90 seconds at 9 am: Call for OCR cut

90 seconds at 9 am: Business NZ calls for RBNZ to cut OCR after Australian cut; NZ wholesale interest rates slide; Chinese services sector slumps; US flat on jobs data

4th Oct 12, 9:01am by Bernard Hickey

Here's my summary of the key news overnight in 90 seconds at 9 am, including a rare intervention from the usually hands-off chief executive of the biggest business lobby group, Business NZ. CEO Phil O'Reilly told Radio New Zealand it was time the Reserve Bank of New Zealand cut interest rates to help struggling manufacturers.

Until now, most business lobby groups have held back from calling for help from the government or Reserve Bank, but O'Reilly's comments are an indication of the stress many manufacturers now face from the New Zealand dollar. The New Zealand Manufacturers and Exporters Association has been calling for rate cuts and intervention to bring the New Zealand down for some time.

O'Reilly said new Reserve Bank Governor Graeme Wheeler should cut the Official Cash Rate from its record low current level of 2.5% when he makes his first decision on October 25, pointing to the Reserve Bank of Australia's slightly surprising decision to cut its official rate by 25 basis points to 3.25% on Tuesday.

Financial markets are now pricing in 25 basis points of rate cuts by the RBNZ over the next year, reinforcing expectations of lower interest rates for longer and making floating mortgage rates more attractive than fixed rates for some.

Yesterday wholesale interest rate markets drove interest rates down 5-10 basis points. The 2 year 'swap' rate is just above 2.5%, which implies markets think the OCR will be on hold until late 2014. Economists and the RBNZ itself, however, still see rates rising from late 2013 or early 2014.

Fixed mortgage rates are based on these swap rates and have been edging down in recent weeks on a fresh round of competition between the banks, sparked in part by ANZ's decision to drop the National Bank brand. See our swap rates charts here.

Meanwhile, the New Zealand dollar fell to 81.8 USc from over 82 USc as investors priced in the lower interest rates for longer and more evidence emerged of a hard landing in China.

China's services sector expanded at its weakest pace in September since March 2011.

US stocks were flat as better than expected private sector jobs figures and a firmer services sector offset the weak Chinese data.

However, New Zealand's central and local governments have been busy borrowing money this week, borrowing a combined NZ$525 million inside 3 days with strong demand, some of which has come from foreign investors. The New Zealand Debt Management Office is borrowing NZ$250 million today and the Local Government Financing Agency raised NZ$275 million yesterday. See more here on our site.

The NZX 50 has also rise to 4 year highs in recent weeks as money printed in the Northern Hemisphere squirts out into developing markets and other 'safe haven' non-printing countries such as New Zealand in a search for yields higher than 0%.

(Updated with detail, links, background)

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41 Comments

by Andrewj | 4th Oct 12, 9:19am 1349295576

What the Government needs to do is cut spending and cut taxes.

This is going to kill you guys if you dont get out of the way. Move!

http://www.washingtonpost.com/business/economy/the-mattress-trap/2012/1…

Hpertiger on the article

They are spending less...

That's why the money is filling up accounts.

Basically since 2008 US consumers have cut back on spending by about 19 Trillion Dollars.

It's why the global economy based on US consumer debt inflation...Is crumbling.

by Basel Brush III | 4th Oct 12, 9:35am 1349296528

What the Government needs to do is cut spending and cut taxes.

I cannot see any relevance based on US moves. The US is totally discreditedon its monetary policies and actions.

As I see it, we need to have the guts to act for ourselves and that may indeed result in more spending and higher taxes both using strategic moves.

Comments such as above without supporting argument provide no help and just reflect similar recent government lack of positive action.

by idlebumski | 4th Oct 12, 10:04am 1349298256

@ Basel; With global financial architecture (still) oriented around USD being reserve currency, what they do will always affect the rest of us, specifically in this case, them lowering rates or printing money, exports inflation to everybody else. Saddam in Iraq was/is the most obvious example of how important this is to them, and what you can expect if you dare to go against supremacy of USD for oil or world commerce transactions.

