By Bernard Hickey
Reserve Bank Governor Alan Bollard has moved to try to talk down the New Zealand dollar and has criticized the US Federal Reserve’s money printing as ‘problematic’ for the global economy, but he rejected any suggestion New Zealand should move to control its currency or impose capital controls.
“Domestic rebalancing is proceeding, but pressures on the New Zealand dollar are not helping,” Bollard said.
Bollard also commented that the New Zealand dollar on a Trade Weighted Index (TWI) basis and wholesale interest rates had assumed a higher interest rate track from recent local economic data than the Reserve Bank saw as justified. The New Zealand dollar fell from 78.2 USc to 77.7 US cents.
The TWI has risen sharply in the last week to a multi-year high after financial markets saw stronger than expected employment figures last week as a sign of higher interest rates in future. The 2 year wholesale swap rate has risen from 3.79% to 4.1% in the last two weeks on the financial market speculation. See the interactive two year swaps rate chart below.
Later in the day, Bollard told the Finance and Expenditure Select Committee that he was watching the currency closely and could not rule out intervention, but that intervention recently in Switzerland and Japan had not been successful for any sustainable period given the forces driving currencies were coming from other bigger economies.
He said any suggestions that the New Zealand dollar would reach parity with the New Zealand dollar were extraordinary, but would attract the attention of the bank.
Bollard also acknowledged Prime Minister John Key had phoned him two weeks earlier to talk about the currency, but that he had not felt pressured. He said he believed Key had only phoned him twice in his time as Prime Minister. The phone call had been to pass on comments the Prime Minister had picked up at an East Asian summit.
Elsewhere, Deputy Governor Grant Spencer pointed out that if European debt markets blew up again it would make it more difficult for banks to raise short term wholesale funds offshore, although New Zealand banks were sometimes benefiting from demand from investors in Europe who wanted to invest outside of Europe.
Bollard made the comments as he released the Reserve Bank’s half yearly Financial Stability Report, which also warned that a softening housing market and falling farm prices could put indebted households and farms under “significant stress”.
The report also pointed out that funding markets for New Zealand’s banks remained somewhat fragile as international investors continue to question the sustainability of big budget deficits, particularly in Europe.
However, the Reserve Bank did point out that New Zealand banks had reduced their vulnerabilities to these international funding markets by increasing the amount of long term and local funding to well above the new 65% minimum regulated by the bank.
But it was Bollard’s comments on the currency and the US Federal Reserve’s Quantitative Easing, often referred to as money printing, that stood out. “Households and businesses are keeping spending low as they reduce debt,” Bollard said.
“Combined with improved export commodity prices, this is reducing New Zealand’s current account deficit and external indebtedness, both of which are positive for financial stability,” he said.
“However the New Zealand dollar remains relatively high, reflecting easy monetary conditions and weak economic activity in the major developed economies. If sustained, this will make the continued rebalancing of economic activity towards the tradeables sector difficult to achieve,” he said.
“Emerging Asia remains the main engine of global growth and this has been positive for New Zealand. Financial markets have become more stable since the European sovereign debt crisis earlier this year. But the widespread withdrawal of fiscal stimulus and debt reduction by consumers and businesses continue to pose risks to the global recovery,” he said.
“In the US new quantitative measures have been announced recently. These appear to be supporting risk asset markets, but they are also putting pressure on capital inflows and exchange rates in third country economies, which is problematic for international rebalancing.”
'But not much we can do'
However Bollard rejected suggestions New Zealand could intervene to protect its currency or impose capital controls. He cited the ineffectiveness of recent attempts of the Bank of Japan and the Swiss National Bank to stop their currencies from rising. He also dismissed the idea of a return to the gold standard.
He compared New Zealand to the grass being trampled by elephants in global currency markets.
Financial stability
Elsewhere, the Reserve Bank said banks’ non-performing loans now appeared to be stabilizing after rising steadily from mid-2007 and it expected to see improvement as the economic recovery continued into 2011.
“Risks to this outcome would arise if the current softness in house prices were to become accentuated or if agricultural export prices were to drop off their current high levels,” Deputy Governor Grant Spencer said.
Property market risks
The RBNZ said in the report that a further weakening in the recovery had the potential to generate further loan losses in the banking system.
“House sales have stalled for the past six months and there are signs of prices falling again. Were this to be accompanied by renewed weakness in the labour market, some mortgage borrowers would find themselves in a position of financial stress,” it said.
