By Roger J Kerr
Monetary conditions in the New Zealand economy are determined by where actual market interest rates are being priced between investors and borrowers.
All the banks have been paying above 4.00% for six-month retail deposits for the last 12 months. They are now paying closer to 5.00% and a higher interest cost for long-term offshore wholesale funding.
If the chart of six-month retail bank deposit interest rates and the official OCR rate is not included in the RBNZ’s Monetary Policy Statement this Thursday to explain the discrepancy to the masses, it will demonstrate how removed the RBNZ is from reality.
The effective management of monetary policy is substantially compromised if your official interest rates are nearly 2.00% below the true market cost of money. Whilst the RBNZ may need to pause on the OCR increase this week, due to the Canterbury earthquake, they are still required to remove the emergency stimulus of 2.50%/3.00% rates put in place 18 months ago and get the OCR up to the market interest rate levels.
When the RBNZ come back to increasing the OCR in upcoming months they will not be “tightening” monetary policy at all, merely returning official interest rates to normal levels and where market interest rates have been for a long time already.
Increasing the OCR will have no impact on the banks’ cost of funds and very little impact on the interest cost to borrowers.
Therefore, the required OCR increases to 4.50% over coming months are only a catch-up to existing market interest rates and will not influence spending, borrowing and investing behaviour/decisions in the economy.
The RBNZ already knows all this, their challenge is to explain it to the public and media (who in particular are only interested in the “tightening” headline without bothering to understand the actual situation with interest rates in New Zealand). Hopefully the chart will assist that understanding!
Outside explaining the OCR/Market gap in interest rates, the markets will be focussed on the RBNZ’s forward view of the NZ economy. I would expect the RBNZ to highlight the following economic trends and forecasts:-
1) High export commodity prices still point to 3.5% plus GDP growth in 2011
2) Weaker domestic data over recent months due to household debt adjustment process, however domestic activity will improve in 2011 as increased rural incomes feed into the cities.
3) Inflation never really fell away to low levels during the 2008/2009 recession, therefore under a strong growth scenario they cannot afford to be complacent about 2011 inflation.
4) There will be further warnings to employers not to pay high wage settlements as this could push inflation closer to 3.00% later in 2011.
5) There are always risks around the fragility of the global economic recovery; however these do not seem to be adversely impacting on our economy too much.
6) The building industry was in the doldrums, but an earthquake re-build has fixed that negative in the domestic economy.
* 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
27 Comments
i'm sorry, looked under every rock i could find (including the ROK - Republic of Korea & the ROC - Republic of China) and still can't find this mysterious emergency stimulus they talk about. Oh well, maybe one day my floating mortgage will drop to 3.5% & then i will find it
He's referring too the OCR being lowered well below actual inflation for the past 2 odd years and Roger is correct in this case. It is well below inflation. Come October and then April it will be even lower again.
Roger loves trading currency, hence his real motive is to boost the NZD via an OCR rise to encourage more foreign speculation into the NZD.
It is considered that the OCR has a neutral % figure...at that point the OCR rate is not stimulating the economy and it isnt braking it. That at present is considered to be 5%, myself I consider it more like 4%. So at 3% we are stimulating the economy, therefore that has to come off and get back to 5% at some point.....
regards
Roger..... on the one hand you say that, quote "Increasing the OCR will have no impact on the banks’ cost of funds" and on the other your saying the RBNZ must remove emergency stimulus. ?? Err, well if the OCR has no impact then you can hardly call it stimulus now can you? Actually you do more to prove the ineffectiveness of the OCR and the RBNZ than anything else.
Also, why just not let markets decide interest rates instead of statist intervention? They (the markets) seem to be doing a good job so far are they not !?!?!