This is unlike the scenario of us printing, which would aguably create inflation internally in NZ only.

by Andrewj | 4th Oct 12, 10:12am 1349298734

No if the US consumer stops spending we deflate. Low interest rates will help it along.

http://www.professorfekete.com/articles%5CAEFNoBusinessLikeTheBondBusin…

http://www.zerohedge.com/news/guest-post-falling-interest-rates-destroy…

http://www.professorfekete.com/articles/AEFLaborLeaders.pdf

capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

by notaneconomist | 4th Oct 12, 2:18pm 1349313512

Andrewj - thanks once again for posts and links. I do like that last sentence - "Capital is the wage fund that backs your employment - assuming of course, that no one is allowed to tamper with the interest rate".

by steven | 4th Oct 12, 12:46pm 1349307967

Sorry but this is far more complex then you imply. Printing only creates inflation if the printing exceeds the deflationary effect of them (consumers etc) not spending and they are not at the zero bound, which at 0.25% OCR they are. Sure some countries are seeing inflation as cheap US money is invested in them....Brazil for instance...some are not....

Printing in NZ wouldnt create inflation as long as we are at the zero bound....even at 2.5% Im not so sure it in effect should be at 2.5%.....ie Im not convinced we are not there either as well have to sell (expand) abroad...

regards

by steven | 4th Oct 12, 12:39pm 1349307555

ho hum.....so mom and pops were burned by the stock market....and plunging house prices and job losses. The stock market is in a dead cat bounce fueled by the FED feeding cheap money to the banks who hold all the trading advantages (information and speed). In the mean time this stupid thinks ppl are losing money due to inflation and thats a risk....(no its an impact btw)....which is low and staying there.

Strikes me its more like the sharks are complaining there isnt enough to feed on....or they are worried that there isnt enough canon fodder left out there to protect them when they exit.

NB I thought US GDP was growing? if they have cut back 19trillion and they (consumers are 70% of the US economy...why does the US GDP show growth?

regards

by midgetkiwi | 4th Oct 12, 1:24pm 1349310280

Or maybe, the RBNZ could do what was suggested a few days ago on discussions.. be a bit unpredictable.

Raise by 100 points this week, then raise by 50 in 2 weeks, then when speculators are truly confused and excited plunge down to 2%. chase away the carry trade, and probably help manufacturers a whole lot more than a 0.25% drop. might even stem property bubble, who wants to leverage to the hilt if the crazy governer may decide to go to 10% next month?

by iconoclast | 4th Oct 12, 2:15pm 1349313340

midgetkiwi: the power of being unpredictable is this: the daily foreign exchange flows through the new zealand banking system run at a ratio of 10:1 (closer to 20:1) where the real-economy is only 1/10 (at best) of the currency-flows. A large proportion of that is hot-money or currency trading a good proportion of which will be in the form of derivatives. If the RBNZ dropped the official interest rate overnight the exchange rate would drop the following day and the derivative players on one side (longs) would suffer both cash losses and be margined, causing a multiplier effect as they liquidate their positions to avoid being margined. Then before they can catch their breath, you have to swing the other way to catch the other side (shorts) out. It has to be savage.

If you read Todays-Top-10 Item number 5 leads you to a debate between Brash and Doyle about the exchange rate, with a synopsis by Hickey. Read it through carefully. I have come to the conclusion none of the 3 have the foggiest idea what is going on. If you dont know what and why you cant solve it. The article is just mud swirling around in the swamp.

Bollard or Doyle said (in the full article) (and Hickey propagates it): Be holistic: Asking the bank to be more active in currency markets will be pointless if the root problem is, for example, a poorly functioning housing market, which keeps supply tight and is conducive to price bubbles.

If you exclude the issue of a constant inflow of wealthy cashed-up-migrants chasing a fixed supply of existing houses, I'm buggered if I can see the relationship between housing prices and the exchange rate. But, there you go, thats what 3 talking-heads with microphones are saying.

by Basel Brush III | 4th Oct 12, 10:17am 1349299050

It is interestin g to note that mortgages in UK rise to 4.74% (as in the article) yet the BOE equivalent of our OCR is close to 0%

Someone tell me the logic behind keeping the OCR at existing level when other countries can separate theirs from mortgage rates.

