Roger J Kerr says the inevitable increases in the OCR in early 2014 are likely to be larger and more rapid than what most expect

 By Roger J Kerr

The debate on when and how rapidly the RBNZ will increase short-term interest rates in New Zealand is only going to intensify over coming months.

Differing opinions and forecasts, interpretation of official economic data and thus forward moneymarket pricing all combine to make this a fascinating period to be witnessing.

My conclusion on the current RBNZ monetary policy stance and strategy is that Governor Wheeler is buying time until the US can taper-off their accommodative money printing.

The Governor fully understands that there are serious dangers for the NZ economy if he shoves our interest rates up well ahead of the US, the net result would be a rising NZ dollar currency value and therefore reduce confidence, jobs and investment in the critical export sector.

He is clearly not prepared to risk that scenario eventuating, thus intervening/talking the dollar down and delaying the inevitable increase in short-term interest rates as long as possible.

He is taking a calculated risk that the hot housing market will not transfer through to more general inflationary pressures over the intervening period.

In my view, the RBNZ is underestimating the strength/duration of the housing market upswing (due to the massive supply/demand imbalance in Auckland and record low mortgage interest rates) and the potential inflation risks.

However, in the Governor’s eyes he is prepared to take the risk and deal with consequences later if he has to.

In other words, inevitable increases in the OCR in early 2014 are likely to be larger and more rapid than what most expect.

If the RBNZ do find themselves behind the 8-ball in addressing rising inflation they will have to act more stringently and severely to rein the expectations and pressures back in when they do act.

Governor Wheeler is just hoping that by nine months from now Ben Bernanke at the US Federal Reserve will be tapering back the US bond buying and the USD itself will be strengthening on global FX markets to keep any Kiwi dollar increases from higher interest rates in check. A difficult balancing act for the Governor in anyone’s language.

However, one can understand why he is keen to get the macro-prudential LVR ratios in place with the banks so as to temper the more speculative property market activities in the meantime.

It is easy to see that RBNZ’s management of monetary policy is more of an art than a science.

Thursday’s GDP growth figures for the March quarter should come out well above consensus forecasts of +0.60%.

It will be another reminder to the RBNZ that they are again underestimating the economy’s expansion, just as they underestimated growth in 2012.

Even though the March figures will be on top of the super strong +1.5% lift over the December quarter, all sectors of the economy were certainly humming in the first few months of the years with the summer drought temporarily increasing agriculture production as more livestock went to the works earlier. 


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Roger J Kerr is a partner at PwC. 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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Unfortunately events may just overtake Mr Wheeler .....
Granted that NZ / Aus Banks still depends on a large dose of foreign borrowings, recent rise in 10y T bills and US Mortgage rates (plus not to mention the sudden shrinking of liquidity in China) and the soon to me non existence OMT from Europe, interest rates in NZ may not be dependent on RBNZ other words Mr Wheeler has no bullets in his gun at all !!

In historical practice, I'm sure you are right. If though the problem is a shortage of money in NZ, in reality he has an infinite number of bullets; it's just that that has not been how monetary expansion has worked here in the past.
Some version of capital controls now (preferably starting with Treasury's needs, then the banks); some buying of foreign assets when the NZD gets toppy; local, as in RB, funding of local banks needs if they are short; and moderate lifting of interest rates next year if unemployment is well down and local demand is healthy enough.
Doesn't seem that hard to me; but history and inertia among all the Humphries in Wellington will make it a bit tough.

Stephen, you are correct as to "historical practice" , but please note they are 1. Historical and 2 Practice. Both of which has not been in used for the past two you also alluded to.
As for "capital cotrols"...I think it's worse than the kiss of death for NZ open economy and debt addiction...
as for "funding of local banks needs" ie "liquidity injection" you think it is a wise political move given we are only 5 years  since 2007 ??  Central Bank Governors are nowadays more political than we wish to admit...

Roger there is a 30 down trend in interests rates in place and we are near to the top of that channel. If we stayed flay for a year that would put us at the top. What gives you reason to believe the underlying long term trend is going to be broken.
On that note it would be good if the charts went back that far, I was able to download mortgage rates from the RBNZ going back to the 60's in excel form, which is then easily graphed.

It looks like the Aussie dollar is on its way down at least for a while and it will take us with it to some extent. Wheeler might be looking at some imported inflation, better prices for exporters , more employment in manufacturing as well as a housing boom.
Interest rates will be rising if all that happens and the currency may have fallen enough to give RBNZ to push them up with a clear conscience.

Forget Wheeler...keep eyes on worldwide rates...the music has stopped.

Except there is no where really for many rates to go....the ones that matter anyway are already rock bottom.

