David Hargreaves thinks the RBNZ Governor may have just given a historic speech - in a bad way

David Hargreaves thinks the RBNZ Governor may have just given a historic speech - in a bad way

By David Hargreaves

As an English-born football tragic, well accustomed to watching a national side consistently performing in a manner guaranteed to disappoint, I am well acquainted with the term: "What did he do that for?"

It's the multi-functional question that embraces everything from the ridiculous cross-field pass to the nonsensical sending off of the best player, but it's never simply rhetorical. "What did he do that for?! No, really, I want to know. What the hell did he think he was going to achieve?"

And of course this soul-searching question finds its way into every day life as well. Attempting to discover just what was in someone's mind when they did or said something is, I suppose something that helps to make the world go around.

Well, I think our Reserve Bank Governor Graeme Wheeler has just had a "what did he do that for?" moment.

Some context: The RBNZ has set piece events in the shape of the regular OCR reviews and two Financial Stability Reports in a year in which it lays out economic forecasts and its views on the economy. Additionally, the top RBNZ officials are a busy lot and they get around a lot. They speak widely and frequently, usually on an off-the-record basis. But what they can do, when they decide they want to say something publicly - and there isn't either an OCR review of FSR due - is turn the tap on, and publicise whatever speech is being made. There's been now eight such speeches this year.

That was the decision the RBNZ made this week when it decided to publicise Wheeler's speech to INFINZ in Auckland. By so doing the clear inference to be drawn is that the bank wanted to say something publicly and therefore in effect steer market thinking in a direction that was somewhat different from the last OCR review just last month and ahead of the next review at the end of this month.

Every RBNZ speech tends to be heavily nuanced and messages are delivered through raised eyebrows rather than with a ball-pane hammer.

What I take from the speech is that the RBNZ is not at this stage intending to further cut interest rates at its October 29 review, but that it may intend to cut once more. Once more. That, however, will be it, and the RBNZ is definitely trying to put a solid floor (as opposed to the pencilled-in floor that's been there till now) on the OCR at 2.5%. And, in what is an amazing about-turn to me, the RBNZ's being heavily influenced by rising house prices in that decision to attempt to put a solid floor at 2.5%.

Back in March, when the OCR was sitting at a too-high 3.5%, Wheeler said that rising house prices in Auckland were not a factor in the decision to then keep rates unchanged.  "No. We're concerned about the Auckland house prices for financial stability reasons," he said then.

But the Governor this week? Well: "...Housing market considerations do influence our thinking on the OCR".

Okay, so we've now got an RBNZ apparently hell-bent on keeping interest rates higher than they should be to quell the housing market - which at this point remains a financial stability issue, not an inflation-related monetary policy issue. In simple terms the RBNZ should NOT be keeping rates up to control the house market, not while inflation is virtually non-existent and a mile away (as it has been now for a long time) from the 1-3% range that the Governor has an agreement with the Minister of Finance over.

The RBNZ is expecting that the falls we saw in the value of the Kiwi dollar earlier this year will really fire up inflation in the first half of next year. But of course a rising dollar again could quickly undo that. And what might cause the dollar to rise? Well, indicating that you don't want to drop interest rates any further might help.

Just before Wheeler's speech was released this week the NZ dollar was worth about US66.6c. As I write this it is flirting with US68c. Now, that's not all about what our Governor said, of course. There was more extremely lacklustre economic information coming out of the US again overnight. It is now becoming hard to see how the US central bank can possibly justify raising interest rates this year.

But if we are now in a situation where rate rises are looking unlikely in the US, and our rates are that much higher than many places, and we have a central bank trying to put a floor on the rates here at 2.5%, what do you think is going to happen in the immediate future? Okay, expected benign inflation figures out tomorrow might take some wind out of the Kiwi dollar's sails, but in the short term, surely the general direction of the Kiwi dollar's only going to be one way and it won't be down.

Since bottoming out on September 23, our dollar is up over 8% against the American currency and over 6% on the trade weighted index basket of 17 trading partner currencies. At the moment on a trade weighted index basis the dollar is nearly 7% ahead of where the RBNZ is predicting it will finish in the December quarter. It's about 11.5% higher than the RBNZ's picking by the middle of next year.

