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David Hargreaves says the RBNZ was always going to remain 'dovish' in its review next week anyway, which is probably okay for now. But the future is a worry

David Hargreaves says the RBNZ was always going to remain 'dovish' in its review next week anyway, which is probably okay for now. But the future is a worry

The re-emergence of Covid in the community has, in a strange way, taken some pressure off the Reserve Bank.

I was never really in any doubt that the RBNZ and Governor Adrian Orr would again be painting a ‘dovish’ picture in terms of monetary policy settings at next week’s release (Wednesday, February 24) of the latest Monetary Policy Statement.

And I’m sure he wouldn’t have felt any need to justify such caution. In the event, the re-emergence of Mr Covid provides instant justification. It’s timely justification though for a central bank that has been starting to look slightly out of step with the mood of the country. I said this on the subject about a week-and-a-half ago.

The latest outbreak is a reminder, if we really needed it, of what a really fragile situation we and the economy are in, as long as the virus remains, in a global sense, out of its box. Any move to ‘normality’ remains conditional on there not being a significant outbreak of the virus here.

So, it will be difficult for the RBNZ to move monetary policy settings to ‘normal’ till we really know that ongoing ‘normality’ is possible. We will know better on that once we’ve all had a shot in the arm, whenever that may be.

And in the meantime we have to hope a virus that suddenly seems to be mutating faster than the alien villain in a bad 1950s sci-fi flick  doesn’t run ahead of the vaccines. If it does, by the way, all bets are off. Oh, yes.

The RBNZ has generally maintained a fairly downbeat and cautious view of the economy, despite said economy again and again surprising on the upside with its performance post the March/April lockdown last year.

Till fairly late last year the central bank was giving every indication, not explicitly but through general body language, that it would likely take the Official Cash Rate down from the current 0.25% and into minus territory

More recently with GDP bouncing back strongly (+14%), inflation sitting well within the 1%-3% target range and unemployment astounding everybody by dropping to 4.9%, the market talk has even begun to move to when interest rates will need to go up again. Some economists are now picking even as early as next year. Wholesale interest rates have caught the mood and have been going up.

Another Level 4?

Fingers, toes, and everything else, are crossed in the hope that we may (yet again!) get lucky with the latest virus outbreak. But what if we did get an outbreak bad enough to justify another Level 4 lockdown?

Hey, I think we could do it you know, given how long it has been since the last one and how we did come through that so well. But we know what it does to the economy. Bang.

Till that threat gets taken off the table, it’s going to be hard for the RBNZ to wholeheartedly commit to normalisation of monetary policy settings.

The best guess would be that next week the RBNZ will therefore paint a steady-as-we-go picture.

It will probably suggest no movement in the OCR for the foreseeable future, though I wouldn’t be surprised if even now the possibility of a negative cash rate is not completely erased from the vernacular.

To some extent therefore we and other economies around the world are set up currently in a super cautious way that allows for the possibility that the virus may be a major drawback for an open-ended period of time.

Held hostage

It’s hard to argue with that. Fixing the global economy was always going to be about getting rid of the virus as a big problem. Till it was no longer a problem we were going to be held hostage.

Not that this message seemed to get through to some that should have known better in 2020.

Indeed, I shook my head violently last year more times than was good for me at some of the talk coming from world leaders (and I don’t even include former US President Donald Trump in this - his handling of the pandemic was in a class of its own).

Some leaders of large countries, and those in Europe do come to mind, really did seem to talk as if the virus was some desperate inconvenience they could get rid of just by deciding they’d had enough of it. It really did take a while for some leaders to get their heads around the idea that a virus for which there is no natural immunity can and will be caught by everybody and it will be a damned inconvenience till immunity is established.

What will actually happen when that immunity starts to be felt - assuming the vaccines remain potent?

That becomes a big conundrum, I think. 

Handling 'normality'

In some ways how we handle the return to 'normality' is the bigger, and potentially more risky, challenge to global economies.

The onset of the virus was fairly swift, which led to equally swift massive economic reaction and stimulus from governments and central banks around the world.

We don't have a clue at this point when the virus will no longer be a problem - and how quickly it will cease to be a problem.

I do think there's a risk that - whenever it is - the impact of the virus lifts more quickly than expected, and leaves various economies in a massively over-stimulated situation.

And what would we get? Inflation. And resultant higher interest rates.

We went into this crisis with global asset prices looking, certainly to me, way over the odds compared with historical levels.

Fed into asset prices

The massive amounts of stimulation have partially fed into asset prices. We've seen that most obviously in New Zealand with the latest bout of housing hysteria.

Rising interest rates globally would see money start to migrate back out from assets. If that starts to happen in a hurry, and given how inflated asset prices look generally, then there could potentially be all sorts of havoc. Asset prices could crash. Which could be ugly.

I do have a bad feeling about what a return to normality might bring then. It could be a real sting in the tail of Covid. 

If various governments and economies around the world are not quick enough to react to the decline of the virus there is still a risk yet that the cure might have more ramifications than the original complaint.

So, being cautious about the 'now' while we're still in the midst of the pandemic seems practical enough. But we've got to be pretty cautious about what comes next too.

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Interest rates will NEVER rise. The game is rigged.

There is also plenty of natural immunity to the virus that's why so many people barely show symptoms.


Absolutely correct!! It also goes back to the libor scandal. Banks and central banks rigging rates so they could cover their positions. Similarly to the funds shorting with gamestop..

Libor is not going away in a hurry - Insufferable SOFR, Suffering

I agree whole heartedly with your first comment re interest rates. Not sure your comment on natural immunity is grounded in any science but hey, this is a finance news website...

