RBNZ Governor Adrian Orr surprised no one with his decision to keep the OCR at 1.75%, but is again leaving the door open for a cut, as well as a hike

Adrian Orr cartoon by Jacky Carpenter. © interest.co.nz

The Official Cash Rate (OCR) will remain on hold at 1.75%, as expected, but Reserve Bank Governor Adrian Orr says the Bank is “well positioned to manage change in either direction – up or down – as necessary.”

This is a similar sentiment to when the OCR was left on hold in May, when Orr said: “the direction of our next move is equally balanced, up or down. Only time and events will tell.”

The statement, which saw the kiwi dollar rise slightly against the greenback and the Aussie dollar, was more dovish than the market was expecting, says Westpac Head of Strategy Imre Speizer.

In response to the OCR statement, as well as Wednesday’s weak business confidence figures, ASB has pushed back its OCR hike expectations from August, to November next year.

Earlier this week, ANZ push its forecast out to November as well.

Kiwibank and BNZ have not changed their OCR hike forecasts; both expecting a rise mid-next year.

In Thursday’s OCR statement, Orr put emphasis on achieving the Reserve Bank’s policy targets agreement with the Finance Minister.

“The best contribution the Bank can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the OCR is at an expansionary level for a considerable period.”

Orr says the recent weaker economic growth figures imply there is “marginally” more spare capacity in the economy than had previously been anticipated.

Last week, GDP figures showed growth of 0.5% in the first quarter – down 0.1% on the quarter prior.

This was under the Reserve Bank’s 0.7% forecast.

But Orr says domestically, ongoing spending and investment by both households and government is expected to support future growth.

“The Government’s projected spending impulse is also slightly lower and later than anticipated.”

The Reserve Bank has not changed its future economic forecasts from May’s Monetary Policy Statement.

Looking overseas, Orr says global economic growth is expected to support demand for New Zealand’s goods and services.

But this outlook has been tempered slightly by trade tensions in some major economies, while ongoing volatility in some emerging market economies continues.

“Global inflationary pressure is also expected to be higher but remain modest.”

On inflation, Orr says the Consumer Price Index is likely to head up in the near term because of higher fuel prices.

“Beyond that, inflation is expected to gradually rise to our 2% annual target, resulting from capacity pressures.”

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41 Comments

where is he seeing this? Not emerging markets.

"Looking overseas, Orr says global economic growth is expected to support demand for New Zealand’s goods and services."

China has strong fundamentals to stave off a recession but the country cannot escape slower growth with a credit binge this time on.
India has the potential to continue at its current growth rate but heavily exposed to a double whammy of rising crude prices and falling local currency.
That being said the oil price surge is but a knee-jerk reaction from speculators, while the supply-demand dynamics have a different story to tell. Demand for hydrocarbons has peaked out and short-term supply constraints will ease off in the coming months.
Southeast Asian economies are likely to get trampled in the ongoing trade conflict.

Nothing to see here unless any one or all of the already well documented "unexpected" events unfolds, then we will cut rates. We've started the Ambulance and our foot is ready to hit the accelerator if need be.

But will people lend to you at lower rates?

If is anything like what the RBA are facing, it might be lower rates with little effect at the bank counter. It's easier to envision stubborn elevated rates and tighter lending criteria is on the horizon.

with the dollar below 68 , this must led to imported inflation, there is only so long before prices must rise.
but with that and an increase could lead to not only a stopping of house price rises but e reduction in consumer spend

the FX rate needs to be sustained at lower levels for a period of time before it will have an impact - the average FX rate needs to lower compared the current average (say over the last 12 months). If so, then it will likely take a little time and there will likely be a lag and incremental effect. The new fuel tax will add to CPI ...

Here is the most recent CPI basket weightings that I could find - https://www.interest.co.nz/news/91579/statistics-nz-completes-its-3-year...

The three largest categories total 57.7%
Housing and utilities 24.47%
Food 19.29%
Transport 13.94%

Food and transport are both FX sensitive, as well as oil price sensitive, which are the majority of your top three categories.

Of some worry, oil prices have been increasing strongly in USD terms, which means that the NZD price has climbed at a rather high rate recently. In the last year, crude oil has climbed about 75% in NZD terms (~72% WTI, 79% Brent). the cost of transport as well as growing food has a strong fuel price component, so expect food prices to increase commensurately.

