Finance Minister says traditional links between NZ$ and interest rates not holding; says previous OCR cuts didn't affect currency; says TWI-OCR linkage not mechanical

Finance Minister says traditional links between NZ$ and interest rates not holding; says previous OCR cuts didn't affect currency; says TWI-OCR linkage not mechanical
Finance Minister Bill English talking to reporters in Parliament on July 5, 2016. Photo by Lynn Grieveson for Hive News.

By Bernard Hickey

Finance Minister Bill English said he was concerned about the rise in the New Zealand dollar on Tuesday to a 14-month high of over 77 on the Trade Weighted Index, but said that the Reserve Bank appeared unlikely to be able to do much about it because the traditional linkages between the Official Cash Rate and the currency had broken down.

English told reporters in Parliament that observers should not be too hard on the Reserve Bank over its failure to meet its inflation targets, given what was happening in the rest of the world.

The comments appear to give the Reserve Bank a free pass to ignore the currency's rise, which the bank itself said in its June Monetary Policy Statement was too high and would force rate cuts to 0.75% over the next couple of years if it stayed up at early June levels of 72.6 on the TWI. The Reserve Bank included a 'high TWI' scenario that, all other things being equal, would create deflationary pressures that would force the Reserve Bank to cut the OCR from 2.25% to 0.75% by early 2018.

English is responsible for holding Reserve Bank Governor Graeme Wheeler to account over the Policy Targets Agreement, which states the bank should "keep future CPI inflation outcomes between 1-3% on average over the medium term, with a focus on keeping future average inflation near the 2%."

Annual CPI Inflation was 0.4% in the March quarter. It has been below 1% since the September quarter of 2014 and below 2% since the September quarter of 2011. The Reserve Bank's forecasts in the June Monetary Policy Statement showed CPI inflation would not return to 2% until the December quarter of 2017, which would mean inflation had been below the Governor's 2% mid-point for six years.

Asked if the high currency was a concern, English said: "Yes, but it's an indicator of the amount of uncertainty in the rest of the world. As the Reserve Bank Governor pointed out, the traditional linkage between interest rates and the exchange rate doesn't appear to be holding at the moment."

"He's cut interest rates quite a lot in the last 18 months and the exchange has actually gone up and you would not have expected that to happen. When you look around the world and see Sterling falling, the US dollar probably softer than we might have expected, uncertainty about Italian banking issues building up inside the European Union, bit of political uncertainty in Australia, you can see why relatively speaking New Zealand's currency looks for now a bit more reliable than most," English said.

Aren't more even more OCR cuts needed?

Asked if Wheeler should therefore be cutting the OCR by even more, he said: "You'd need to talk to the Governor. He was pointing out that cutting interest rates didn't seem to have affected the currency. We are in a pretty strange economic world. The Swiss or Japanese Government is issuing 20 year bonds on negative interest rates. No one really knows what that means or what all the implications of that are. It's a bit hard to draw simple conclusions from a movement in interest rates or a movement in currency rates."

English was then asked if the economy and exporters should therefore just have to sit there and take the higher currency, he said: "It's a rate set by the market. There's a lot of dangers in trying to use your Reserve Bank to play around with the exchange rates, particularly in a world where no one really quite understands how different economic indices are going to interact. Normally you would expect a flow through from currency connections to inflation and interest rates, and that's part of the very difficult task that the Reserve Bank has."

"The relationships which in the past which we assumed were quite mechanical, now just don't seem to hold. I'm sure if it was easy then they would have easily hit the target. One of the challenges for this central bank and others is that any given day you can't really judge what the right decisions is. You can only really judge in hindsight so they've got a real dilemma."

Most economists expect the Reserve Bank to cut its OCR again on August 11, with the potential for one more cut to 1.75%, partly because of the very high TWI.

When do you hold the RBNZ accountable?

English was then asked when he would hold the Reserve Bank accountable for not meeting its inflation targets.

"You've got to keep in mind a wider context. They're dealing with a world where it's been pulling towards 0% interest rates and they're trying to get ours up, and that's a real challenge. In the light of the very complex economic environment we're in, we shouldn't be too hard on them," he said.

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Nats focussed on 4th term. Nothing else. JK calls it leadership.


Perhaps it doesn't matter as banks no longer lend to real businesses so interest rates have little effect on real economic activity.
Banks make their money from complex financial trading of financial assets.
Or indebting house buyers who are forced to pay inflated prices from immigration/foreign buying.
As per this interview with Time editor on RNZ this morning:
Rana Foroohar is assistant managing editor at Time magazine and the former economic and foreign affairs editor for Newsweek. Her latest book, Makers and Takers, explores how modern financial institutions have turned away from ordinary business investment and towards speculation through vehicles so complex that their leaders can no longer track risk. The upshot, she says, is a world where businesses can't get the capital they need to grow, ordinary workers are saddled with increasing debt and the global economy occasionally melts down."

Not particularly relevant in NZ/Aus. Largely commercial banks with relatively limited "complex' investments when looking at their balance sheets (includes OBS assets).

I would argue against that point, most banks don't hold loans on their own books, they 'originate' them and sell them onto pension funds etc which ultimately goes through the rating agencies and investment banking 'slicing and dicing' process and ends up in our automated retirement accounts

Taking money from us fortnightly for mortgages while selling our own loans back to us as 'units' comprised of who-knows-what at inflated prices under bogus ratings from S&P and the other cronies who are paid by the banks (no conflict of interest there...)