“Furthermore, the banking sector remains heavily exposed to developments in the agricultural sector. Strong increases in commodity prices over the past year have boosted the cash flow position of many farms,” it said.
“Nevertheless, agricultural land values have been falling and farm sales volumes are very low. Any material drop in commodity prices could expose relatively indebted farms in the sector to significant stress.”
The Reserve Bank said it generally supported the Basel III push to improve international standards for bank capital and liquidity, but that it reserved the right to make any changes for New Zealand conditions.
“Sluggish for some time”
The Reserve Bank noted the pressures on the global and New Zealand economies from the effects of attempted deleveraging by households, banks and some governments.
“Many developed economies are continuing to adjust to excess leverage on household, business and financial sector balance sheets built up prior to the financial crisis,” the RBNZ said.
“Growth in these countries is likely to remain sluggish for a significant period of time while efforts are made to restore balance sheets to healthier settings.”
“It is typical for consumption and investment to remain subdued for an extended period as households and businesses attempt to reduce debt in the face of lower wealth and lenders apply generally tighter lending standards while replenishing their capital buffers.”
Chinese and Aussie property prices
Also for the first time the Reserve Bank commented at length on the risk of a bust in the Chinese property market.
“Chinese property prices have shown spectacular growth over the past year, largely driven by growth in domestic lending. A slowdown in China could materially affect New Zealand, particularly if New Zealand export prices fall,” it said.
However, the RBNZ noted, recent policy actions in China appeared to have had some success in restraining growth. It also commented on Australian property prices in relation to the Australian economy and the strength of the banks there.
“On some measures, property prices in the region, including Australia, appear stretched, carrying the risk of a sharp correction and slowdown in economic growth.”
(Updated with video, Bollard comments on markets pushing up the NZ dollar and interest rates more than the RBNZ saw as justified; Interactive swaps chart; link to full Financial Stability Report. Bollard and )
No chart with that title exists.
37 Comments
Good to see Alan has the bollards to point out the problems the US money printing is causing everyone. Not the colourful language the Germans etc are using but good to see anyway. John Key on the other hand sounds like a real Fed sycophant.
Otherwise Bollard seems to have a reassuring grasp of what's going on.
Interesting. We now have a scenario where the price of nearly everything is rising, which some would call inflation, but very low interest rates. And with more money printing, which i'm sure will happen en masse, these effects will only be amplified - higher prices, lower interest.
I've had a feeling a price inflation and low interest scenario would happen for a while now, but didn't think it would manifest itself like this. Rather thought that interest rates would be kept artificially low because raising them would kill the consumer/borrower. Instead interest rates are being pushed lower because every country has to destroy their currency to stay competitive.
They'll have to force cash onto people soon. Only way to keep any value is to get out of money. Not that this is anything new, but it is certainly extremely evident in these times.
Nearly everything isnt rising...some things are, some things are not....
In order to get a picture or a trend for the economy you need to look at the core inflation figure and not the CPI...for the core (in the USA) we are seeing dis-inflation and by the end of the year in the USA it could actually be deflation....ie next month...
In terms of printing money, its the money increase in circulation that counts to create inflation. That is actually decreasing...as consumers are not spending. Govns are spending but its robbing future spending to do now but that spending is less than what consumers have withdrawn....
So what you need to consider is NET....if the consumer withdraws 2 trillion of spending and we "QE I" with 800 Billion thats still a net 1.2Trillion down....so what they have done to temper the dis-inflation rate, they have not reversed it...
Stag-flation is what Japan suffered for 2 decades, now into its third....some things rising, sure but property etc dropping.....those PIs in NZ are looking like road kill when that happens here IMHO.
In a deflationary scenario cash is king as is flexibility and ebt is really, really bad as is being in the wrong assets and even shares.......
So it comes down to, you think its inflation, I think its deflation (or at best stag-flation)......do as you believe, you are a grown up.
regards
Nah only commodity prices are rising and if our dollar goes up everytime comodities boom then it negates any extra cash inflow we might get.
All other assets still blown up from too much debt. They will deflate untill debt levels get back to something sustainable, and if our dollar is sky high this is going to take a very long time to happen.
The shit will hit the fan.
