Why the OCR needs to be at least 4.5%

The RBNZ needs to lift the OCR to make it relevant again

30th Aug 10, 11:55am by Roger J Kerr

Hopefully, RBNZ Governor Alan Bollard was taking good notes when Fed Reserve Chairman Ben Bernanke was delivering his address to the annual central banker’s jamboree in Jackson Hole, Wyoming last weekend.

If he was listening carefully he would have received the message that Bernanke does not foresee a double-dip recession in the US economy, he projects modest economic growth for the second half of 2010 and stronger growth in 2011.

As Governor Bollard puts together his 16 September Monetary Policy Statement, he could be well advised to follow Bernanke’s view, than to listen to the local bank economists who have taken fright at weaker domestic data over the last few weeks and now want to the RBNZ to a sudden U-turn with monetary policy settings.

The local gurus are looking backwards at one part of the NZ economy (retail and property) and wrongly concluding that the recovery is stalling and GDP growth will be revised sharply downwards for 2011.

The RBNZ’s mandate and remit absolutely requires them to base monetary policy settings today on their projection of GDP growth and inflation in 12 to 18 months time.

If forecast GDP growth is north of +3.00% and inflation is north of 2.00% for 2011 they must have monetary settings at “neutral” now.

An OCR interest rate left at 3.00% is a long way from “neutral”, it is in emergency stimulatory territory still.

The new neutral is a 4.50% to 5.00% OCR.

The whole saga around the setting of the OCR is total poppycock in any case, as any OCR change is not making one iota of difference to true market deposit and lending interest rates in the economy.

The banks’ combined average cost of funds have been up at 4.50% to 5.00% for months now. The OCR is irrelevant in this situation, it is just that bank economist and bank traders need something to move to justify their own positions!

If Alan Bollard has any understanding of what really drives the NZ economy (exports), he will conclude, as I have, that the growth outlook is positive and he should not waiver from his well sign-posted removal of the 2009 monetary stimulus.

The RBNZ kow-towing to bank economist and moneymarkets pressure at this point will be counter-productive for growth and inflation.

Remember the RBNZ bowing to that pressure in 2007/2008 when they kept monetary policy too tight for too long and caused the recession? They would not want to make that same monetary policy mistake again by taking a populist, but too short-term view of the economy going forward.

If the NZ economy is stalling right now, how come nearly all the listed companies’ reported profits last week were above forecast and expectations. The economy does not just revolve around residential property and retail stores, our big export industries are doing very well now and will be expanding output over the next 12 months as they cash-in on record high export commodity prices.

Alan Bollard needs to take another hard look at the chart below before finalising his monetary policy statement this week. The blue nominal GDP line is not stalling; it is following the export prices straight up.

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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

No chart with that title exists.

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28 Comments

by Les Rudd | 30th Aug 10, 12:16pm 1283127413

Mr Bean gets it, so there may be hope for RNBZ yet:

Central banks may face further tasks, says BoE's Bean

http://www.bbc.co.uk/news/business-11123774

"Later this year, the coalition government will unveil details of new powers for the Bank to try and head off any future crisis.

And Mr Bean used his speech to set out examples how these could underpin "macro-prudential policy" under the Financial Regulations Bill.

These included forcing banks to build up reserves in good times to help them weather downturns, and imposing restrictions on how much money mortgage lenders would provide.

"With an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem," he said.

"That is what macro-prudential policy is all about."

There is no need to hike the OCR, the recent hikes were a mistake, appropriate tightening can be achieved with more effective and robust use of macro-prudential tools.

Les.

by Gertraud T. | 30th Aug 10, 12:25pm 1283127919

Just testing

by Wolly | 30th Aug 10, 1:12pm 1283130761

"Poppycock"....call it for what is Roger....Bullshit!

by powerdownkiwi | 30th Aug 10, 1:42pm 1283132570

Try looking at exports.

Logs - ah, exellent. Making moolah off of otherwise ropey country. Long may it cont........

oh dear, oh dear....

How many rotations do you get off ground of any kind, sans added nutrient?

So the current accounting of exports is improper accounting - it's a sell-down of the family silver.

Hardly a justification/basis for anything, I'd have thought.

by michael | 30th Aug 10, 3:27pm 1283138823

Roger I am 100% with you, policy setting must see into the future and prevent what most people involved in the day to day events are not able to see. This is quite true when it comes to small country like NZ where things can happen very fast. Take this latest trading balance if seen just by the bare numbers it looks distressing but this has been the best July balance over the past five years, To me it looks like NZ is moving forward at a very fast pace. And once the pace is set there is no turning back. I keep saying the you should start making room for the NZers who will soon be heading back home... All the best for New Zealand.

by Christov | 30th Aug 10, 4:12pm 1283141549

Oh Crikey Roger...............do it all again.

by Gummy Bear Hero | 30th Aug 10, 4:25pm 1283142341

Never trust a guy called Roger .............ever ! Their eyes are too close together , and they smell of elderberries .

by Justice | 30th Aug 10, 6:00pm 1283148015

"If he was listening carefully he would have received the message that Bernanke does not foresee a double-dip recession in the US economy, he projects modest economic growth for the second half of 2010 and stronger growth in 2011."

