sign uplog in
Want to go ad-free? Find out how, here.

Experts say now isn't the time to unwind last year’s interest rate hikes

Experts say now isn't the time to unwind last year’s interest rate hikes

Economic experts are urging the Reserve Bank not to change the Official Cash Rate.

The New Zealand Institute of Economic Research’s Monetary Policy Shadow Board recommends the central bank leaves the OCR at 3.5% on Thursday.

A majority of the board, whose nine participants give their personal opinions on where interest rates should be, is comfortable keeping the OCR on hold.

The board’s average recommended OCR is 3.46%.

NZIER concludes now isn’t the time to unwind last year’s interest rate hikes.

Its principal economist, Kirdan Lees, says the factors that favour lower interest rates are more compelling than the domestic indicators that point towards a strong economy.

NZIER’s Quarterly Survey of Business Opinion indicated strong economic growth of 3% to 3.5%, continuing from the end of 2014 to the start of 2015.

Auckland city’s median house prices also shot up 13.2% last year, boosted by strong migration.

Yet on the flip side, slumping oil prices saw annual inflation drop to 0.8% between September and December, which is below the Reserve Bank's 1% to 3% target band.

Lees says dairy price falls and drought conditions will also dampen economic activity in 2015.

Furthermore, inflation pressures are muted throughout the economy, as businesses are finding it hard to pass on price increase to consumers.

Shadow board participants’ views

“There are a lot of balls in the air at the moment”, says BNZ’s head of research, Stephen Toplis.

“The major risks to inflation still lie to the upside, as activity runs above potential and the housing market reheats. But at the same time, downside risks from global issues, weak dairy prices and a prospective drought are very real.”

New Zealand Steel and Tube CEO, Dave Taylor, and ANZ chief economist, Cameron Bagrie, lean towards dropping rates to 3.25%.

“Always thought the RBNZ pushed too hard too fast. With the current conditions there is a case to redress”, says Taylor.

Bagrie maintains, “The RBNZ has an inflation target and not a growth or a housing one. Non-tradable inflationary pressures are receding rather than accelerating. There looks to be material structural forces at work.

“The OCR is higher than it needs to be. They won't be cutting but the tightening bias needs to disappear.”

Business New Zealand chief executive, Phil O’Reilly, and MYOB executive director, Scott Gardiner, are completely behind leaving rates at 3.5%.

Gardiner says, “Concerns loom on the horizon for SMEs with many sectors at top of business cycle – and head winds about to arrive with prices flowing through to cash flow challenge for key sectors.”

Auckland University professor and Motu senior fellow Arthur Grimes doesn’t want rates to creep above 3.5%.

“Goods markets are showing approximately zero inflation while some asset markets are still showing some upward pressure.

“This complicates monetary policy rate-setting but, on balance, a wait-and-see approach to the interest rate level is warranted with no precipitate changes required in either direction.”

Toplis and Auckland University professor, Prasanna Gai, are the only participants who wouldn’t mind the OCR edging up slightly to 3.75%.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


"The RBNZ has an inflation target - not a growth or housing target".  
"The OCR is higher than it needs to be".   ANZ's Bagrie 
how many Quarters will be coming up where inflation is in negative territory?   

I'm with you MortgageBelt, the RB seems inconsistent.
If inflation was trending up the RB wouldn't hesitate to lift rates, let alone if it was trending above the upper band.
Are we just getting pillaged for interest?

Yes, NZ is in a permanent state of hiking bias due to our global masters instructions, and our unfettered foreign property investment/purchasing open door policy.   

and worse when you look at the tradeables sector just what is thier inflation rate? and how long has it been like that?  just why do economists and commentators think this is something that can continue?
oh -1% ish.
the other interesting chart is,
It last dropped badly in 2008/2009 and now looks like showing the biggest downturn since then.

