By David Hargreaves
To the best of my knowledge Graeme Wheeler has never been a gymnast, juggler or acrobat - though I gather he was a more than useful cricketer.
The Reserve Bank Governor will need to be a bit of all those things in this week's normal six-weekly review of official interest rates (IE show strength, dexterity and agility and don't give the delivery too much of a tweak) as he struggles to produce a decision that will keep 'the market' satisfied and on an even keel.
You see, this country is currently in a strange place with its interest rates. We've got them wrong.
It is a debateable feast, but I would certainly argue that our Official Cash Rate, at 3.5%, is around one whole percentage point too high. And interestingly enough, one whole percentage point is how much the RBNZ raised rates between March and July 2014 to counter a spectre of future inflation that subsequently disappeared into the ether.
As I have opined previously, those rate hikes last year can now be viewed as a mistake. I hastily add that I didn't think it was a mistake to put rates up at the time, and I can't recall many if any economists saying it was.
The trouble is, the RBNZ can't just teleport itself back in time and magically unwind those rises to give us the 2.5% we should have. It would have to physically now climb in and drop the rates. And strangely, even though the rates may be one percentage point too high, dropping them by that much would send all sorts of incendiary messages to the market. Not least affected of course would be the Auckland house market. Did somebody say incendiary?
Sending a signal
It is all about signals. The 'market' hangs off every nuance the RBNZ gives out. "Did the Governor raise one eyebrow then, or both? And what does both eyebrows raised mean?"
Send the wrong signal, albeit inadvertently, and the market will put 2+2 together to produce 22. And then it's all on.
Growing numbers of economists have been picking that the RBNZ will drop interest rates. In fact some of these predictions have almost amounted to calling on the central bank to drop rates, which is interesting. The ANZ in particular has been quite strident and is again this week pushing for a rate reduction ahead of releasing its latest monthly inflation gauge on Tuesday. Yours truly presumes the latest gauge release will again show falling inflation, backing up ANZ's claim for an imminent need for rate cuts.
What it all means is that Thursday's interest rate call by the RBNZ is very much "live" in the sense that the market is asking: Will it, or won't it? This is the first "live", "will it or won't it?" OCR decision since the last rate hike was made in July last year.
I'll be gobsmacked
Personally, I will be gobsmacked if the RBNZ does cut rates on Thursday - even though, as I've just said, I think rates are too high.
The central bank moved toward an easing bias on interest rates only a little more than a month ago, first in a speech by assistant governor John McDermott and then backed up a week later on April 30 in the last OCR announcement.
Logic would suggest that the RBNZ would want to give itself a bit of breathing space between declaring a move toward an easier stance on rates and actually easing rates.
Then there's inflation. We know this is looking benign at the moment - 0.1% being about as benign as it gets before you get into deflation. But regardless of what ANZ comes up with this week in terms of its inflation gauge, the RBNZ's most recent inflation expectations survey in May showed an uptick in expectations - albeit very slight and from low levels. So, that would be a reason for the RBNZ to pause.
Naughty Auckland
Then there's that Rebel Without a Cause, which calls itself the Auckland house market. It is 'hot right now'.
The RBNZ and the Government (the latter very late to the party, but nevertheless, welcome) have both unholstered weapons and aimed them at Auckland. But as is the nature of these things, the physical start date for this 'pincer movement' is October 1. The RBNZ would surely want to get closer to that date before moving interest rates down. Why pour petrol on the fire now when you've previously announced that the fire engine won't be on the premises till October 1?
But what about the dollar? The ANZ and others have been very keen to cite that as a reason for moving rates now.
And we do need a lower dollar in the face of what is now clearly an economy past its peak and with some sectors - notably dairy - really starting to struggle.
Dollar dips
But it is worth stating that as I write this, the Kiwi dollar is since April 30 (the day on which the RBNZ announced a move to an easing bias and Fonterra dropped its milk payout forecast) down nearly 9% against the American currency and around 6% on the trade weighted index. The inflationary impact of such a fall can hit quite quickly through higher import costs - and the RBNZ needs to be mindful of that.
There's no doubt that markets are betting that the RBNZ will move rates down this week. The key question then becomes what would the NZ dollar do if there's no move by the central bank? Might it rise strongly?