Jezz Roger, your so see through and full of it! Who the hell in their right mind thinks Bernanke has ANY credibility what so ever?

YOU trade currency do you not? We all know your underlying motive here that you keep repeating. You not fooling me or anyone else who knows the real economic situation out there without bias.

by middleman1 | 30th Aug 10, 6:02pm 1283148120

Interesting that moderates like Roger Kerr have become the new target for vitriolic reactions, replacing the boringly repetitive abuse campaign against PIs which mercifully seems to have died down. At least until Bernard re stokes the fire.

Kerr proposes,quite reasonably, that we need to make a distinction between the export and non tradable sectors when reaching conclusions about how well NZ inc is travelling. But the apocalypse set will have none of it. Every sector of the economy is screwed, we are doomed, no more debate needed.

Chris J proposes that cost cutting is the driver of the stronger than anticipated corporate results. Yes, true up until six months ago and you'd expect to see stagnation by now if that was the last trick in the hand. But interestingly net (adjusted for a bulge last July ) productive capital investment remained positive last month and two way cargo movements through ports such as Tauranga and Lyttelton grew. Aussie corporates ponder what to do with the mounting cash piles generated from sharply improved profits and debt retirement. Worries about growth generated inflation are occupying many minds over there.

With 70% of economists believing we WONT have a double dip, you bunker guys might need to review the number of cans of C Rations you have tucked away in your end of times bolt holes.

by Justice | 30th Aug 10, 6:11pm 1283148667

What ever. People like you and 'Dodger' who can't admit they were wrong, Bernanke was wrong, infact not only was he wrong he's a fool. He is still wrong and failed to see the US housing crisis, the credit crisis, etc along with other 'idols' of yours and Roger's like Greenspan most probably. Yet here was people with real economic knowledge who run real businesses writing to Alan Bollard back in 2006 telling him of the crisis ahead, telling him to stop following US economic policy ie (low OCR for too long) . One of those people was me. What were you and Roger doing in 2006 i wonder?

by Justice | 30th Aug 10, 6:21pm 1283149302

not to mention currency trading

by middleman1 | 30th Aug 10, 9:16pm 1283159760

Chris J

Obviously all companies have cut costs. The large corporate I work for included. That wasn't my point - I was simply challenging your statement that strong corporate profits are currently being generated from cost cutting. You'd have been correct a year ago but increasingly this is no longer the principal profit driver. The scope for cost cutting has now been largely fully exploited and growth, improved productivity or diversification is where it is at now and in the future.

by Justice | 30th Aug 10, 6:36pm 1283150160

Listen to the bullshit from Bernake now and THEN.

http://www.huffingtonpost.com/2010/07/21/bernanke-to-congress-the_n_654…

by Nomad | 30th Aug 10, 7:36pm 1283153771

As usual absolute and self serving crap from Roger. Who would in his /her right mind consider Bernake as credible. I do not expect anything better from Roger.

by middleman1 | 30th Aug 10, 7:46pm 1283154360

Justice

How on earth does a simple suggestion to consider a proposal from Kerr that is at least a reasoned one, immediately position me as a Bernake or Greenspan acolyte?. You have an amazing facility for quantum leap linkages. Sadly incorrect but entertainingly bizzare nonetheless.

For the record I was in 2006 moving strongly towards cash, by 2007 completely there. So, I trust you won't be too crushed to learn you were not alone in spotting that we were heading for trouble.

The only residential property I owned then, and now, is my own house. Nice try to position me as one of your despised PI's but wrong guess, again.

Currency trading - nope, not as such. I build my overseas equities at times of currency weakness but sorry, I don't fit that public enemy grouping either.

Disappointing when a person doesn't fit a stereotype isn't it ?.

Tell you what I do though and that is run a large business which requires me to take a balanced stance on business and economic trends. I listen carefully to the opinions of people like Kerr even if I disagree with them. I've found over a lifetime in business they can often provide little bits of information that give you ideas and an edge on the opposition.

It's called being open minded !

by Les Rudd | 30th Aug 10, 10:11pm 1283163066

I so liked this paragraph:

"We might not be in such a pickle now if economics had started to become more of a science and less of a religion by following Fisher’s lead, and abandoning key beliefs when reality made a mockery of them. But instead neoclassical economics completely rebuilt its belief system after the Great Depression, and here we are again, once more experiencing the disconnect between neoclassical beliefs and economic reality."