Inflation is muted becasue "as  businesses are finding it hard to pass on increases to consumers"
What utter rubbish !
What increases are they trying to pass on ?
Why are price increases even remotely justified in current conditions  ?
Businsses are already charging too much for just about everything we buy by any international measure
Businesses should be passing on the savings from a massive decrease in the costs of imports from a rampant Kiwi$ , and a retail fuel price that has dropped by around 15% .
Interest and Finance costs are the lowest in the 70 years since WWII.
Shipping costs from China have fallen dramatically due to fuel price decreases
Kiwi Consumers have seen none of these benefits passed through to retail  prices , other than on  a few TV sets and fake Nike running shoes.
New Zealanders are overpaying for everything from a bottle of milk to a can of paint .
Even petrol and diesel should be cheaper , crude has more thna halved but petrol is still way above historic levels .
And dont even get me started on the retail ripoff in NZ . 
In December I bought  3 Van Huesen longsleeve shirts for work online for US$29.97  . They were airfreighted here and then delivered by road to my front door .
Local price in Auckland RETAIL CHAIN STORE  $40.00  EACH .
Go figure !

Actually I tend to agree with "hard to pass",
If you look as some data....
like a company that put up prices 7% and lost 9% of sales....they dropped prices again.
Companies selling less in a package for the same money, a few of those about.
Companies switching from quality ingredients to utter crap...say 50% tomato paster in sauce to 20% and then milk solids filler, salt and sugar and artificialy flavour
Good oils removed and pam oil put in, expect its just listed as "vegitable oil" so you dont know.
NZ businesses are small scale so have overheads and small scale importsand over distance and I believe we also pay far more for retail rental floorspace, ergo some of our costs are painfully high.
Not so sure on shipping costs yet, can you actually quote?
As an example I bought in bamboo sheet at $200 a sheet shipping per sheet hasnt really moved, a few dollars so maybe $195 a sheet. Meanwhile other things like electricity are rising at 4%?
Clothing is an interesting one. Trying to get shoes for my eldest in US8.5 and cant get them in NZ even online in the colour wanted and even 8.5 is hard, nothing in the retail shops.  Amazon however 1/2 the price ($60US v $160NZD) and the exact colour, will they ship? nope.

It seems to me the ideal time for Wheeler to kick the tyres a bit harder and test 3.25%
The retail banks have already pushed the boat out with rates well below the recent averages and I would suspect that a drop in the OCR would not cause them to continue downward. Their source of money to lend out is alrady quite sticky and I would guess they have nearly empied the tank there.
A drop would surely help exporters and relieve the banks of some pressure on servicing the rural loan book

many logical reasons to cut, but goes against standard economic dogma so unlikely.

Oil price falls is not an isolated commodity fall:
"Wait until they discover that it was but a symptom of the compressive deflationary depression now gripping the entire techno-industrialized world."  Kunstler

So the deflationary influences from the world onto NZ are likely to keep coming.  

What exactly is an economic expert and if there really is such a thing does anyone know of one that has made accurate forecasts in the last five years? Last year economists and bankers were forecasting that interest rates would climb to around 8%. Based on that tens of thousands of home owners fixed their mortgages at rates that are now considerably higher than the market. We are more likely to see 3,4,5 year fixed mortgages being offered at levels under 5% at some point soon and no inflation for at least 3 years. The Reserve Bank in NZ have it all wrong and they should vut the OCR by at least 1%. The European economies are in serious strife and the $USD will at some point collapse once the current flight to safety evaporates.

take a look at Steve Keen and Paul Krugman isnt doing too badly.

Well I am on record here for the 2014 prediction that interest rates would go down. I got it wrong for NZ last year, but right for a lot of places. I stand by the long term trend that rates will continue to trend down, as they have for 30 years.
But how this plays out in the real world is a tricky one because the same model I have developed says that velocity will drop and prices have to rise (the money supply expand)  to compensate. This is a trend prediction though, not a short term one. Short term deflation could, for instance, collapse manufacturing and subsequently cause a shortage. An unanswered question is how far can asset growth go before there are consequences?