Note for Wheeler on Oct 25, -- Knock OCR from 2.5% to 1.5% as a starter. See the rabbits run!

by Andrewj | 4th Oct 12, 10:23am 1349299422

But in the USA people are saving more as the interest rate goes down, and leaving the share market

http://www.professorfekete.com/articles/AEFLaborLeaders.pdf

by steven | 4th Oct 12, 12:49pm 1349308180

The banks have said that they match the OCR purely to allow the RB to take the flak. They have certianly been hinting for the last year? that they dont see their rates following the OCR down...

So yes sure 4.74% isnt un-expected.

regards

by Phil Stevens | 4th Oct 12, 9:29am 1349296191

Oh, Andrewj, such novel thinking! They should try that in Greece and Spain, and you should take full credit for the successful policy suggestion.

by Andrewj | 4th Oct 12, 9:40am 1349296837

No they want to increase taxes and reduce spending or perhaps better to say reduce the incease in debt.

http://www.telegraph.co.uk/finance/economics/9582547/UK-hooked-on-debt-P...

drjonathanwilson

28 minutes ago

No, Bill it is not debt that we are hooked on but rather socialist redistributionist consumption economics that give rise to debt and no corresponding human or physical assets by which economic growth can repay the debt.

Socialist consumption of redistributed wealth without replacement pure and simple - that needs to change first and soon.

But I do not see any high profile British politicians advocating radical reductions to the size of state spending combined with a radical reduction in taxes for the productive.

Even Mr. Warner and Mr. Evans-Pritchard refuse to discuss such a policy mix. And if there is no support for a small state taking little and promising little at the Telegraph you can be sure that there is no support elsewhere.

Bill, you are right - you could see your sovereign investment fund collapse in value due to a lack of politicians that you could back and trust to do the right thing in rolling back the socialist welfare state that has been the UK since WW2.

Jonathan

by Gummy Bear Hero | 4th Oct 12, 10:47am 1349300840

The socialist government in France has shown the way , with a plan that is heavily skewered towards raising taxes ( up to 75 % on the " rich " ) , and less orientated towards cutting spending .......

...... politicians worldwide are largely ignorant of their role in the GFC , and in their failure to clean up after the event , and to get economies back onto an even keel .....

Even in little NZ , the Gnats are spending far more per year than the appalling Clark & Cullen socialist government did ...

by Gummy Bear Hero | 4th Oct 12, 10:58am 1349301529

My vote for PM is still on you , Hugh...

.... and , when people ask me " Hugh who ? "

I'll say , " yes , Hugh's the key to a brighter future " ....... hooooo , yeah !

by Gummy Bear Hero | 4th Oct 12, 8:03pm 1349334188

Phil Goof had no personality at all , yet he led NZ Labour for 3 years .... and Helen Clark was no scintillating conversationist , hardly the sort of gal you'd take home and introduce to your Ma & Pa as " my bird " .... yet she was a popular PM with the bribeable voters of NZ for 7 years out of 9... .. even the current PM , Jolly Kid Key , is a relatively chromosome free guy ... ... smiley , wavey ... steady-as-she-goes ... smiley , wavey ....

.... as much as I'd love to lead the Gummy Bear Party to victory in the general election , no one is gonna vote for moi once they twig to the fact that Rodney " twinkle-toes " Hide and I are cousins !

Sad , but true !

by Christov | 4th Oct 12, 11:15am 1349302546

Nobody...that I know, of has yet asked the Question...?

Just who is running the side show here....as Billy Bob seems to be popping up in inconvenient places lately..like signing off warrants.....is it at all posible John Boy is a Corporate muppet, and Billy is the actual facilitator.

I said here a long time ago , I was never quite sure Billy ever got over not being endorsed as the P.M. in waiting...The public may have a short memory...but not our Billy Bob and after all he holds the most powerful portfolio in Govt.

