi MB
Personally if I had a mortgage I would not be holding my breath for certainty of much under 4%.
Banks are still going to need to attract both domestic and international funding, and note that over 70% of of NZ bank funding is sourced domestically. How much will that domestic funding be affected if term deposit rates and KiiwiSaver cash accounts are returning less than 2.5%.
There again, I am one for whom mortgage rates of 8 to 9% were the norm (and memories of 22 to 25%), so 4% is really cheap.

4% of $800K is a lot more than 25% of $80K. You were borrowing a fraction of what a modern borrower has to take on today. You also had inflation and rapid wage growth chipping away at it. It's not even remotely comparable.

Hi GV
Ever heard of a thing called a wage freeze which was in place at the time?
If so; try factoring that in. ;)

It was 2 years dude, just like the "22% interest rates". The wage freeze was put in place to try tackle the rampant inflation at the time. You know, wage inflation was ridiculous and this was decimating the debt burden at a rapid pace. Why else initiate a wage freeze if it weren't for the fact that inflation was taking off?

Dp

GV27
The phrase is relative not comparable

ANZ are a bunch of doom and gloomers. They should instead invest everything in property and over leverage debt or derivatives. The property prices in Australia are looking good, buy the dip, property only goes up, etc. Oh wait they already have.

I don't see the 1% as being realistic as the banks started ignoring the OCR on the last step down. I'd expect RBNZ to turn into QE idiots first.

Minimum wage is going up 20%, we are at full employment, we have rampant wage growth across the public sector but we need to cut the OCR? This does not make sense.

Give it a few months and ANZ will be asking for a hand out. It would make more sense in that context.

I'd better move the wife's account off ANZ. Sounds like a good time to ditch ANZ.

In what report did ANZ say all this?

Much appreciated

Well we talk about DGMs here alot but ANZ has taken the cake. I think they know from their aussie parent about the situation coming and are now deciding to be realistic. Great point above about Kiwisavers not growing and making easy capital growth hard to come by!

I don't agree rates are going to go up.

The forecast can be no surprise when you consider the impact of the RBNZ proposed new capital requirements for NZ banks. Capital will need to rise from 10-12% to around 18%. Macquarie analysis a few days ago suggest that will require a 90 - 140bps rise in bank margins to compensate banks to retain their current ROE - you can bet that they will expect to retain their average 13% ROE or otherwise look across the Tasman when banks decide they need to pull their heads in, be it credit control after the Royal Commisioon, or capital control. RBNZ need to allow for that but it will mean bigger all falls in the rate that borrowers will pay...dont get excited as usual Mortgage Belt

First-home buyers are a dominant/expanding force in the housing market right now.

If the OCR falls to 1.00% in 2020 then the lower cost of debt would be a leg up for them.

House prices seem unlikely to rise much in the next year or two. (But a falling OCR would guard against significant falls.) Anyway, on balance, housing affordability could well improve. Nice!

The flip-side, of course, is that those with bank term deposits would have to accept deplorable returns......... A pity for the elderly, retirees etc.

TTP

And those that base their future mortgage payments on a 1% OCR

They don't have to accept deplorable returns.. they can pull their money from those accounts and invest in something else.

Just had a look at ANZ term deposit rates on the website, highest was 3.8% for 5 years. So your money is locked away for 5 years, and you get 3.8% less RWT (33% for most, maybe less for pensioners).

Sure makes the 4%-6% dividend yield (usually fully imputed too) of several NZ utilities type companies look pretty good by comparison. And they usually offer slow but steady share price appreciation too.

Sorry ANZ - but lowering the OCR may simply further juice asset prices – and not really assist in raising your inflationary hopes.

The banks don’t want Auckland to catch the Sydney property drops.
Better to drop NZ rates to keep prices from plummeting.

Why would prices in NZ be looking to “plummet”?

Sydney & Auckland both been blown up by foreign buyers & money in a similar manner.
Sydney now deflating.
Banks hope to avoid an Auckland deflation. Hence lower rates needed.

US Fed funds rate is 2.5% and 2-3 hikes next year. NZ cash rate is 1.75%. It can't decline too much without putting pressure on the NZD.

ANZ must be worried. They are clearly spinning the lower rates rhetoric as an offset to a future of lower leverage.