(Thanks Steven.)

by President of P… | 30th Aug 10, 10:07pm 1283162833

Float. it does not need to go up. get a new shirt...

by michael | 31st Aug 10, 5:35am 1283189730

Because New Zealand is an export based economy that is enough reson to have higher Interest rates. If you see who are the largest traders in the NZ dollar you will find that exporters hedging against currency swings are the number one users. Speculators are few and they do not account for much of the movements in the currency they carry very little weight if any at all. Australia has one big problem with their super profit miners, these firms pour so much money into the Australian economy that no matter how high the OCR goes they are flooded with money/inflation/china. When it gets that high the only solution is to TAX those incomes in order to shield the consummer from both inflation and high OCR. I think that Mr Rudd was right when he proposed the Super Proffits Tax and no matter who ends up running that country the first thing that is going to be back on the table is goint to be the Super PT or the alternative will be a sky high OCR putting at serious risk the Housing Market wich is already flaging alert signals. If Australia can not reverse the present Housing trend there will be big trouble for the banks and lenders. The hung Parliament is a bad thing for miners and the Aussie because the Super Tax is coming once the political dust settles, But it is good news for the average Australian mate. Maybe in the near future the New Zealand government will have to consider taxing the food exporters super proffits to prevent and shield the consummer from an "abnormal" OCR. Those commodities are bound to go much higher and demand is not shrinking.

by Les Rudd | 31st Aug 10, 5:50am 1283190600

michael - I find these statements interesting:

"If you see who are the largest traders in the NZ dollar you will find that exporters hedging against currency swings are the number one users. Speculators are few and they do not account for much of the movements in the currency they carry very little weight if any at all."

Have you got any information on the volume splits (fractions) involved please?

I recently came across a Bloomberg article stating that NZD is traded at around 43% of GDP per day, so having some more concrete information of the sort that supports your statements would be useful, thanks.

Cheers, Les.

www.mea.org.nz

by michael | 31st Aug 10, 7:09am 1283195387

Les: That the NZD is traded at 43% GDP tells you of the size of the Forex market wich is a shade under three trillion dolars a day... so that you get an idea of how small the NZD is relative to the market it is the one major currency where the SSI or Speculative Sentiment Index has no relevance because statisticaly it has not enough volume as to deliver reliable readings. Take care.

by michael | 31st Aug 10, 7:18am 1283195909

Les I think that the only market where the NZD makes sense is against the AUD because it is it's number one trading partner... but if you go against the USD you get la vida loca: It is overvalued by 1500 pips !!!!!!. according to Blomberg's PPP.

by michael | 31st Aug 10, 7:48am 1283197698

Les: But then we start talking about Bloomberg. That is a market driven show but people tend to think that it is the market, I am sure that it has driven more people to ruin than to success. Don't read to much into the big teethy laydies

by Les Rudd | 31st Aug 10, 9:52am 1283205134

Michael - here is the Bloomberg article I was referring to: Kiwi Favorite of Speculators as Bollard Pressured (Update2) http://www.bloomberg.com/apps/news?pid=20601080&sid=avbWVDmHK8MA The 43% figure is not so out of kilter with other ratios I've come across putting NZD in the top three of traded currencies at between 100 to 120x gdp pa. However, am really interested in you providing some evidence for these statements that you made: "If you see who are the largest traders in the NZ dollar you will find that exporters hedging against currency swings are the number one users. Speculators are few and they do not account for much of the movements in the currency they carry very little weight if any at all." Especially considering the gdp export fraction and the size and frequency of associated trades. Thanks, Les.

by michael | 31st Aug 10, 10:42am 1283208145

That is probably right on an intraday base.

by michael | 31st Aug 10, 10:54am 1283208897

Les, you mind if I come back to you tomorrow ?, you see I live in a different time zone and I have other things to take care of , thank you.

by Les Rudd | 31st Aug 10, 11:22am 1283210546

No problem. Reply to one of my comments and I'll get an email telling me you have replied. No rush, just keen to learn. Cheers, Les.

by michael | 31st Aug 10, 12:18pm 1283213901

Les: I took some time to find some data for you. The Open interest on any given day - that is open positions in the forex mkt- shows that the most traded NZD pair is with the USD and that on average it ranges from 1% to 2% of the total pie ... in my opinion it is not something to writte home about especialy if you compare it with other pairs such as USDJPY 14% give or take, EURUSD 40% or GBPUSD 17%... if you go down to less traded pairs such as AUDNZD the pie percentage could be microscopic and all trades are cleared by a mere six banks namely all Australian and NZ banks. These very small percentages account for very volatile trades and I agree with you that the number of trades might be huge but can you tell the difference between a trade that lasts between ten to sixty minutes and those who make the open interest ?. That is where the difference lies. The difference that separates the commercials from the gang of traders This could go on for ever but if you still disagree with me well fine, but have this idea in the back of your trading book and come back to it if it makes any sense to you.. At the end of the day what counts is the OPEN INTEREST.

by michael | 1st Sep 10, 1:49am 1283262597

Then here is one last thing. On Fridays the banks publish the open interest with an added note indicating both Commercials vs. Speculators and net long vs net short positions, if you trade the AUD NZD crossing you will have to get that information from the source ie. the banks that clear the trades,.. if they hand it to you. Then you will know exactly where you are standing. if you know how to read the data you will have a fair chance of making some good trades. Cheers.