As the Minister of Tourism, GCSB,N.Z. Security Service ,Ministerial Services....you'd have to say John Boy's a non performer, piss poor in fact ,perhaps he is due a performance revision....

Food for thought....

by steven | 4th Oct 12, 12:53pm 1349308423

The effects of tax increases on GDP and Govn revenue is fractional. So for every 1% you rise taxes the effect is < 1%....Austerity on the other hand is 1.6 x possibly more....

So if you want the Govn income to survive taxing the rich has the least adverse impact. In terms of top tax rate it can go to 70% with little sign of adverse effects either.

Brace, tax rises are coming I suggest...

regards

by Kunst | 4th Oct 12, 9:40am 1349296831

Time is changing – and government(s) don’t see it.

Life for most people is getting much harder in the next few months – many to breaking point.

Considering the underperformance of most of the frontbenchers, the mismanagement in general of our economy and the fact that integrity and honesty of our PM diminished - now in difficult times - our country desperately need a government change – urgently.

What is needed right now at least is a government, which can provide an honest, trustworthy relationship to the NZpublic.

by steven | 4th Oct 12, 1:04pm 1349309063

Except there isnt one....look at Labour and Shearer just as big a useless as NAtioanl and JK.]

and look at the possibilities for negative impacts if any were honest....its in their interests to lie, ommit and obsufiscate because if they say the truth "oh god we are screwed" the depression we know is coming starts then and there.

regards

by Kunst | 4th Oct 12, 5:22pm 1349324526

D. Shearer in my opinion is a slow political starter I agree, but has charisma, integrity and other fantastic human qualities – characteristics not only for a suburb statesmen, but also a leader for New Zealand in difficult times – a real “hands on” Kiwi – growing into and with the job.

http://en.wikipedia.org/wiki/David_Shearer

http://img.scoop.co.nz/media/pdfs/0905/David_Shearer_CV.pdf

by Poission | 4th Oct 12, 9:33am 1349296414

Interesting developments in the last week,is money market managers having been exiting commodities.

Food prices are expected to be stable prices for wheat,will hold or decrease slightly as US and canadian production is high (canada being up 6%) FAO

The price expectations for dairy would be little increase.

Oil experienced a fat thumb reduction ( as expected) due to decreased consumption and increased US production NZ pump prices are still around 10clitre above where they should be.

The quantitive easing in the US has a remarkable spinoff (positive feedback) as those with high fixed rate mortgages refinance at lower levels and prepayments suggest a debt reduction of 25% in one year.

US new car sales are up as consumers replace older,( with more effcient) little net gain in actual car volumes,which will further reduce consumption.

by Andrewj | 4th Oct 12, 9:47am 1349297269

I have friends who leased a new car in San Fran for $160 a month 12,000 mile a year cap. I hear of others doing the same.

So yes new cars are selling but whats it taking?

http://www.leasetrader.com/search/In.California.xhtml

by Poission | 4th Oct 12, 10:19am 1349299171

I am looking at it from a different perspective,that the increased fleet modernization will become a driver in consumption reduction.If we observe that Toyotas sales increase with a higher fuel effciency will further decrease fuel consumption.The hybrid sales alone (for september) save the requirement for 1M bbl of imports alone.

The consumption and import reduction at present is looking towards imports by jan at aound 1995 levels.A significant driver in the US balance of payments deficit.

there is no shortage of Cash per se,US companies are awash with it (around 1 trillion offshore in safe haven status) 3 companies APPLE,CISCO and GE around 250 billion in cash offshore,and are still increasing debt GE for example(which decreases tax liability)

This has the peculiar asymmetry where 26 of the top 100 paid CEO of US listed companies receive a higher remuneration then their companies pay in Federal tax.

by powerdownkiwi | 4th Oct 12, 11:03am 1349301811

Fishi - that's a fallacy.