But to flip that one around, let us just suppose the RBNZ did drop interest rates on Thursday, and what the heck, why not whack 50 basis points off them? The market reaction may well be "okay that's done, fine" and then perhaps start looking for reasons for the dollar to go up again! You never can tell, but maybe.
If on the other hand the RBNZ makes clear it is looking at rate reductions - but doesn't do it - then this will hang over the market. In this instance the threat of a reduction might (providing the market believes it will be followed up on) be more effective than the actual move.
So, waiting now and moving later could be advantageous. And there might be something else the RBNZ could throw into the mix here too.
Sell those dollars
As we know, the central bank's not that keen to intervene in the currency markets (given that there are some individuals in this world who could cause this country to lose its collective shirt if they decided to have our central bank on), unless it feels it can be effective. In the past the RBNZ has tended to only sell substantial amounts of NZ currency at times when it feels the Kiwi dollar is looking 'toppy' and can be pushed over the edge.
I would speculate we are now approaching one of those times. Don't be too surprised if the RBNZ doesn't offload a few wads of Kiwi cash in the coming weeks.
I'm sticking with my pick that our Official Cash Rate will be 3% by Christmas. Previously I had suggested the first move would be October. I will now bow down to common opinion and suggest that the first move is probably likely to be September. There's a logic to doing it then because the September rate call is in conjunction with a full Monetary Policy Statement - and the RBNZ generally prefers to start a rate cycle with the accompaniment of a full explanation (though that is by no means a hard and fast rule).
But of course. I don't know. Only our acrobatic, juggling, gymnastic ex-cricketer of a Governor and his trusted lieutenants know.
One thing I would say as a parting shot: If the RBNZ does cut this week - less than two months after acknowledging that cuts might realistically be on the table - then it would be an indication that the economy is weakening rather more quickly than has been widely believed.
17 Comments
What is the inflation target?
What is the inflation figure right now - and what is the projected inflation rate in 12 months time?
So what should the OCR movement be?
The Auckland house market will run its track whether the OCR is 8% or 1% - it's a minor influence.
Housing markets elsewhere are flat to declining.
I would argue that our interest rates are too low. Savers and pensioners are getting destroyed and that's why equity markets are rising, because they need yield. As far as housing and general borrowing is concerned it is all about confidence. If people are confident about the economy and returns they will pay 10% or even 20% interest rates (as evidenced often in the past). If confidence collapses then 1% interest rates will draw no bid from potential borrowers....this is common sense to most people apart from governments and central bankers. The NZD will fall significantly over the next 12 months even if the RBNZ whacks the OCR up to 5%, purely due to capital flows going into the USD. My fear is that the powers that be will listen to idiots like Summers, Draghi and Pikkety and launch into negative interest rates to spur "spending" and "growth". This Soviet-style tactic will be the ruin of us all. Sadly, the signs are all around us and you can bet on the politicians to push us over the cliff. Some politicians can see the western socialist paradise edging closer to collapse and the only thing holding up govt debt is low interest rates, so they will fight to keep them low....until they can't and the market tides overwhelm them.
After 7 years of a global Great Recession and facing a global meltdown, NZ cannot really afford to be the only outlier in the developed world. The reality is that consumers are still hunkering down and! for example, an average wage earner in Wanganui paying 6.7% mortgage on their declining value house is really out of kilter with the global reality.
The interest rate hikes in NZ were very much a mistake and have already damaged regional NZ.
Tight Govt spending is also worsening NZs fragile state.
Avoid "common sense", its no argument.
Argue all you want, so OAPs are getting little income? what about the SMEs? We have no inflation and SME's / tradeables are showing signs of -1%.
20%, no I dont agree at that point or earlier FHBs start to go under history shows this. In fact you can look at examples say Sweden where raising rates even a few hundred basis points tanked the economy.
NZD fall, maybe. Once we see a panic, yes. Sure the easy money will rush back to the USA. That is certainly what happened in the past, so no rocket science badge for that guess.
The OCR wont be going up to 5%, it will be going down. "ruin us all" I have news for you, someone has to pay the interest on the money the OAPs etc have lent out, make that higher and no SMEs will be borrowing or even quiting and sending up unemployment.
Id certianly rather listen to Keynes who's work has been proven yet again over the last 6+ years rather than Austrian like Mises who has been proven a failure, again.