What sort of 'havoc' does the author expect from money starting to migrate back out from assets (such as houses and some share-prices), given that they are were already overinflated before the emergency official cash rate cut of in March 2020. This inflation IS the havoc. Simply correcting it is the opposite of havoc - it would be calming

Nice article David. I share your concerns.

The first part of the article makes no sense. The RBNZ can't base monetary policy on the fact that there might be a major outbreak in the future. React to what is actually happening, not what might happen.

They should normalise monetary policy, then re-stimulate only if and when a major outbreak occurs. Clearly the economy is resilient to multiple short lockdowns as we have had over the last year anyway.

They can do whatever they like. They control the narrative and keep their 'independence.' Yes, it's a farce and a con, but the sooner people realize this, the better it is for your own self preservation.


Dropping interest rates to the current levels was a massive mistake even at the moment the decision was made. Not rising them immediately shows how little interest the RBNZ has for the wellbeing of the NZ people even less for equality and housing affordability.


Yes, it was a massive mistake. And even worse mistake is not normalizing monetary settings now.
Interest rates must increase now, slowly but progressively, before it's too late and before the NZ housing Ponzi gets even more out of control than already is now.

The damage was done in mid 2015 when the RBNZ lowered rates despite the country being in a "rockstar state". Interest rates were lowered from 3.5% in Mid 2015 to 1.75% by November 2016. This went against the generally accepted principle that monetary stimulus occur in a recessionary environment & monetary tightening occur in a booming environment. The RBNZ is clearly not competent at their job.

Central banks generally follow wholesale money market interest rates down.

Low interest rates aren’t a central bank providing accommodation, they are instead its worst nightmare being shoved right back in their face. Well, our worst nightmare because for one thing despite repeated failures, rates that never rise testifying to that failure, central bankers are never held to account. Link

QE spikes after inflation tests the realms of deflation, which serves to confirm the failure of previous monetary policy action.

The RBNZ should play it safe and cut the OCR into negative to boost the economy. Because apparently low rates means high growth..

I picked up the sarcasm ;)

When will the orthodoxy acknowledge that sub-2% rates do not stimulate the real economy, and instead drive speculation in risk assets? How many years of failure does it take before empirical evidence counts for something? I doubt there will be many tourism businesses saying "Well, I have no customers this year, but my interest payments are down by 25 basis points so I guess I don't need to fire anyone".

But, but, but, its all about the houses.

That’s what science is; you try something and if it doesn’t produce the desired results you know it didn’t work. You stop doing it. In terms of QE, a third go-round would’ve at least proved it couldn’t have been “quantitative.”

Bank reserves at any level, Bernanke replied, “are not the issue.”

“CHAIRMAN BERNANKE. The issue is the state of financial conditions. And we are still able to lower interest rates, improve, broadly speaking, asset prices, and that provides some [stimulus] incentive.”

In the best spirit of:
"Never let a good crisis go to waste"
We have.
We could have recalibrated our economy; made it fit-for-puropse for whatever comes after Covid-19 and no one would have been to blame. Political decisions unthinkable pre-pandemic were all possible when it hit. Yet we blindly ignored the opportunities we had in the name of political expediency and failed economic dogma of the past (If it worked, why are we here?).
No one knew what was going to happen when the virus hit, and it is precisely because of that we could have been bold and incorporated economic reform into whatever protections we needed to give our people. But we didn't.
We kept the worst features of pre-Covid economics and anchored them to a future of the same.

We could have recalibrated our economy; made it fit-for-puropse for whatever comes after Covid-19 and no one would have been to blame

You really think so? Any major shift in economic thinking or direction doesn't happen overnight. What is the vision anyway?

In some ways the experiment (of closing the border) has yeilded some useful results. The question is now, when this thing is over whether we will learn anything from it?

1. International students add next to nothing to NZ. They spend most of their time in low paid jobs driving taxi's or working in supermarkets and hang around to get residency to continue with the same jobs. All while putting pressure on infrastructure and housing, making the latter more expensive by increasing rental demand.
2. International tourist hot spots like AKL and Qtwn rely on temporary travellers and migrants as staff so they can be paid poorly by many multi-nationals. Little of the money coming into these towns goes to supporting the sensible growth of these towns and puts more of the burden back on the people that live their.
3. Kiwi's love buying and investing in property. It's a drug and one we have little will power to get off.
4. Some industries (e.g. hospitality and horticulture) can only exist on minimum or below minimum wages.

Tourism and education support the consumer spending sectors of the economy. That is why they're so important. From a govt perspective, it's easy money.

Money will devalue until it’s worthless and a digital currency will be announced. Equity can be exchanged for the new currency.......oh wait, one won’t be needing to as it is already digital....

Do something with the cash while it’s still worth something. Maybe an overseas holiday.

RBNZ formed by mostly ex OZ Banker & investors, their world balance view subconsciously rely on maintaining the 'numbers' - albeit, if those numbers are no longer relevant or easily been manipulated, it's relative view.
They are bit embarrass now, as initially won't do the 'knee jerk' reactions but later on? precisely doing just that.. outperform the whole world countries in term of country size, population, economic for their 'stimulus' hell even removing the LVR (rejoiced by all Banks), then just following the retail Banks again, when the binge is out of control. NZ is a country which run by bunch of inept teachers, which only follow the will of kid voters. If you're the young professional Kiwis, then the obvious is to join the place across the ditch, where everything in NZ are being controlled from: banking, grocery, refugee, deportation, recent terrorism citizenship, healthcare standards etc. etc.