It takes around 300,000km, for a fuel-efficient vehicle to cross over vs a guzzler. The build energy (largely fossil fuelled) has to be offset against the difference - and it's only the difference - in gas mileage. Making it worse, is the fact that folk tend to travel more 'because they can afford to', in their more efficient car. .

by Poission | 4th Oct 12, 1:26pm 1349310414

There is no fallacy here,the energy inputs are similar.The underlying information (the signal) is that the efficency of the US fleet is increasing by 0.06l/100km per annum and which will increase further.

The consumption indicators is that the US will fall below 18 million bbls per day by Jan.Over exposure to commodities ( as trends align ) has seen the managed funds exit commodites and especially dumping of oil contracts (170000 in two days) the interesting problem is when the trading behaviour of the so called commodity currencies correct,something the financial institutions overlook.

by steven | 4th Oct 12, 1:20pm 1349310057

US well maybe consider that its not all good news, corn v wheat...

http://www.ers.usda.gov/newsroom/us-drought-2012-farm-and-food-impacts…

Corn is feedstock for US meat and milk production, so Ok bread is stable, meat could rise somewhat later on.

"About 80 percent of agricultural land is experiencing drought, which makes the 2012 drought more extensive than any drought since the 1950s."

8><----

"The drought has the potential to increase retail prices for beef, pork, poultry, and dairy products first and foremost - later this year and into 2013. But in the short term, drought conditions may lead to herd culling in response to higher feed costs, and short term increases in meat supply. This could decrease prices for some meat products in the short term. That trend would reverse over time after product supplies shrink.

Commodity prices are just one of many factors affecting retail food prices. Historically, if the farm price of corn increases 50 percent, then retail food prices as measured by the Bureau of Labor Statistics (BLS) in the Consumer Price Index (CPI) increase by 0.5 to 1 percent. Commodities make up less than 15 percent of the average value of retail food purchases, so even if all commodity prices doubled, retail food prices would increase by no more than 15 percent."

ARM loans also make up a decent % of US mortgages?...so I wonder on that "high" 30 year loans at 5% are now 3.5% so much data to sift through.....if its worth sifting.

Sure oil futures are down, considering the FED has just announced QE unlimited to get the US out of the stall/decline it was/is in. The oil futures would be based on the state of the US economy if it isnt recovering then the oil price would drop.

Also deisel prices are very high in the US impacting truckers and in turn delivery costs of food etc...

regards

by splineman | 4th Oct 12, 9:49am 1349297385

I wonder what the net U.S savings rate is. If you pay down debt that is counted as a "saving". Don't trust a lot of these stats to be honest.

I personally think the debt overhead is a major part of the problem. Interest payments compounding exponentially and banks dropping rates to encourage more business (debt) over longer terms is really not encouraging economic growth. It's crazy at the moment.

Selling off state assets in exchange for synthetic credit is also so short sighted and I don't see a long term upside to it frankly.

Cheers

by iconoclast | 4th Oct 12, 10:06am 1349298385

Bernard's Daily School Report: Careless. Could do better. Can try harder

Nonsensical

Financial markets are now pricing in 25 basis points of rate CUTS (multiple) by the RBNZ over the next year. How do they want it. Monthly in 2 bps lots?

by Gummy Bear Hero | 4th Oct 12, 11:11am 1349302278

Dear Mrs Hickey :

The playground at our school is a buzz of happy children , chattering and playing every morning , until you drop off little Bernard ...... and then the gloom decends ...... what do other kiddies know of fiscal imbalances , the OCR , and the trade deficit ....... these are 6 year olds ! ..... Just 5 minutes after the arrival of your boy the playground is silent , utterly silent , save for a few muffled sobs from the kindergarten wee ones .

Please try to broaden Bernard's reading programme at home , more of Wind in the Willows , and the Famous 5 ..... and perhaps less of the NBR and the story about Chicken-Little .

Thanking you for your time .

Fenella Croops , Mrs ( Taihape Junior Primary School )

by iconoclast | 4th Oct 12, 11:24am 1349303099

Hardy-Har-Har and Lippy-the-Lion and Bernard in the playground

http://www.youtube.com/watch?v=Z5AGtSnvA4s

by powerdownkiwi | 4th Oct 12, 11:46am 1349304409

You'd be better investigating before you advoked.

