David Hargreaves thinks the Reserve Bank is unnecessarily gambling everything on a December rise in US interest rates

David Hargreaves thinks the Reserve Bank is unnecessarily gambling everything on a December rise in US interest rates

By David Hargreaves

I don't know if you noticed, but there was a paragraph missing from the end of the latest Reserve Bank Official Cash Rate decision announcement.

The missing bit read: "Over to you, Janet."

Yes, they didn't say it, but our central bank is waiting for Janet Yellen and the US Federal Reserve to raise interest rates. If the Fed (finally) jumps in December and puts up US interest rates this would be expected to push the New Zealand dollar down, increasing the cost of our imports and causing NZ inflation to spike to the levels the RBNZ is expecting. Such a spike is crucial if the RBNZ is to finally get in line with its official monetary policy target of 1-3% inflation and an explicitly targeted 2% rate.

Now, obviously whatever happens in the US is very important. But should our central bank be pinning its policy decisions on what happens in the US - as it appears to be?

No, surely not.

I will say up front that I think the RBNZ should have trimmed another quarter of a percentage point off the OCR now and followed it with another cut before Christmas.

While it may seem odd to say so, the 'do nothing' option in this case was more risky than actually cutting rates.

The Fed will make its final decision on interest rates in mid-December, after our Reserve Bank (December 10) makes its final official announcement on interest rates for this year*.

I can only suppose that the RBNZ is planning a quarter of a percentage point cut to the OCR (to 2.5%) on that day and has fingers crossed that the Fed subsequently moves rates up. The REALLY risky course of action would be for the RBNZ to sit tight on our rates and wait and hope that the Fed moves.  I sincerely hope that the RBNZ is not even remotely considering that latter course of (non) action.

If the RBNZ did leave the OCR sitting at the current 2.75% level and the Fed didn't raise rates then I think you could confidently expect the NZ dollar to surge, and by the time everybody's re-emerged from the beach it may well be riding over US70c again.

If that happened the RBNZ's projections of higher inflation really would be blown out of the water and I think serious questions would start to be asked by Finance Minister Bill English of just when the RBNZ is thinking of getting in line with the Policy Targets Agreement English has with RBNZ Governor Graeme Wheeler.

Even if the RBNZ does (and surely it will?) reduce the OCR to 2.5% on December 10, there's still a risk that things will go awry if the Fed doesn't push US rates up.

The RBNZ had the chance to take the initiative by dropping our rates now. It would have kept downward pressure on the dollar between now and December and a follow-up rate cut in December would have ensured continued downward pressure on the dollar afterward - even if the Fed didn't come to the party.

It seems to me that the RBNZ has spent far too much of the past two years waiting (and being continually disappointed) for the Fed to 'normalise' conditions in the US. The fact is the Fed has now on an ongoing basis failed to live up to its pre-decision displays of bravado. There has to be a pretty good chance that despite its latest chest beating the Fed will yet again come out with a non-decision in December.

I suppose we can perhaps take some comfort that the RBNZ at least acknowledged in its latest statement that there was a risk the Fed would not move, by cautioning that our rates may have to move lower if the NZ dollar stays strong. But I would also point out that this statement rather cuts across what Wheeler said only two weeks ago when he appeared to be trying to put a 'floor' on our OCR at 2.5%.

I don't think the RBNZ has a dog's show of getting inflation to the levels it's saying it will - unless it gets very lucky with the Fed. But as I said earlier, the RBNZ is taking a big gamble on the Fed. One it should not have taken. Surely we have to make our own decisions and not wait for others?

If the Fed doesn't move in December then the OCR will have to be cut below 2.5% next year. No doubt.

And no doubt also that this would be another bucket of petrol on the house market fire. Therefore for sure you could expect that the relaxation of the LVR 'speed limits' outside of Auckland (from 10% to 15%) would be reversed in short order followed by the RBNZ dipping back into the 'macro-prudential tool kit'.

In this regard the release of papers showing Treasury expressing enthusiasm for debt-to-income ratios is interesting to say the least. Watch this space.

