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Opinion: Will Graeme Wheeler have to swallow a dead rat and cut the OCR?

Opinion: Will Graeme Wheeler have to swallow a dead rat and cut the OCR?
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By Gareth Vaughan

Here's a tongue in cheek look at how Reserve Bank Governor Graeme Wheeler may have spent part of Thursday morning.

7.45am: Arrive at RBNZ HQ, boot up Bloomberg terminal, sit back and wait for the statement from the US Federal Reserve's Federal Open Market Committee.

8am: Quickly peruse the Fed statement, thankfully observing that Fed Chair Janet Yellen (who really does look like Richie Benaud's long lost sister) is still hinting at rate hikes this year.

8.10am: Give the RBNZ team the green light to use the version of our own pre-prepared OCR review statement that includes the line about future interest rate adjustments being "either up or down."

8.15am: Adjourn for breakfast.

8.55am: Return to office.

9.00am to 9.30am: Sit back with feet on desk and large flat white in hand cheering loudly whilst watching the NZ dollar tanking on the Bloomberg screen.

Heading lower?

In all seriousness though, will the next move in the OCR, possibly this year, really be down?

Excitement, and expectation, that this will be the case certainly built in some quarters following the Reserve Bank's first review of the OCR for 2015.

Of course the Reserve Bank, as expected, left the OCR unchanged at 3.5%. But it was this line in Wheeler's statement that got pulses racing: "In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data."

The either up or down comment removes the previous tightening, or hiking bias, and opens the door to a potential OCR cut.

But don't hold your breath.

The Wheeler led Reserve Bank has made much of a "neutral", IE not economically stimulatory or dampening, OCR level being 4.5%. That's 100 basis points higher than what the OCR's currently at, and ideally where Wheeler would like it to be.

His big push to get to 4.5%, which kicked off with a hiss and a roar last March and was followed by three more hikes ending in July a full 100 basis points higher than where he started,  fizzled out like a firework on a rainy Guy Fawkes night. My view was always that the Reserve Bank would take an election pause after the July hike. Problem was during this breather the oil price fell through the floor and there was no inflation in sight.

With annual inflation now down to just 0.8% that makes it nigh on impossible for a Reserve Bank Governor tasked with keeping inflation between 1% and 3% on average over the medium term to pull the trigger again and hike rates. Indeed, Wheeler himself acknowledged annual inflation is expected to be below the target band through 2015, and could become negative before a gradual move back towards 2%.

Opening fire on the Kiwi dollar

So instead he opened fire on that bugbear of New Zealand exporters, the Kiwi dollar. The words "unjustifiable" and "unsustainable" were rolled out, with Wheeler saying he expects a further significant depreciation. He also threw in the line hinting that the next move in the OCR could, potentially, be down. And on cue the NZ dollar fell to a three-year low against the greenback.

Of course one side effect of a Kiwi dollar that's weaker against the greenback will be more expensive imports, just maybe opening the door for some inflation to emerge.

That said Wheeler's unlikely to swim against the global tide, where the Europeans and Japanese are printing money for Africa, and hike the OCR any time soon. Nonetheless, he'll be keeping a close eye on Yellen to see whether the Fed delivers any hikes.

But in terms of a cut, I believe it'd take some significant change from the current economic picture to force this. Especially given Wheeler's seeing annual economic growth in New Zealand of more than 3% and a hot Auckland housing market.

The BNZ's Stephen Toplis, in the serve he gave the Reserve Bank over the wording of its OCR review, covered off key potential game changers that could force a cut. These include; a sudden and unexpected fall in global economic activity, a sudden and unexpected drop in domestic economic activity, further falls in dairy prices, and/or a drought "knocking the stuffing" out of the dairy sector.

In the uncertain world we live in all of these scenarios are clearly possible.

But make no mistake. Wheeler & Co, basking in the glow of their recent international recognition for forcing banks to dial back their high loan-to-value ratio residential mortgage lending, and swimming against the developed world tide by actually hiking rates last year, don't won't to turn around now and cut them.

Because that really would be like swallowing a dead rat.

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Interest rate yield levels are of secondary concern - capital security is paramount for the excess QE $trillions seeking any safe haven. Most players are hoping to avoid the necessity of suicide rather than dwelling upon the health status of rodents.


Just read a recent sample of financial news to smell the stench of fear, if actual G3 sovereign debt prices are too overwhelming given the realised direction and declared intent of the participants.


The other consideration is whether the 4 hikes in OCR in 2014 were a mistake.  What did the 4 hikes actually achieve?  Send the NZD higher perhaps,  minimal containment of inflation - the little that was there - , no impact on fixed interest rates (they decreased), small effect in floating rates (which borrowers are just using a a temporary perch while picking the short term fixed rates), inflation was obviously going nowhere, so the hikes were pointless. 

Were they under pressure from the banks?   Were they under pressure from the Govt, to look as though some attempt was being made to temper the Auckland house market?   

In 2010/2011 they were keen to hike up to 5% or more until the Chch earthquake restrained their intention.   

So, we have a permanent hiking bias and intention to hike at all times revealed, unless major disasters absolutely force a restraining order on them.   "Hike, unless forced otherwise" is the mantra.  


A timely reminder to households that interest rates don't go down forever, they go up and down. So model some of that into your budgets before buying rather than relying upon my central bank to continually bail you out at the ongoing expense of people on fixed interest income, the forgotten people in the globe today.


Since January 2009, the OCR has been 3.5% or under. That's over 5 years that the OCR has been on historically low levels.   Although historically low, they are still high on a global comparison. 

For the last 5.5 years borrowers have been warned by bank economists that mortgage rates were going to hike up to 8/9%.  

It is likely that the OCR will remain under 4.0 for some years, unless the global economy returns to full health which looks unlikely.   

The OCR is now becoming irrelevant anyway, as fixed rates will continue to decline despite banks 'protesting' at the so called loosening of policy. 

The RBNZ will be bailing out more than over leveraged borrowers shortly if global developments keep worsening, they will need to move into emergency liquidity measures for the entire economy. 


The OCR is no longer about inflation. This is a currency war!


Globally, been that way for many years. Key just thought we could sit around and hope it didn't hit us.