I would trust a prediction from regular poster Steven more than I would trust any economist.

Sadly Im reading economists and regurgitating it. Though Im doing a bit of mixing from a few to form my own views as well and Im very much interested in evidence and proof.  
So the Q is really look at the ones with a) success but also b) the logic and models of why and test them. c) chop out those with politcal bias (especially) and d) vested interests.  You are right though, so many (too many)  fail because of c) and d) and prove it with a) because they dont have b).
So for instance Peter Shiff predicted a US house price collapse, but then also predicted gold was going to soar 2 fold or more oh dear 30% down on that.

Here's a question -
What if Wheeler's statement tomorrow were designed to remove the tightening bias but also introduce possibility of slight loosening possibilty over the short/medium term from now on?
He would only need to be implying possibility of .25 cut if conditions warrant it at any point during next twelve months to make the currency traders a little bit cooler on NZ dollar.
This possibilty combinined with American economy possibly looking more attractive to currency traders over next 12 months, might help ease pressure on NZ dollar and might help it slowly trend down a litlle over next twelve months.
This would provide exporters with a little relief (especially with diary payouts softer for now) and be the perfect time to absorb slightly higher import costs for the economy due to the inflationary gap (new term "under-inflation" anyone?) created by the big drop in oil prices.
What think the readers?

May I ask you, - why are you (and others) trying to predict what the RBNZ head is going to do/say tomorrow? I mean, what’s the practical purpose of the prediction? 

Exporters are getting some relief now, mainly against the USD, and more slowly against the others (i.e. more sustainably). All barring the EUR that is which, when you announce you're going to print another 1.1tln more of them, no one's going to fall against that dog of a currency no matter what level your interest rates are at. The RBNZ will definitely delete the tighening bias in their statement tomorrow but I really doubt they will hint at the possibility of cuts other than making it clear they're now totally neutral. If they do hint at cuts, put another 10% plus onto Auckland house prices this year because the market will likely take swap rates (read longer-term mortgage rates) well lower again (and the RBNZ knows it) - what do you think they will want ? 

Grant, I'm not sure they can use Auckland as an excuse. 
The horse has bolted in Auckland and by all accounts, foreign investment has been the main driver of prices.
Kiwi incomes are not increasing enough to push prices another 10%, certainly not in a deflationary environment. LVR's, enforcement of existing CGT's and limiting foreign residential investment would work better in Auckland.
Oil prices are low, so that would offset some of the pain from a lower dollar.
Exporters and the BOT would benefit greatly.
Its a perfect time to cut or maybe even print :0 'wash my mouth out'.

Look you could well be right Caleb but we could have said that last year, and probably the year before that. The problem with bubbles (apologies to the non-believers) is that you never know when they will pop, all you know is the bigger it is the bigger the mess. The RBNZ will be in risk management mode with Auckland, and I seriously doubt that they are going to be prepared to take the risk on firing up another year of it when much of the pressure is coming from immigrants who are coming here and borrowing at NZ interest rates. I think you're right about the other tools they can use, and I wouldn't be surprised if they're looking at further ones again now, but I doubt they will risk a cut when the NZD is tracking down anyway with a bit of momentum. If oil stays here for a year, and milk prices look like heading at similar levels into 2017, then all others things being equal, definitely, but not now.

are they really in risk management mode?  Are the foreigner buyers and inflow money really being targetted?

I think theyre still in Denial (wot foreigners? u must a racist bro...)

Of course they are  - are you saying that you think that the RBNZ doesn't care about the Auckland property market ? They have a huge focus upon immigration and what that means for Auckland in particular and the implications for them for monetary policy

Quite a large rise on the NZX with a down day elsewhere.
That is saying the investing public sees rates as peaked for the time being and are zeroing in on the high dividend stocks to replace falling bank deposit rates.