New Zealand cannot afford to get into a sell self perpetuating spiral of despair by trying to keep its dollar value at a level where we remain internationally competitive. We cannot compete with the big boys, and it is delusional to think that any adjustment to our monetary policy will have any significant impact on the world stage. All I can say is "buckle up, and hold on for the ride, its going to be bumpy"
churr churr
FYI I've updated with Bollard saying markets overreacted to stronger jobs figures last week by pushing up the NZ$ and market interest rates in anticipation of faster and bigger rises in the OCR.
The NZ dollar has fallen about half a cent.
Bollard, however, said there was no way New Zealand could stand in the way of such moves being driven offshore. He was sceptical about the effectiveness of currency market intervention, pointing to the lack of success in Japan and Switzerland.
He ruled out any moves to control capital flows and rejected suggestions of a move back to a gold standard.
cheers
Bernard
Im just reading this weeks Straight Furrow and see the Aussie banks have a bit of a problem with Aussie farm debt. Its doubled in the last 5 years to $58 billion, banks are telling farmers its time to move on.
"The widespread reliance on using farm equity to absorb losses and running costs over the last few years has left agriculture with a debt problem far worse than the housing market and thats unusual." "Neither the the farm sector or the banks want to a huge influx of farms swamping the market, that would put massive pressure on everyones farm equity but Id guess that 5 to 10 out of every 100 farms are now struggling to sercice debt in a reasonable season or better."
Aussie debt is about the same as ours but Aussie ag is huge in comparison.
I am always a buit sceptical about Aussie Ag because I know that most of the production comes from, about the %1 thats irrigated.
I need a break from this blog – but may join again later in a few months time, when the people of New Zealand ask fundamental questions - where are the quality jobs, how do we pay the bills and why can we not afford new infrastructure/ education/ medical needs ? Had enough of that “DailySmallTalk” going around the circle – bye !
..and I’m very disappointed about the NZMEA not coming up with some new profound ideas, how we can improve the production sector.
Regards Walter
Jeepers Walter : Who's the Gummy one got to play with , now you're joining Count-of-Christov on a sabbatical ?
And who's gonna keep rarking up those loafers at the NZMEA who don't address your questions ; yet demand answers to their's ?
Enjoy your free time . Have a snifter or two for me ( still orf the juice , last of the rabies shots due on the 15'th ! ) .
See'ya Kunzie !
Andrew – do you know of an army camp for 60 years + who worked successfully in the ArtBusiness for 40 years starting up with 0 – never needed foreign money, but worked for 20 years 10 – 14 hours a/day - exporting all over the western world ?
Yes - I think many people have to toughen up in this country !
..and you know Andrew - everything is paid to the last dollar house/ business/ car/ fridge/ icecreme not one single Bollard owned by a bank !
The quick fix - society has changed - forever
In a society such as ours where we have instant access to almost everything we desire, there is the expectation that life should be easy, without pain or struggle, and that if we want something we should be able to have it, and what is more, "we deserve it" (as the cosmetic ad tells us). An example of this trend is the rising level of credit card debt. Underlying this phenomenon is the idea that if we want it we should be able to have it - and have it NOW. In a society of quick results and instant fixes many people no longer are prepared to do the hard work that is involved in obtaining something of real and lasting value. People want instant information and answers, not a deep and thorough understanding, but they end up with the equivalent of "fool's gold", not real gold. You can't take short cuts in the process of gaining real understanding - the results are just not the same.
No it has not changed for ever....
Indeed we have been brainwashed for decades.....I didnt have a TV for 6 years, I think my kids are better off for it. We have a free one now but they are old enough to cope with and understand that adverts are some admans fantasy and not anyones reality...
Me I dont watch TV unless its a DVD......I dont listen to radio....for the same reason....its just an over-dose of vallium....happy....happy....spend...spend......bad news ppl, we did that with cheap oil, which is no longer cheap......
Some huge changes to society are coming me thinks.....useless admen will starve or sweep the roads.......as someone said food is 10 times cheaper today than it was in our grandparents time, that will reverse. So there will be far less disposable income for cosmetics and ipods and other worthless addons....
regards
Re: china....one thing I take from China is the reality of whats actually happening in their economy and what the central Govn thinks or what it says is happening can and do differ. By this I mean that when the central Govn issues a policy change to the other provences or its institutions its expectation is they have the desired effect....if not heads might role....so the provences/institutions report that yes its happening as expected.....the reality however is different. Now we see that the RBNZ is reporting its looking better....but is their data real? or make believe? if they are relying on what the Chinese Central Govn is telling them or ts data output they may be surprised...
regards
Here's the latest KWN interview with Jim Rickards.. If you haven't heard this guy speak before he is very engaging. In this latest interview he talks about QEII, Inflation, gold standard, G20 meeting, China and currency wars, and the US military excercises for a "collapsing dollar" scenario. a packed but very informative 20mins.