If the dollar continues to outperform RBNZ predictions then we can reasonably forget about inflation kicking up to anything like the levels the RBNZ sees for the middle of next year.

So, to go back to the very start and the "what did he do that for?" question. I can only conclude that the Governor is getting his excuses for why he's again going to miss his inflation target next year in very early. It's those darn houses, you see.

I just wonder for how long this is all going to wash with Bill English.

Here's my drastic suggestion: The RBNZ should right now abandon the loosening of the 'speed limit' on LVRs outside of Auckland. Keep them at 10%. And widen the currently Auckland-targeted 70% LVR lending limit for investors to the whole country. Then next year let's look at some sort of income-to-debt-funding ratios.

...And, let's have interest rates that are targeted at getting inflation between 1% and 3%. If that means reducing them to levels similar to those in other countries. We should do it. No 2.5% floor. No floor at all.

I think Wheeler's speech this week will be looked back on - and not in a good way - as a watershed.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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.


Comment Filter

Highlight new comments in the last hr(s).

I think it is time for this governor to go. He is basically not doing his job of keeping inflation in the agreed band of 1-3%. He clearly has no intention of following this agreement.

Agreed, finally an article that recognizes the political motivation behind the RBNZ's actions. Wheeler has had far too much time to remedy his mistakes and continues to blunder along in ignorant bliss.

Time for him to find a new job. Apparently Australia want him, that would be a win-win, in no time he would have the RBA OCR up to 3.5% and Aussie could be martyrs to the NZ economy.

Now is the time to adjust the inflation target to zero, within a range plus or minus one percent. The inflation target of 0-2 percent was introduced by the monetarists (in our case Roger Douglas) to deal with the runaway inflation of the eighties, and in September 2002, the inflation target was raised to 1–3 percent to prevent overly harsh interest rate hikes. Simply not relevant in today's reality. Adjusting the inflation target to zero would go a long way to restoring the people's trust in money as a store of value and thereby reduce the need for us to buy extra houses to preserve our wealth.


Here's a suggestion for the governor. Put a fixed rate levy of 1% (or even 2%) a year on all new Auckland residential mortgages.

Auckland housing hammered. Rest of the country gets on with life.

Job done.

And National will never win an election again...

We can only hope.

A lot of sense - I would go for that

My guess is Wheeler is worried about deflation

That's the problem. The article makes the point that by talking down OCR cuts Wheeler is signalling high NZ interest rates that will support a high dollar and keep inflation low (even push NZ into deflation).

If he was worried about deflation he should be talking up OCR cuts. This would indicate more relaxed monetary policy, more money in circulation, lower dollar, more chance of inflation.

Wheeler is looking decidedly schizophrenic at the moment.

Further cuts in interest rates are counter productive.
My "on the ground research" shows that lower interest rates make people spend less rather than more.
Savers and deposit holders who want interest as income become even more reluctant to spend instead trying to squeeze out the maximum from their savings.
8 years ago someone with $100k in the bank at 7% earned $7000 p.a.(ignoring tax)
Now the same $100K might earn 3% or $3000 p.a. a loss of spending power of $4000 p.a
We are teetering on the edge of deflation as is most of Europe and Asia.
If you think inflation is bad, just wait until deflation come along.
We could be in for a generation of a Zombie economy.

your research and opinion is up to your usual standard I see.

So BigDaddy, are you saying the RBNZ should lift the OCR? Get savers back to %6 return? That won't help your asset value much.
Then again low interest rates have resulted in a lot of cheap money flowing in to production, which never had the corresponding growth in demand, mal-investment on a grand scale.
In time we will find out if low interest rates also destroy capital.

Andrew, you are right, that is the question and that is the conundrum.
Each way we all lose.

That big dairy farm in Tasmania that the New Plymouth Council is trying to sell is a classic, marginal land with very poor returns, has destroyed a huge amount of capital and they did it all for a %1.5 ROI in a good year. Never should have been converted in the first place.

Big Daddy, As it happens I largely agree with you, although suspect higher interest rates would be roughly neutral on spending. Mortgage holders would presumably have to tighten their belts somewhat, while savers would spend more. Nevertheless if dropping interest rates further is at best useless, that does then beg the question what else the RBNZ and or government in a fiscal sense should do if the economy starts to tank. I personally believe opening the fiscal taps with either infrastructure spending, or tax cuts, would be a better way, depending on how that was funded. If from borrowed money offshore, that would only lift the exchange rate, having negative effects on the rest of the economy. It would also need assets sold or the country further indebted, neither of which is ideal.
The obvious answer then is a transfer from the RBNZ to Treasury. Do you see an alternative solution?