As always a bob each way. Out of necessity NZ is managed reactively ie observe the actions of and reactions of the big economies to each other and events, and do the best to navigate a good course through them. No other option afraid to say, but both last Labour & National governments (Cullen & English) did fairly well at this eg leading up to and through the GFC.

“Beyond that, inflation is expected to gradually rise to our 2% annual target, resulting from capacity pressures.”

Hmm, I've heard that before. The question is are there really "capacity pressures" or has the RB got the NAIRU very wrong?

How to decode this banker blather? there is “marginally” more spare capacity in the economy than had previously been anticipated.

Presumably, something like this:
Previously we thought there might be limited capacity as the government talked about turning off the immigration tap. Now it looks like the government will bring in "capacity" as they see fit. So we will keep blowing money into the housing market to keep everyone happy.

No mention of NZD collapsing as money flows back to the USD. Complacency at the RBNZ? Surely not.

Orr seems very laid back and his priority is clearly maximum sustainable employment, inflation being secondary. No mention of financial instability. Has he been lulled into sleep by the soothing sounds of the Wellington delusional groupthink and started to believe in impossible things like the rest of them?

In stark contrast to Jay Powell, who appears to be his own man, rather than parroting his predecessors' platitudes, he speaks quite openly about loose monetary policy leading to financial instability, which is not necessarily inflationary in the expected way. Inflation being a special case, instability being the general one. Powell also points out that the last two bubbles ended with a financial collapse before inflation got out of hand. He seems to be a serious, no messing bloke.

My view is that there are only 3 things that will cause them to do anything (raise/lower OCR),
1. CPI inflation picked up quickly.
2. An emerging economy -like crash in our exchange rate, they would probably do something..
3. We dip into recession .

seems a bit tooo simplistic..?
No so many lessons learnt Post GFC..

Yes, I can't see them raising rates because of cpi inflation, only because of wage inflation in excess of 5%. So expect more of the same.

They have acted to some extent on the capital controls though, with the credit limits on lending. However, I think they are deluding themselves about the effectiveness of their actions as I think the big driver was the Chinese clamping down on capital flight.

So expect the unexpected, Auckland house prices to start going skywards again as the Yuan devaluation gathers steam. Ignore the anti-Trump brigade, it is Jay Powell calling the shots, Trump is a sideshow. This is the only game in town:
https://fred.stlouisfed.org/series/USD3MTD156N

What do you think would drive wage inflation, public sector wage bargaining?

It is usually the public sector, I read somewhere they are now only 34% overpaid against the private sector, down from 38%, but not sure the figures were reliable. I don't see it happening that fast, even though the unions are slavering. I laughed at the IRD and MBIE trying to follow the Nurses. How delusional to think the IRD and MBIE have the goodwill that nurses have.

I suspect the NZD will continue declining at some point and there will be nothing the RBNZ can do to stop it. The result will be no money for house building and sunglasses in Auckland. Exporters who survive will do well for a while. Eventually the Fools Who Know Best will find a way to stuff it up again, that you can rely on.

I never think of public sector wage increases as inflationary as it has to come out of the pocket of taxpayers, so someone gets little more the rest of us get a little less.

The country's productivity declines. Britain in the seventies. Society collapses. They have never really recovered, hence the Brexit vote.

The Muldoon/Lange era here.

A 30% increase in the minimum wage over 3 years could do it!

Has the RB trapped itself by not raising the OCR during the boom times? If they had, then they would have some room to move if things get tough. At 1.75%, how useful will that be when trying to stimulate activity. They will mess around with the other tools but surely not to the same effect. At this time I suppose they have Hobson's choice, with the amount of debt sloshing about, stagnant house prices and dropping business confidence, any hike will have a big impact.

They play on the indebted team.

The RBNZ tried to raise rates to stop the Auckland house price bubble, but had to back off as there was no ordinary inflation in sight. So we got hyperinflation in Auckland house prices.

It's really a problem of asset growth outstripping wage growth, it's an imbalance. Low interest rates have not helped wage earners on a treadmill of high rents or loaded with debt and high repayments, leaving many with very little or no disposable income.
Assets have outstripped the rest of the economy, a correction is inevitable.

Inflation in the price of existing assets is proof of excess liquidity. Central banker groupthink sees excess liquidity as a good thing, I don't understand why. I get the argument for excess liquidity from the central bank as an emergency measure, but as ongoing policy it makes no sense to me. It creates misallocation of capital to daft things and just takes the pressure off the politicians to actually solve the problems of the day.

how we look at "money' is all screwed up. This is whats actually going on.