Roger , I agree broadly , and assume your prognosis is based on emperical evidence whereas my views are gut feel .
Before ramping up rates, Wheeler should reduce rates to stop foreigners speculating in the Kiwi $. There is one reason I would disagree about rates increasing sharply  , its that the Kiwi $ will get even stronger with dire consequences , and as a soft commodity exporter , we need the foreign exchange earnings
My overall view is the same as yours ,  from my readings of financial press  
1) The present rates are unsustainable , they discourage savings and capital formation
2) Asset bubbles are arising due to cheap money chasing assets ( shares , houses, etc)
3) The de-basing of currencies due to current trends by central banks ( Printing ) is going to come back like a spook in the night , with a nightmare attached
4) The " reversion to the mean " which is a feature of any market price ,  will involve interest rates reverting back to long term trends
5)Yields curves are pointing upwards after many years .

1) The classic defination of an An entrepreneur is an individual who organizes and operates a business or businesses, taking on financial risk to do so, ie borrows money, hence low rates encourage business and wealth creation.  Ppl should and do save for a rainy day, if rates are low then they put their money into other things than deposits eg shares. 
2) Yes, but thats 4~5 years ago, today well everything incl emerging markets is set to pop.
3) You dont get inflation when in the zero bound trap, it seems you missed Keynes in your economic education, this is classic stuff.  Now afterwards, yes you could well get inflation, however note that the money isnt in ppls pockets and probably never will be, hence we are still in the doo doo.
4) Mean is historic, looking to the future is wildly different...
5) Only if the RB is suicidal, and even then not for long....
"evidence" nope Roger doesnt do that, his gut feel is rocking along as uh.....well as yours....
Sit back and watch....2014 will be worse than 2013....not better....its all coming unhinged...

You are wrong steven. An entrepreneur doesn't always have to borrow money. A bit of self sacrafice by forgoing a mortgage and not being swayed by peer pressure to get into the property ladder can do wonders. Flexible capital is all that's required.

Well I might not be at Graeme Harts' level, but i still retired before 40 with more money than i can poke a stick at. [---- deleted ----  Ed]

Lol - 45, but not so much luck with that stick business. Only ever owned one modest home at a time -and even that is too time consuming for my taste. Inanimate domestic objects don't do it for me.

Geeze do we need that sort of language?  
Moa man, you need some anger mangement man!

Take it or leave it Chairman, would you rather I re-post it in Mandarin or Cantonese?

post in any language you fancy.. simply NZ is a land of wrong white crowd.

Most business I'd suggest borrowed/borrow, so sure there are exceptions (I can think of one Cosworth)...but classically ie pre-dominantly, no, I dont believe I am wrong.

OCR increases, no matter when they come, will not come too early.

OCR increases soon?  Don't think so Timmy.. not when the big bro across the ditch is starting to get a cough!

Yep, just as the Chinese do the opposite - I guess it's gone beyond asking "Who's your Daddy", in Australia at the moment. 

The problem with that assumption chairman is, how high did our rates go when the Aussies went up through the GFC ? - simple answer, not one basis point. There are times when the performance of two economies temporaily disconnects, and what you really stating is that this is starting to look like another one of them, and consequently a different direction in rates, again 

um, not sure if you read what he said wrongly, or I have.  I take it to mean the OZ economy is going to tank and, so will ours follow.  This I agree with, OZ was "lucky", as long at the Chinese kept their ponzi scheme going and buying iron ore all was well with us both, Now the chinese economy is looking like the zombie its been for a while there is nothing now to keep the OZ over-priced housing market going so its down with it.  Except maybe another first time buyers grant, and another, etc etc...but you cant keep up for ever.

two simple facts:
1. Australia is still NZ biggest export market
2. Australian is NZ largest overseas visitor
When they stop buying or visit our little country.. we will have to beg motherland China.

Sorry Chairman I thought you were talking about interest rates - the market has currently got 40bps of cuts built into Australian rates, and therefore a known for NZ rates. Doesn't mean it can't end up being more but its all a matter of how bad it gets. But if you start talking about sub 2% OCRs for Australia then your talking an even bigger currency fall, leading to higher long term rates for a country like NZ that has to access funds from offshore (and theyre better savers than us) and needs to retain a favourable prie advantage to attract it.

I was referring to the general economy which somewhat connected to the OCR.  RBNZ can't just hike the OCR when the economy is in distress, it will simply go into intensive care if the RBNZ goes full swing.


I think sub-2% is likely here. I think you are working in an all else equal scenario, but there are some variables here.  What ppl can lend at is dependant on the wish to borrow, and what they are borrowing at, so really in a world borrowing off the fed at 0.25% lending it at 2 ~ 2.5% is better than nothing.  So really we should be looking at a similar event like say the Great Depression for an indication of whats possible, though I hope we have improved policy since that time.