This week's OCR review was the first of four key pre-Christmas announcements that will collectively have a big influence on the economy next year. David Hargreaves reads the tea leaves

This week's OCR review was the first of four key pre-Christmas announcements that will collectively have a big influence on the economy next year. David Hargreaves reads the tea leaves

Well, that's one down - now three more to go...

The Reserve Bank's Monetary Policy Statement and Official Cash Rate (OCR) decision on Wednesday can be viewed as the first leg of four crucial announcements before Christmas.

Next up is the RBNZ's Financial Stability Report (FSR) on Wednesday, November 27. 

Then the RBNZ's release of its final proposals on increased capital requirements for banks on Thursday, December 5.

And last up is the Government's Half Year Economic and Fiscal Update (HYFU) on Wednesday, December 11.

The window into our economic future

Taken together the four big set pieces (including the just-gone OCR decision) promise to be very big scene setters for next year. They will be a window into our immediate economic future.

The interesting thing is that while the four events are each discrete, there's a lot of cross-influencing that might occur from one event to another.

Already it's being widely viewed that the RBNZ's decision to hold interest rates makes it more likely that the bank will again relax the loan to value ratio (LVR) restrictions when it releases the latest FSR on November 27. I've already said previously I think the RBNZ will do this and I think the RBNZ's decision to leave the OCR unchanged at 1% just makes it a more sure fire thing that the LVRs will be relaxed.

I still think the RBNZ would see some value in something of an upswing in housing activity at this stage and if they are not helping that by dropping interest rates again they can help by making it easier to borrow - hence a relaxation of the LVR rules.

This is likely to be particularly the case if we do see any sign of banks now moving mortgage rates UP, which is possible after the sharp rises in wholesale interest rates resulting from the non-cut to the OCR.

A natural flow

So, there's a kind of natural flow-on from the RBNZ not lowering the OCR, but then on November 27 relaxing lending rules...and then there's December 5. That day we finally get the RBNZ's definitive word on how much extra capital it wants banks to hold. This will be almost a full year after the RBNZ released its proposed capital requirements.

I'm not going to speculate now on what the RBNZ might eventually come up with.

What I would say though is that given the amount of posturing we have seen and continue to see from the banks it may prove extremely useful for the RBNZ if it does relax mortgage lending rules ahead of the bank capital announcement. And it might also be extremely useful to have a bit more gunpowder left in the OCR than it would have had if it had reduced it on Wednesday. 

The banks have been producing a grinding symphony of how once they are forced to hold more capital this will force lending costs up. 

I think this is an extremely simplistic argument since ultimately the banks can only charge what the market will put up with. And if we assume there is such a natural thing as competition, then it can be assumed that if one bank heroically tries to ramp its mortgage rates up, then others will see a market opportunity and will undercut that rate. If all the banks raised rates unflinchingly in unison there may be some serious anti-competitive questions raised by the regulators.

Keep an OCR cut handy

But notwithstanding such arguments, it would still be useful for the RBNZ to be able to say to the banks and the public that they (the RBNZ) are making it easier for the banks to lend (via the looser LVRs). And, if need be, the RBNZ might even be able to brandish a capital-driven OCR cut - IE working to neutralise any raising of mortgage rates the banks are able to accomplish.

Of course I doubt the RBNZ would ever style such a move in the way I have just done, but it wouldn't have to. Come OCR decision day it just tells us whether it is cutting the OCR or not. And clearly this is not a central bank too worried about 'surprising' the market - as it has just done that with the decisions in both August and on Wednesday.

The point is though, that by having that little more petrol in the tank an OCR of 1%, rather than 0.75% will give, and with possibly relaxed LVR rules, the RBNZ would go into bat against the banks over its capital proposals in a much stronger position.

All that would then be missing from the RBNZ's Christmas shopping list would would be the much-wanted extra fiscal stimulus to be provided by the Government. 

How about that fiscal stimulus?

The RBNZ seemed much more laid back on the whole subject this week, with the Monetary Policy Committed noting "fiscal stimulus could be greater than assumed" (which I think is an odd comment without knowing more about the context in which it was made). Asked by interest.co.nz at the OCR media conference about the call for fiscal stimulus, Governor Adrian Orr said: “You don’t have to keep shouting..." and “...I imagine that it’s been heard".

Well, of course there may yet be a chance for some extra signalled fiscal stimulus, with the HYFU to be announced on December 11.

Certainly there hasn't been any obvious indication from the Government that it is planning an extra boost - but certainly also, announcing a boost just before the start of election year would be timely. So, let's see.

I don't think this week's OCR decision should be looked at in isolation, nor should any particular conclusions be drawn from it. The strong reaction from financial markets in pushing up wholesale interest rates has meant that, in effect, we've seen a tightening of monetary policy. But monetary policy that is tightened can be loosened very quickly. 

The sum of the parts is what matters

We need to see what results from the combination of the four major events/announcements discussed in this column. It's the sum of these four events that will carry ramifications into next year.  