A few wee graphs to go with you playlunch:

http://www.energybulletin.net/stories/2012-10-01/how-much-oil-growth-do-we-need-support-world-gdp-growth

by notaneconomist | 4th Oct 12, 11:57am 1349305022

GBH - Absolute Classic.........l can't stop laughing.

by steven | 4th Oct 12, 12:27pm 1349306823

and Fenella was your mum? I can tell the your IQ and living in la la land was genetically inherited...explains prozac addiction as well.

regards

by Basel Brush III | 4th Oct 12, 2:05pm 1349312708

Elsewhere Phil O'Reilly of Business NZ suddenly wants a rate cut (when before he did not back MEA). The dodo awakens?

However OCR is obviously NOT connected to mortgage rates and any excuse for not lowering OCR using themortgage rates excuse is spurious. Obviously we do not need surplus and "hot" money sloshing around so we should make it unattractive with a very low OCR. A shock move exceeding 1% would start it off with suggestions of more.

On the mortgage front, RB can grab the retail banks where it hurts and impose whatever controls will make them lend less on housing. . A lot has been said about controlling their sources of funding but we see little evidence of anything happening.

by Rumpole | 4th Oct 12, 4:20pm 1349320844

Basel - totally agree, time for the RB to play the shock jock - OCR 1% in one go and dissuade the speculators from screwing NZ$ - food is not optional and we export it so a rate of 60 US c would stimulate our agricultural exports whilst sorting out our external debt situation giving our Govt time to get the hell out of what it doesn't need to be involved in and let the productive and ingeneous citizens to get on with returning NZ to a solvent and pleaasant place, whch probably means less immigration especially of those who will not be contibuting to our sucess.

by Andrewj | 4th Oct 12, 4:28pm 1349321280

That would depend on how much foreign debt we had, wouldn't it.

The combination of a modest public debt and a large net foreign debt reflects that most of the net foreign debt is held by the private sector. At 31 December 2011, gross foreign debt was NZ$257 billion, or 125.8% of GDP.^[22] At 31 December 2011, net international debt was $147 billion or 80% of GDP.^[23]

New Zealand's persistent current account deficits have two main causes. The first is that earnings from agricultural exports and tourism have failed to cover the imports of advanced manufactured goods and other imports (such as imported fuels) required to sustain the New Zealand economy. Secondly, there has been an investment income imbalance or net outflow for debt-servicing of external loans. The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008.^[24]

^{http://en.wikipedia.org/wiki/Economy_of_New_Zealand}

If you want ingeneous citizens then you need to tax them less, so you need to cut government spending, Im not talking welfare, Im talking civil servants.

by notaneconomist | 4th Oct 12, 5:21pm 1349324500

Andrewj - Here's an interesting article from the Herald. " A tax on debt"

http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10…

by Andrewj | 4th Oct 12, 5:34pm 1349325244

The tax needs to be on the creators of the debts, anyway whats backing the ability of those with debt to pay the new tax, dairy farming?

The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008.[24]

Watch our current account blow out as exports fade due to our uncompetitive economy, we dont produce enough to pay our way, yet they drop interest rates so we can borrow another 680 mill a month. Then they need to drop interest rates further which destroys more capital, Im on Fekete's side.

hypertiger

All the money in existence is debt.

It's possible to get out of direct debt but in the system all are in debt.

The only way to escape the indirect debt is to exist outside the system

If everyone were to avoid debt creation...The economic system would implode.

by Andrewj | 4th Oct 12, 4:37pm 1349321837

E3 New Zealand's overseas debt

http://www.rbnz.govt.nz/statistics/extfin/e3/data.html

http://www.nbr.co.nz/article/key-paints-grim-picture-nzs-foreign-debt-1…

http://www.stuff.co.nz/dominion-post/business/7410552/Standard-and-Poor…

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=107…

At the end of 2010, the latest figures available, our gross external liabilities were $312 billion. Four-fifths of that was debt rather than equity and three-quarters of the debt had been incurred by banks.