The GFC was caused by the same process, and we bailed out the idiots who did it - it may not be a risk to a specific bank but it creates even bigger systemic risks which are often underestimated

Wheeler should raise the OCR by 50bps. See what JK and BE say then.
The Currency may need to be manipulated by other means, if really necessary..

Of course it is OCR. Carry trade is what brings the NZD to the level where it is.

Thank you. Few people seem to acknowledge it.

Disagree, there seems quite a disconnect between OCR and exchange rate

Well if we don't cut the OCR then we aren't going to allow Kiwis lower mortgage rates to be able to afford those rampant house prices. So do we just let the Non-resident and local Investors carry on buying up in their feeding frenzy.

Plus we're killing our exports and a very high NZD will have a huge negative impact on Tourism as well, especially now that the Europeans won't be able to afford to come here.

This just in, Bill English has just been told what the Reserve Bank actually does.
Witnesses say he was initially shocked at the fact that it isn't indeed a substitute player for when another bank gets injured.


Heads are starting to fall off! Anyone noticed the sudden increases in frenzied 'think tanks' from all over the show trying to come up with ways the hide, pretend, and mitigate the falling deck of cards? Things are getting so noticeable and obvious now to even the most ignorant voter. The whole housing bubble has become a economic black hole warping space and time! No wonder winter is late, due to all the political hot air flowing from the beehive


Mr Wheeler, if nothing affects the currency, then print, man, print. Send Bill an extra 2-3 billion for his infrastructure fund, so he can actually do something meaningful. If truly nothing affects the currency, then make it a round $10 billion.

"Finance Minister Bill English said the extension to paid parental leave would have been too costly."
"Treasury estimates the cost of this legislation amounts to $278 million over the next four years, a significant extra - unbudgeted - cost," English said.
That's $70M/year.....

they should have been printing ages ago to fund infrastucture, but that is outside there thinking

I get the general impression that Mr Key wants to keep the NZD insanely high so he can make a quick exit in the next few months, when it all hits the fan and starts to implode! He probably wants to run off and purchase a private island some where.


Clear evidence that the whole economy has just been swallowed by the juggernaut that is Auckland housing crisis. Bill seems to be quite unconcerned that the productive economy, remember us....? is being thrown under the bus as collateral damage.

Lets focus on what we do best , selling more houses to each other... and incase that looks like faltering lets keep the immigration doors wide open to keep the music going at all costs before the election and JKs date with destiny.

Totally correct. But we are now at a stage where unless debt growth continues, commodity prices will fall even further.... The world is now in a real bind; if they cease debt growth (ie capital gain growth based on nothing) the big risk is that it kills the productive economy for good. Because this new found "wealth" is helping prop up commodities .... Big trouble ahead

It's totally insane eh. Some history for you from Peter Shiff. Interesting reminder


Personally, I think the house prices are the biggest risk to the economy.

In view of that, interest rates should rise.

The whole interest rate/inflation model appears broken from where I sit.

It is broken - interest rates cant be raised now - the debt burden is too big.

You do realise that neither Government nor the RBNZ have any real say in interest rates charged by the banks.

Ludicrous to believe that the RBNZ has meaningful control of our currency , when almost all( and much larger) central banks are currently engaging in currency manipulation and indeed outright devaluation. Furthermore where Australia and China allowed our currency some freedom during the last financial episode, the opposite is definitely the case at present as both China , who will undoubtedly devalue at some point and throw out more deflationary pulses and Australia now struggling with its own economy , held up primarily by overpriced real estate and household debt .It simply does not matter which continent you look at , there are central banks struggling with weaker global growth, and at some point , today, tomorrow , next month, one will let the genie out of the bubble and go all in to give its domestic economy a better chance than its neighbour. The problem that the RBNZ should have addressed,( and belatedly is better than not), rather than waxed and waned upon our currency , when obviously something was inherently astray on the global stage, was to prevent the blowing of domestic asset bubbles, to avoid a balance sheet recession down the line which will take far longer to repair than fluctuations in our currency. I can see the NZD go to .95USD over the coming 24 months if central banks continue upon their merry way, but at some point the musical chairs will run out.

So how does the individual respond to that. Other than getting a time machine and buying real estate 5 years ago.


May we ask BE that if giving Wheeler leeway on his only real task then why do we need him and so save his salary?

Stupid Old Bill ... finally hes coming round to the times are a changin - just 8 years too late

People are crazy and times are strange - it's an Idiot Wind blowing every time he moves his mouth....

I called it first people. Auckland housing is too big to fail. My man john has issued an order to Graham to lower interest rates. Or else.

Mr English, you are a smart man. Of course the TWI is directly influenced by the OCR, just look at how much the NZD has gone up since the RBNZ did not cut the OCR .
Also the RBNZ has not cut the OCR by much (0.25% net over theist 2 years) whilst other countries have slashed theirs.

If you raise the OCR we are stuffed, if you lower it we are wasted, if we do nothing we'll all perish; I think BE thinks we've had it; at least he's honest...
Maybe it's time to look at structural change, (and increasing bank's capital ratios to curb the runaway lending)

Of course its the OCR rate that is affecting the NZD. Its known in currency circles outside NZ that Wheeler has thrown the towel in, and its open slather. He's not even going to try.

I guess what gets me most is that we all post on here saying things along the same lines, but nobody really has any intention of doing anything meaningful. We all want change but none of us are prepared to go and get it.

Today I put a considerable amount of money into physical silver. I already did gold. Tomorrow I will invest in Bitcoin. And at the end of winter I will move to Hong Kong and harvest New Zealand from abroad like everyone else does (oh yes, and at a much lower tax rate as well)

I'm sick of this dumb country.

Remove Governor Wheeler from the RBNZ