Yep! - the monetary policy statement was deliberately dovish

Yep! - the monetary policy statement was deliberately dovish

By Roger J Kerr

RBNZ Alan Bollard delivered a monetary policy statement bank in line with expectations - that is, downbeat, cautious and dovish on the economic outlook.

The pessimistic RBNZ forecast for the economy over the next six to nine months is a bit hard to reconcile with strong and improving business and consumer confidence at this time.

However, the Governor is keen to get to the NZ dollar value lower and in some ways I do not blame him for a tactically and deliberately dovish prognosis of the economy.

The Kiwi dollar did weaken marginally in response.

There was very little reaction by the interest rate markets as the long-end of the yield curve was being pushed higher by rising long-term US Treasury Bond yields (up from 2.90% to 3.28%). The RBNZ were far too optimistic on economic growth with their forecasts for 2010 at the start of the year.

Now as the year draws to an end, the RBNZ seem to be reacting negatively to their own woeful forecasting performance with a forward projection for the whole economy seemingly entirely based on the flat domestic retail and housing sectors.

Anecdotal evidence is that the Christmas retail spend will be stronger than the doomsayers predict and house construction activity has picked up with old consents now being actioned. It may be dangerous to conclude the decrease in building consents is a sign the home construction sector is going backwards.

In terms of the track of short-term interest rates in 2011, the RBNZ are now adopting a strategy of waiting to see real evidence of increased activity in the economy before adjusting the OCR up from its current stimulatory level.

I see this as a dangerous and ill-advised management of monetary policy, which requires a bit of “art” as well as science to read the mood and pre-empt increased economic growth that technically drives increased inflation risks.

If they wait until June 2011 before increasing the OCR the RBNZ run the real risk of being well behind the 8-ball and being forced to raise rates very rapidly in response. We all know that such a knee-jerk response to stronger actual data leads to a sharply rising NZ dollar and exporters being slammed once again.

The RBNZ forecast muted GDP growth of 0.4%/0.5% per quarter over the next three quarters and then a sudden gear-shift higher in activity to over 1.00% per quarter for the next three quarters. It is very difficult to fathom just what will prompt the step change in mid-2011, other than the re-build in Christchurch that will add +0.5% to next year’s GDP growth.

The RBNZ also see consumer spending and business investment continuing to be cautious and flat. I think they are under-estimating the positive knock-on impact of export commodity prices being at 30-year highs has on the wider NZ economy. Some industry sectors like forestry and log exports are booming right now, not that the local financial media have realised this yet.

In my opinion the first half of 2011 will be stronger than RBNZ forecasts.

As expected, a good part of the RBNZ monetary policy statement was devoted to the housing market as the most important driver of the economy. The residential property market has been subdued by tax changes, tighter lending criteria and job insecurity. The latter factor is no longer a negative as the export-led recovery starts growing employment.

The RBNZ’s continuing pre-occupation with the housing market is a worry for the conduct of monetary policy.

The Export NZ survey last week reported that 44% of export firms are going to be increasing their staff numbers over the next year. That is considerably more positive than the official RBNZ view of business investment/expansion.

The other surprising aspect of the MPS was the RBNZ view that the “low” interest rates are having a less stimulatory effect than in the past.

The RBNZ should realise that even though the OCR may be “low” at 3.00%, true market interest rates were lenders are meeting borrowers on price are quite a bit higher at 5.00%. Banks have been paying 5.00% for one to 12 month retail deposits for some now, lending the money on at 7.00%.

The core funding ratio regulation and wider credit/lending margins has caused this situation.

I have always contended that maintaining the OCR so far below the true market price for money is imprudent and will eventually cause the Governor a problem i.e. he will lift the OCR from 3.00% to 5.00% and it will have no impact on the economy or the banks’ cost of funds. So why not make that adjustment sooner rather than later?

Clearly, I see considerable risk in believing that the forecast RBNZ track of 90-day rates in 2011 will be close to actual outcomes. Come March/April the RBNZ will be forced to change their tune on the 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

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"I have always contended that maintaining the OCR so far below the true market price for money is imprudent and will eventually cause the Governor a problem i.e. he will lift the OCR from 3.00% to 5.00% and it will have no impact on the economy or the banks’ cost of funds. So why not make that adjustment sooner rather than later?"

On the contrary by keeping the OCR at 3.00% more and more people are moving to floating mortgages where it has an immediate impact.  If OCR was already at 5.00% everyone would be on fixed mortgages once again and the Governor would be back to waiting two years for his interest rate increases to be felt...

Same old Same old eh Roger. Sure there is some good activity coming from a few sectors; dairy, logging and so on but our cities are stuck grooming each others dogs etc. with little inclination to take on the world in the export area.

Further, and as alluded to by AB, household debt is at, or near, record levels and it is this that is proving a massive brake on the domestic economy. We also need to get the Government books back into surplus ASAP, that would remove the $13 billion stimulus it is currently receiving. So plenty of options to slow the economy as required but with the beneficiary rate still high and employment participation rates still low I think we've got 12 months or more at or near the 3% OCR

 "...strong and improving business and consumer confidence at this time"


Here you go this.