I feel reasonably confident in saying that by not many months into the New Year we will have a lower OCR. The LVRs will have been loosened. And the Government will have at least signalled more fiscal stimulus for the economy.

As for how the banks react to the capital proposals, well, obviously that's going to depend on what's in the proposals.

But I think the RBNZ's prepared itself pretty well for all eventualities. And my best guess is that the bank posturing will turn out to have been just that. 

The next few weeks are going to be real interesting though. There's going to be a lot to absorb. Then we can all have a think about what it all means for next year - election year - while we are on summer hols.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

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Too little to late to save Labour next election.

20
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Really..you think Soyman is a shoe in? Economy seems fairly robust at the moment, and I am not hearing any grumbles from the business I deal with? The only ones I hear are at bbqs in the weekend and older blue bloods who would vote National even if they sold NZ to China for a dollar.
Reducing the LVRs would be a mistake..but got yo keep the ponzi going for a bit longer I guess.

Anyone who thinks Labour is going to lose needs to explain where National is getting coalition partners from, or how they are going to force both NZFirst and The Greens under 5%.

Not sure if anyone already said so, it's from ACT & from the recent SNZ for sure - add to that a bit like JK being groomed to replace DB, Jacin to replace AL - we all knew who's going to replace SB ;-)

... my prediction for early 2020 is that Taxcinda will announce her marriage to Clark ... thereby distracting the media completely with that , rather than focusing on the general election .... and then the actual ceremony ... just a couple of months before the polls ...
Soyman's got no answer to that ... game over ...

I think you're onto something. Just think of the women's magazine covers.

Good call. You mean 'Clark with an E'

.. oh yes .... my bad : Clarke ....

Whew ... feel so much better now ... Clarke Gaylord .

..right....

Dp

Didn't mean that as a criticism, but as a pun. Remember reading that as a title of one article about the First Partner, written may be last year.

Here it is,
'There’s something about our First Bloke that keeps nagging me every time I see his cheerful face.
Is it the fishing, the posing, the DJing, the pleased-with-himself grin, the apron, the "first man" thing, the flourish of an "e" in Clarke?'

https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12037416

You mean, .. how do we get here? C'mon 9yrs of rock star economy.. I can give you a front seat on the rock star concert Carlos67, you're happy. Except later on just to find out that. I'm not what I claimed to be/bogus rock star. Good economic management should at least resemble to the good Cancer illness management, acknowledgement of the facts are the first key to attend the issue.

11
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Seems that NZ and Oz are really property junkies, trying to tap the money vein that has dried up. Lowering the LVR rates puts customers at high risk and so to our banks. Wouldn't be surprised if we'll see the removal of LVR restrictions altogether in a year or so allowing the banks to introduction of 100% mortgages, Now that is a road to disaster. Banks would do better to reintroduce interest only mortgages and keep LVR restrictions in place.

After that no job and no income with 0% mortgages.

The QEs and all this debt ridden principalities need to be kept alive CJ, soon we'll see the above 50yr mortgage options for sure-After the next big bang! - My predictions about these dominoes effect?; all started from one, certain/several countries.. that cannot longer bear the weight of the debt that being passed on between countries..thus passing it on to their citizens as means of tightening belt/austerity (first come to my mind is: 'get blood out of a stone' & 'French revolution') - Check out those in Latin America, Europe, Hong-kong.. & others now.

Nothing is forever, not even debt. Every borrower eventually either repays what they owe, or
defaults.... one way or another, the debt goes away....And as we see debt-laden businesses run into difficulty bankers will tighten lending standards, and the dominoes will start to fall.
One of Western civilization’s largest problems is we’ve convinced ourselves debt can be permanent. We don’t use that specific word, of course, but it’s what we do and is why government debt keeps rising. We borrow faster than we repay previous borrowing....Our leaders have no real plan to reduce the debt, much less eliminate it. They just want to spend, spend, spend forevermore. And most citizens are okay with that. As a result, I think we will spend the latter part of the 2020s going through a kind of worldwide bankruptcy... we will collectively realize the situation can’t go on and find a way to end it.

https://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/TFTF_Nov_15_2019...

11
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... markets can remain irrationally overpriced for much longer than predicted... as house prices here attest ... but , the longer they remain there , the bigger the bust when it inevitably comes ...

Some people really do think that this time or this place is different .... yeah , right !

Quite right. And markets can equally be irrationally underpriced for longer than predicted. And what's irrationally priced at the moment and undervalued? Cash, and its price - interest rates. My expectation is that those with unapplied debt-in-hand ( no net debt and as many Fully Drawn Advances as they can get their hands on - keep your debt and credit balances in different places though) will be better positioned to ride out any adjustment to our economic systems. I doubt they'll be unscathed, but scars are better than death.