The OCR wont be going up to 5%, it will be going down. "ruin us all" I have news for you, someone has to pay the interest on the money the OAPs etc have lent out, make that higher and no SMEs will be borrowing or even quiting and sending up unemployment.
Supply the readers with documented evidence SMEs in Europe, Japan and US are doing better with official O/N target interest rates less than 25bps.(1/4 of 1%).
Face facts NZ borrowers pay a premium to access liquidity from those far removed from our perpetual state of national indebtedness - NZ has never managed to shake off a current A/C deficit in 40 years and lenders are slowly losing patience with the reality that wooden shacks are the only collateral left to secure lending against. In a word a bunch of third world, banana republic losers - hence the interest rate premium you so despise. Try another country with prospects and quality assets to lend against.
Pension funds not getting a return is a big problem. They need a 7-8% return to remain solvent. Based on current interest rates the Swiss pension fund will be insolvent by 2030....like most others around the world. Who will then pick up the tab? Of course, insolvent governments...silly me.
SMEs are struggling due to excessive debt levels and an ever increasing taxation an regulatory burden (for those that are asleep, the govt is 35% of GDP....not bad for a non-producing entity). If first home buyers go under with interest rates at 7-9% then the debt level is the problem, not the interest rate. Sweden is just another socialist basket case and is hardly a model economy to aspire to. An OCR of 0.25% is a sign of desperation and failure, not success. As I stated, SMEs need smaller govt and ultimately confidence in the economy...the interest rate is not the primary concern. Keynesian policies have been an unmitigated failure over the last 6yrs. Global debt has skyrocketed well above 2009 levels, government debt and bonds are on the verge of imploding and we are heading into major deflation. However, I guess this is what all the Keynesians dreamed about all along...once it collapses they then get to initiate their master plans: wealth taxes, the banning of cash - ie. Fully electronic monetary system, capital controls, etc. Then, they will be able to impart their "wisdom" and "leadership" on the rest of us poor sods and all will be well because they know best.
The RB would be completely irresponsible to lower interest rates anytime soon while we have a major problem with Auckland's over priced housing market.
The Government is sitting on its hands and encouraging more and more investors to buy houses in Auckland.
The RBs hands are tied while the Government is reluctant to do anything to alleviate this problem.
If John Key did put the country first and controlled Auckland's crazy prices, then we will all be better off with lower interest rates.
He wont, of course because of self interest.
David, you may be right in terms of what the RBNZ will do, but your arguments on their behalf are not very compelling. The main argument seems to be that for some strange reason it should take at least 5 months from April to September, for the Reserve Bank to actually make a move that frankly they more or less conceded in April that they should make. There has been no data since that suggests that bias was incorrect. My experience in business is that once it is clear that a change needs to be made, and everyone knows it needs to be made, and you've even told them it needs to be made, then it is best getting on and making it. There may be some modest notice that is useful for markets to get ready, but two months would seem ample in that respect.
2% inflation is the target. There is no data suggesting that is likely. They have missed the target for now many years in a row. The inflation expectations survey has been shown to be a not very educated guess. The currency has declined 6%; the RBNZ wanted 15-20%. If they don't drop on Thursday expect the currency to retrace most of the 6% higher.
My experience in business is that once it is clear that a change needs to be made, and everyone knows it needs to be made, and you've even told them it needs to be made, then it is best getting on and making it. There may be some modest notice that is useful for markets to get ready, but two months would seem ample in that respect.
Many would agree with your sentiments- what's Janet Yellen waiting for?
Maybe China's data impact upon NZ will concentrate RBNZ thinking - negative trade balance factors and a collapsing currency will no doubt be to the fore of discussed topics.
China’s exports fell 2.5 percent last month from a year earlier in dollar terms, while imports plunged 17.6 percent, leaving a trade surplus of $59.49 billion, customs data showed. Read more
As China's imports are mostly raw goods to turn into produced goods that is a bad sign. They have a stockpile of resources, iron ore, oil, so if they are reducing their imports it would seem the debt funded building is slowing so they will have to dump cheap products on the rest of the world to keep production up. I saw the head of a steel producer in the USA mention this a month ago he said even though their mills were more efficient and productive they won't be able to compete with cheap Chinese steel if it floods the market
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