 Trademe link.

"To xenabuffy, roz12 and anyone else in a similar situation we truely feel for you.

This is one of the most horrible times I can recall in my 30 years of farming and to a large degree the current dry spell is a slowly tightening noose for many. There is an awful lot of pain and uncertainty out there as well as a fair bit of denial.

I spoke with Jeanette Walker last night (read her article on page 13 of the November 23rd issue of the Straight Furrow "The Elephant on the table") as she has a very good handle on this whole situation and how the New Zealand (or should I say Australian) banking industry is handling things.

Jeanette is trying to get a groundswell of support going to change Reserve Bank policey so that it is more in line with what happens in Australia and Canada when it comes to people who are having diffuculties finacially. Although none of this is going to help in the short term it could have an impact on how such matters get handled in the future.

Having seen first hand the devastating effects that recievership and statutory managment can have on families as well as individuals (I have it on good authority that there have been 11 suicides amoungst farmers in the last 18 months directly associated with financial stress) there is a real need to address the issues surrounding this very real problem

As macca says unfortunately there is much more pain to come yet.

Our thoughts are with you"


Roger , I do not agree with your view .

The RBNZ has every reason to be dovish . I have both emperical evidence and anecdotal evidence to support my concerns for the 2011 outlook . 

1) I received the Govt Gazette this morning and 51 companies went into liquidation last week.

2) Borrowing by Kiwis has all but ceased and  fallen apart .

3) The Kiwi $ is being thumped and petrol is going to cost $2.00 a litre soon .

4) Imagine what rocketing fuel costs are going to do to food prices , putting more pressure on consumer spending .

5) Every retailer is having a sale ............... what are they going to do for after Christmas sales... give the stuff away?

6) Worst of all , the Government is spending way in excess of what its earning , running a massive public service and the most generous benefit system of handouts and family support anyone can imagine .

Abraham Lincoln is credited with saying , "You cannot keep out of trouble by spending more than you earn '"

I am more than somewhat concerned about our near term future.

Dont say you did not see it coming .  




"I have always contended that maintaining the OCR so far below the true market price for money is imprudent and will eventually cause the Governor a problem i.e. he will lift the OCR from 3.00% to 5.00% and it will have no impact on the economy or the banks’ cost of funds. So why not make that adjustment sooner rather than later?"

Absolutely Roger. Silly Bolly chap. He seems unable to differentiate between the usual problem he has of high Inflation, high interest rates and high exchange rate; which leads to a nasty slow down in asset price inflation and then asset price deflation; and the current situation of low inflation, low interest rates and high exchange rates. As I say, silly old Bolly.

So instead of being a good kiwi and feathering our collective nest he has taken to wandering about clucking, not quite sure what to make of it all. The answer is not in the textbook written by some long dead economist I'm afraid.

He needs to get a grip, get creative and be a little more entrepreneurial. Help the economy rebalance. Encourage saving. Encourage affordable housing.

If I was him I would put interest rates up to a neutral level tomorrow. Why not? It would send the price signal that borrowing is bad, saving is good. Not doing so is just plain woosy.

Okay, I hear you say, but what about the exchange rate? Simple. Every day its over 72 cents US I would buy half a tonne of gold, every day it was over 75 cents US I would buy one tonne of gold and every day over 80 cents US I would buy 2 tonnes of gold. Sure it's inflationary but that's what he wants isn't It? So why not just stop playing and get serious. Play to win.

I was enormously impressed by Dr Bollard's core funding initiative, it was subtle (the journalists took 6 months to notice by and large) and seriously effective. It gave him control of the banks.

So please Dr Bollard get on with it and stop titting about. Encourage saving. Put interest rates up 2%.  If the exchange rate is a problem just make a profit for us. Create dollars, buy gold.




I realise there will be those who think I am a fruitcake, but there are many who saw a crisis coming and cashed up beforehand. Not being aggressive about interest rates only saves the banksters and the fraudsters and the foolish to continue in their errant ways.

Jezz, Roger if we are doing so great then why is our foolish Government experts still borrowing 250 million a week with a very real possibility of a downgrade which is rightly deserved anyway?

Stop talking dribble Roger! WAKE UP MAN!

Roger's comment that a rise in he OCR of 2% would have no effect on the economy, has he got rocks in his head. Farmers are in dire straits now and when the OCR was being Tweaked, bank response was to put up 90 day roll over rates .5% for every >25% adjustment.The rural sector couldn't stand a 2% increase NZ's fragile primary sector would collapse completely. Many farmers are only just meeting their mortgage payments by reducing expenditure, no fertilizer,laying of staff. A survey I did Feb 2010 showed that 44% of farmers or their spouses are working of farm in an effort to pay the bills.

NZ's economy is at a crossroad and has Keys etc got what it takes to sort the mess out?