Link here:
Bernard
John Key has a big mouth and loose lips. That gem yesterday about the RBA being underwater $4 billion was vital information that was not reported here in AU. Nothing. Silence. It means the RBA has decided the AUD has reached a point it can be defended. The fact they are now selling is important, partucularly for NZ. Obviously Key had been alerted. Who by? Bollard? Probably. Suggestion. Can you set up a private hotline with John Key and get his ramblings for the day, each day. Great stuff.
Inflation is the increase in the amount of currency. Nothing more and nothing less.
Prices are affected by the amount of currency AND the velocity of that currency.
Prices can rise while there is no inflation, due to loss of faith in the currency.
They can print in an attempt to maintain the amount of currency, but that will simply result in a growing realisation that paper currencies are just paper.
This way leadeth hyperinflation. That's NOT large inflation, that's a rapid loss of faith in the currency leading to a positive feedback loop with ever rising prices as people try to avoid holding the currency.
As prices rise, the treasury/Fed is forced to print more, as their costs rise and their revenue falls, just making the matter worse.
With all this money being pushed into the economy some times it’s hard to get your head around the differences between a million, billion and trillion. I do like this comparison to dollars as seconds; it really brings the difference to light.
Dollars as Seconds.
How about comparing dollars with time as seconds? One million seconds equate to approximately 11.5 days; one billion seconds equate to 32 years; and one trillion seconds equate to 32,000 years!
Here's a nice simple visual guide which shows why the modern obfuscating defintions of "inflation" and "deflation" make no sense:
http://neuralnetwriter.cylo42.com/node/3445#comment-5398
"So their definition of inflation is "a rise in prices", but their definition of deflation is "a fall in prices OR contraction of credit"."
Hold onto your hats boys , we're heading into the perfect storm in this Currency War .
The strong NZ $ is going to wreak havoc with our manufacturing exports , result = more unemployment.
Interest rates are going to go up because the Aussie owned banks WACC is higher than the OCR , and more expensive debt is not helpful right now . Result= in more unemployment as businesses cut costs to meet higher debt servicing costs .
The deficit is likely to bite us later and Government is going to be forced to incur more debt or shed jobs in the public service , result = more unemployment .
Retail sales are in a slump and who knows what is going to get this up again
This Currency War is a new game and we don't have the rule book yet.
Very =V
Very interesting this....the RBNZ making a clear statement..... that the property bubbles in residential and rural sectors must be kept inflated.....
"....warned that a softening housing market and falling farm prices could put indebted households and farms under “significant stress”. Risks to this outcome ( growth etc) would arise if the current softness in house prices were to become accentuated"
"The RBNZ said in the report that a further weakening in the recovery had the potential to generate further loan losses in the banking system."
QED, it is govt and RB policy to protect the bubbles to save the banks....so expect seriously unaffordable housing to remain in place....that means the urge to and ability to save will be with those who have no debt. They will not spend and they will not borrow and they will not pay the bubble prices for property. Suck on that.
But Ralph has the answer.." COMMONWEALTH Bank boss Sir Ralph Norris admits the mammoth 0.45 per cent interest rate rise will cost some of his customers their homes.(He)said it was better to see "a few" foreclosures than have an economy hamstrung by a low-profit banking...
"....warned that a softening housing market and falling farm prices could put indebted households and farms under “significant stress”.
What about all the potential and recent first home buyers who couldn't afford houses in the first place. What about retiree's on fixed incomes who has seen the amount of their investment income slashed. People benefiting from housing being kept over inflated are only taking their benefit from others not creating it out of thin air.
Talking about the devil, scroll this page right under the Post new comment space and you will find Similar pages, the first title goes: RBNZ holds OCR at 3%, says will have to hike it to remove stimulus "at some stage"... This was only a few days ago, In my job if you make such a mistake you get your ass kiked out the window... see you in the next life.,, sayonara.
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