Wheeler the great spun millions in profit to the treasury from recent bets towards a falling NZD. Let us see of he is guess right again. Profits says keep him, loss says drop him.

You do realize that Wheeler doesn't need to guess that the currency is going to fall right?

Wheeler can buy NZD on Monday.
On Tuesday he can tell everyone that the NZD will go up because he is going to raise the OCR by 0.5% before the end of the week.
By Wednesday evening the NZD will have shot up and he can sell at a profit.
On Thursday he raises the OCR.
Kiwis complain on Friday so he short sells the NZD that same day.
Saturday he tells the world that the OCR is going to drop 0.75% .
Takes a break on Sunday
Monday the NZD falls off a cliff and Wheeler buys NZD to fill his short position making a killing for the second time within a week.

Where is the guess work in that? I'd call it insider trading as opposed to guessing.

I hope you don't think our little old NZ reserve bank can control it's currency against major pairs. Now that is a laugh. Wheeler can be trumped anyday of the week.

Not if he put his mind to it. He can certainly affect it downwards; keeping it up can be a challenge if the market is determined to take it down.

Might be a bit early to call the recent NZD bounce a change of trend based on the actions or otherwise of central bank officials here or elsewhere. The commodity guys (and currencies are just a form of virtual commodity as far as I can tell) say that trends persist for longer than most people expect. There is a good chance the NZD will stop at US 69.5 cents and then carry on down and down for a while. Who knows how far it might go? US 30 cents? I think these things are caused by trillion dollar money creation and destruction overseas rather than our own actions.

The problems in the USA are massive, their $ could fall drastically, we could find ourselves at parity.

I guess it depends what the original currency was that needs to be repaid. That is the currency that will be in most demand.

China, America , Europe, Australia, Brazil ....... The list goes on. All have massive problems. lower interest rates are not the answer. We can't solve the problems of the world that are affecting us by manipulating our little economy.

Hard to see it over any extended time frame? Short term anything is possible but the NZ economy barely competes at 60 cents let alone parity.

David, commiserations if your football enthusiasm has extended to passionate support for English rugby. Must have been a tough couple of weeks.
By the by, have very much appreciated your contributions on this site, including this article. Wheeler's speech does indeed seem to have come from nowhere. You do wonder whether he checked it with Bill English, or whether there is now a bigger rift between 1 The Terrace, and 2 The Terrace.

Some years ago it was announced that Central Banks are not subject to insider trading rules - they can trade their own currency knowing what they are about to do will move the market - if they know they are raising interest rates, the Central Bank can and does buy its currency, makes the announcement, then sells the bounce over the following days. The reverse for interest rate cuts

The RBNZ would be pushing on a string with any further interest rate cuts.

Personally I like Wheeler, he is honest in his assessments (if not always completely accurate) and has been somewhat innovative by central bank standards with regards to macro prudential policy.

No, he hasn't achieved the goldilocks recipe, but much larger central banks with greater resources haven't been able to either. He is also trying to tip toe around one of the most overvalued housing markets on the planet - not wanting to crash it or let it keep running.

Easy to criticise, much harder to find someone who would do a better job.

All Wheeler did was pour gas on the NZD by hinting/implying that the OCR won't be dropping in 2 weeks even though all indications previously were that 2.5 was where we were headed and the FX markets priced for that. either he's playing the FX so they can make some money as some have suggested...or his previous statements about the NZD being too high etc etc were a bit BS. The complete u-turn on housing impacting their decisions is astonishing.

The problem lies solely with this National Government. They are reluctant to do anything that may stabilise or bring down the price of housing.
Wheeler can only do so much without damaging the banking system.
John Key's wealthy backers will not support him if he attempted to do something effective to allow people to buy their own houses instead of renting.

Thanks heavens I am not alone in being seriously unimpressed by Graeme Wheeler. He was wrong to raise the OCR by a full 1% last year,wrong to hesitate in reducing rates this year and wrong again now.

Your access to our unique content is free - always has been. But ad revenues are diving so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.