I am a bit concerned about the misleading nature of your graph
Up until about early 09, there was no need for the banks to compete for retail funds as their funds were all obtianed in the HOT market - that is why there was no margin between retail funding costs and the OCR. Banks just used those idiots that didnt think to get cheap funding and fincos slurped up the resk
Wiht the GFC and the RBNZ's core funding requirement coming into play, retail funding is more important and therefore banks are prepared to pay a margin over the OCR. Therefore there has been NO decoupling, rather, an appropriate and acceptable margin has been put into place to reflect the increased importance and demand for retial funding that has come into play.
The Reserve bank will never be able to get the OCR to match the retail funding rates, nor should it. There already has been tightening. All you are asking for is for the RBNZ to increase the OCR, so that the banks have an excuse to all increase the level of retail rates and thereby increase their overall margins.
This play is not about tightening, its about banks pushing to improve their margins
Nice try Roger but it will stay where it is because there is no real growth taking place...wipe away the spin and BS to see a Turkey waiting for the day before xmas. Govt revenue going down.... fiscal hole opening up. Commodity prices static at best...Plus the prospect for a rapid increase in the cost of the foreign loot. Throw in the earthquake as great bad news...the sort of news that masks the truth. Were it not for Christchurch, the RBNZ would be forced to do nothing without the comfort of an excuse.
If I am wrong then please point out where the jobs are going to be for the mob which was thrashing about in the building sector...now dormant. Or the RE agents lost for want of other people's munny. Or the retail sector workers. The jobs are not there and they aint coming back.
Meanwhile the 180 ooo ooo ooo.oo of mostly household debt that is set to cost more to finance...is not going away any time soon...like twenty years soon.
"however domestic activity will improve in 2011 as increased rural incomes feed into the cities".....the hell it will. A good deal of any increased rural income will go straight to the banks as they raise the rates..or to the banks to pay down debt. You are not going to see a rural splurge in town.
That graph suggests to me two things. Firstly and most obviously, that since March 09 the banks have begun to pay more for retail deposits despite a continuing drop in the OCR. Reasons for that are well covered in the posts above such as the increased competition for retail funds. And secondly and quiet clearly that the OCR is a very poor mechanism to try and stimulate the economy via bank interest rate charges as since March 09, the banks have by and large ignored it, particularly with respect to retail rates!
Doesn’t look like much of the RBNZ’s current stimulus is being passed on there then really, does it? Of course, if the OCR does go up, we all know what the banks will do then eh? And bank retail deposit rates approaching nearly 6% because of a creeping OCR in this current global economy would I think be quite damaging and risk reigniting the carry trade and shoving the NZ dollar right up the Khyber! Just what our 'export lead' recovery needs.
The basic problem is that when times are good, people over-estimate how good everything is/will be; and then when times are not so good, people over-estimate how bad everything is/will be.
Seems to be human nature to get overly optimistic, or conversely overly pessimistic. If you look at what someone like Wally bangs on about you'd think we entering armageddon.
Realistically there are mixed signs (even BH sees the pluses as well as the minuses), and that's because the reality is that it was never going to be as good as some thought/hoped for, nor going to be as bad as some think/ hope for. We will have a period where there will be a mixture of pluses and minuses- some will latch on to and stress the minuses, others will latch on and emphasise the pluses. Guess whatever turns them on!
Nope. Fundamentals. For property now they are all bad. Got nothing to do with estimates, or opinions, or faith and hope and dreams and hype and wishful-thinking.
Fundamentals. They shriek "Get out of property as fast as you can!"...And who are we to argue with the fundamentals?
Problem is that the fundamentals are mixed, it's just that people who know a little about something attempt to develop a view on what is happening overall based on what they see around them; their information is limited, their understanding of the broad forces which drive markets leads them to conclusions invariably extremist (one way or the other ), not recognising other factors are also in play - which makes for things turning out less well than those on the one extreme extrapolate, and better than those on the other extreme extrapolate. But I do appreciate the whole nature of a blog is set up for those of us who are opinionated and like to sound off , so keep up the good work.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.