10
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“There are decades where nothing happens; and there are weeks where decades happen" - Vladimir Lenin

Good quotes, very scientific if you consider the likes of natural disasters, pragmatic if consider the likes of worldwide countries to be under pressure from debt & shifted into high gear of austerity measures - it is a matter of WHEN not IF, we might bite the nails with regards to Brexit, Tradewars and potential real wars... but I encourage readers, in this 'interconnected world' to check how healthy this world/countries economy, after that pick your country domino to push.. for the rest to follow.

If all the banks raised rates unflinchingly in unison there may be some serious anti-competitive questions raised

But, essentially, the OCR put up or down is a Universal Pricing Signal, so surely it's too much to expect that such a signal would not prompt a series of individual banks' reactions, which in a simplistic reading could be taken as 'cartel behaviour'? A few bips here and there different, mild variations in T&C's - how close do these need to be to trigger the wet bus ticket stack?

That's the key Waymad, Universally how healthy are this world? hints (you've been warned); next Apr.. the tiny 30-50K dep guarantee, Deuche & HSBC banks reduce work force, Banks here locally scramble to change their T&C for dep. settlements, world events, etc. We all can only have guess 'as what we don't know' thus prepare for the inevitable - Personally, after Chch/Kaikoura EQ - we do prepare for emergency kit. Don't consume that kit. Same advise to loan/borrower - by owe means buy your RE/investment etc. - Just make sure you have a wiggle room to anticipate the downturn. The sad part on this site? - it's rife with the promo of that... there won't be a downturn, no need to prepare, no need for life jacket, no need to fasten the seat belt while flying after-all the 'light indication' stated so.. hmn.

They might lower the lvr for FHB, on what basis would they do it for investors?

A sobering reminder for those of us who were there at the time:

60% of the current workforce was too young to be in work when the last recession hit in 1990, 29 years ago.....While the interest rates were high, looking back, they were affordable if you had work because loans were smaller – (the interviewee) had a mortgage of $30,000. He ...worries about young people taking out huge mortgages while wages are stagnant and jobs insecure. “I’m not sure how the next generation is going to be able to cope,” he says. “I say that from my kids’ point of view. The bills, the mortgage, it’s a matter of trying to hold a job that actually pays reasonably. That’s the hard part now.”

https://www.theguardian.com/business/2019/nov/17/remembering-the-recessi...

Yes.
Economies are cyclical. Everyone knows that. There are boom periods, periods of moderate /weak growth (like now) and recessions.
A recession will come again, and jobs will be lost.
How will the housing market weather that storm when it comes?

15
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NZ can weather the recession storm providing we reduce our living costs gradually. The bigger issue is trying to stop Boomers from selling off NZ to the highest bidder if National is allowed back in to power. They think they'll all be millionaires but really they are just creating a false economy at the expense of younger Kiwis.

12
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If a recession hits in the next 1-3 years, the housing market will drop away.
Unlike after 2008/2009, we don't have the luxury now of being able to make big cuts to the OCR to stimulate the market.

There is no limit to how negative OCR interest rates can be forced down. Negative interest rates will be like evenly-distributed defaults and "hair-cuts" all round. To paraphrase an old NZ catch phrase, negative rates will be the default you have when you're not wanting to admit it is a default. Low and negative rates are effectively admissions by the central banks that they have enabled excess debt to accumulate.

However, the prospect of forced defaults will not stop them in the mean time from loosening lending standards (loosed LVRs) and encouraging more wasteful consumption from cheap debt.

double post

their just creating a false economy

"they're".

Hmn.. Correction, Recession then Depression. Who would have thought that Hong Kong now is into Recession's territory (correct me if I'm wrong please).

Yes
Talk of a recession and recovery ignores the fact that it will be DEBT itself that will be collapsing
Which means Wealth simultaneously collapses
Which means jobs & supply chains are no longer a given
And then what?

The point is though, that by having that little more petrol in the tank an OCR of 1%, rather than 0.75% will give, and with possibly relaxed LVR rules, the RBNZ would go into bat against the banks over its capital proposals in a much stronger position.
Banks will always look to maximise return on capital on behalf of shareholders, hence lending priorities will be determined by the asset class that demands the least capital and provides the most liquid collateral - there is a reason why the risk weights for sovereign bonds are zero.

Residential property standard risk weights can be reduced by implementing 'the internal models based approach'. ANZ has reported a figure as low as 27%.

Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages held by one third of households.

Any RBNZ imposed capital increase will see bank lending migrate towards the zero risk weight asset category. The rumour is that JP Morgan is loading up on pristine repo collateral in the form of US government debt and is unwilling to commit any balance sheet capacity in the money markets to alleviate funding stresses of associate institutions. The Fed has undertaken this duty since mid September in the form of TOMO and POMO liquidity injections.

This prognosis is at best unsettling for the debt dependency NZ has developed buying and selling mostly non GDP qualifying residential property assets to each other, and hardly fits in with Mr Orr's new found claim: "There has never been a greater time to make use of accommodative monetary policy for investing in productive assets." - Link

Great post. Re the last claim by Orr, propaganda at its most stark. "Never been a greater a time" is not a proxy for future actions.

Great article David, I think you're right on the money on just about every point