"It’s an exceedingly weird and difficult concept, as in convention almost everyone talks as if there is actual currency in all this – there is not. The wholesale system does not operate on such platitudes and anachronistic arrangements that make for currency as it was always known. What happens are bank exchanges among, and only among, various forms of ledgered liabilities. When Brazilian companies need dollars to engage in foreign trade (on both sides, to buy and in reception during a sale) Brazilian banks source those “dollars” via the eurodollar market and then lend them internally, pocketing whatever spread they can find after whatever influence is acting wherever. That means the “dollars” they obtain are eurodollar bank liabilities typically of small duration – they are synthetically short the “dollar.”
http://www.alhambrapartners.com/2018/06/27/there-is-only-one-global-trad...

Roger not having a go, but what period are we talking about? Recall period up to 2008/GFC we had mortgages at about 8.5% in general, which most commentators seemed to think were from RB doing more than necessary. Since then a sustained fall with a short lived rise about 2014. It seems control of interest rates is not excavtly the outright panacea of economic ills that is commonly expected?

They seem to have had a policy of being too late to raise rates under Clarke and Cullen, so they tried to be timely under Key and English. Abject failure in both cases really. Auckland house prices are the shameful result.

So that is an example of an old saying amongst financial circles that the RB arrives too late, does too much and stays too long.

To give some credit to the RB, the mess we're in is not all their fault. Govts have taken the part of Keynesian economics that suits them for decades now...that is, spend up taxpayer money in the bad times. Conveniently, they've opted to carry on doing this in the good times as well. Result is a greater drag on the economy and lower growth and unpayable debt (based on fairy tale growth assumptions). However, if they follow the ECB playbook and start buying govt and corporate junk bonds then we'll be seeing a complete currency collapse and explosion in interest rates in the future. The ECB is destroying the European bond markets, with barely a whiff of opposition.
Orr's language speaks volumes about the real sense of panic that exists behind the curtain at the RBNZ and other reserve banks around the world. They know that confidence is fragile and the trigger for the next systemic crisis could come from anywhere. Soothing expressions like "well positioned", "equally balanced", etc, are anything but confidence inspiring to the intelligent investors and market makers out there...

There's another saying that comes to mind with respect to pulling your money out of shaky markets...you're better off being a year early than a day late.

I have doubts about how effective rate cuts will be when the OCR is already at 1.75. The Aussie cash rate is 1.5. Cuts can help debt serviceability at the margins but RB would run out of road very quickly. And if the expectation is for asset price falls I think the buyers will disappear and OCR cuts will be like pushing on a piece of string

I can’t see RB hiking, but I’m not sure that matters. See what’s happening in Aus, banks are under pressure via funding costs and this will eventually feed into rates.

in a low interest environment people won't risk capital if there is a risk of not getting it back.

I have a friend who sold a house in Napier 6 months ago for a cool one mill, They told me yesterday that if they had waited and sold it this week ,they would have got an extra 300k. Thats a real cut in the spending power of a dollar.

Hyperinflation in plain sight, but no one can see it.

The charge of the Auckland Brigade?

“The kind of dollar selling from that bank was so aggressive that we knew instantly that it must be from the Big Mama,” said a Shanghai-based senior currency trader at an Asian bank, referring to the Chinese central bank’s nickname among local traders."
http://www.alhambrapartners.com/2018/06/27/big-mamas-leaves-huge-footpri...

"In my view, this widely held wisdom is based on a profound misreading of economic and political reality and trends in the U.S. and around the world. I believe that a looming global recession and fear of deflation will lead the Fed to cut rates instead and reinstate quantitative easing, or QE, causing U.S. bond yields to fall."
https://www.barrons.com/articles/fed-rate-cuts-and-qe-will-resume-soon-1...

Orr sounds to me like ,if anything, he's going to cut.

So if he cuts by 0.25 or 0.50 how much will be achieved. I would venture to say nothing except we would only be !.00 away from Zero. Time interest rates were raised and let people face the music

All these dull minds can conceive of, is juicing up the economy with cheaper credit. The ultimate sugar high.

This all ends badly for many economies , more so for a small economy like NZ. Markets are repositioning themselves into inflationary commodities, staples and utilities. Over valued TECH is done for now or at least until the next quarter. Bond curve inversion is inevitable. Predictions for recession next 2 years is becoming more and more rampant...who will have the ammunition to react . Normalization is required for what's to come and little to do with economic conditions.