*An earlier version of this article had an incorrect date shown. This has been amended.

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I will say up front that I think the RBNZ should have trimmed another quarter of a percentage point off the OCR now and followed it with another cut before Christmas.

Can you quantify what good may emerge if your crusade for two nearby OCR cuts were to materialise?

A qualified deviation from this observation would be welcome.

All the Fed's QE and ZIRP (zero interest rate policy) accomplished was the inflating of multiple bubbles (housing, stocks, bonds, student loans, subprime auto loans, etc.) and chumming the feeding-frenzy of financiers gorging themselves on income-producing assets while the dwindling middle class has been mesmerized into accepting debt servitude as the acme of middle class membership. Read More

There is no way the Fed will cut this year - probably not next year either. There is more QE to come! NZ Reserve Bank should have cut now and in December - absolutely!

The link with the Fed also occurred to me, such that I wonder if the Fed went to friendly- read compliant, at which we would surely be top of the list- fellow central bankers, and said something like "we want to get these things off the ground, but it would be helpful if you all talk rates up in the meantime, and don't actually drop them". Such communications would have partly explained Wheeler's out of the blue speech a couple of weeks ago. After a recent G20 meeting some of the global rhetoric changed, including from Carney of the BOE, so I wonder if it is coordinated.
A difference is that other countries are far less likely to be compliant, and when push comes to shove, will play currency wars if it suits them.
Will Yellen even follow up is the big question? I suspect she will (and hope she does), but Wheeler will be a bit exposed if she doesn't.

Enough with the Keynesian madness already! We have had enough interest rate cuts dammit.

Lowering rates not only inflates bubbles, but this subsequently increases income inequality, and has the long term effect of deflation. Japan makes a nice case study for this. You can’t achieve a 1-3% inflation target by implementing policies which are long term deflationary.

Now that the Chinese are tightening up the loopholes re capital controls, the flood of Yuan hitting our shores will abate. Sure, our higher interest rates may attract other currencies looking to escape ZERP, but so be it, everyone (including us) will be printing like crazy soon anyway.

I still can’t believe people around here think the fed are just going to waltz out of their liquidity trap and raise rates.
The Fed cannot raise interest rates without causing a cascading house of cards collapse in derivatives. You can drink all the cool aid you want, but Janet arnt raising rates.

PS did anyone see this interesting article regarding oil storage capacity problems due to oversupply?

I see Japan is poised to purchase more equity like derivatives, which inevitably sucks capital resources out of the functioning economy.

Japan’s central bank already owns more than half of the nation’s market for exchange-traded stock funds, and that might just be the start.

The Bank of Japan will boost stimulus on Friday, according to 16 of 36 economists in Bloomberg’s latest survey, with 12 saying it would do so by increasing its annual ETF-buying budget. With 3 trillion yen ($25 billion) a year in existing firepower, the BOJ has accumulated an ETF stash that accounted for 52 percent of the entire market at the end of September, figures from Tokyo’s stock exchange show.

Policy makers weighing a deeper foray into equities shows how the world’s third-biggest stock market has become one of the most important Abenomics battlegrounds. The Topix index is up 21 percent since the central bank unexpectedly tripled its ETF budget almost a year ago, and Citigroup Global Markets Japan Inc.’s Tsutomu Fujita says there’s room for them to triple it again. For Amundi Japan Ltd., expanding the program would do more harm than good. Read more

Crikey. I'd heard people who have lived in Japan say it is a communist state in disguise and that reform is impossible, but that takes the cake. They have nationalised the stock market already.

Yes RW, and that is where the RBNZ is taking us - Corporate Communism. They have just sent a coded message to all their favourites: banksters, real-estate agents, fonrera, nzx, et al saying, "We will deliver free money and a worthless currency for you. Hold the faith, it's just a bit inconvenient at the moment because some very positive NZ data has snuck thru the net; but we are going to counter that and all will be right for you, we promise."

The US economy will self-destruct if they raised interest rates (in my opinion having read various blogs).

They are not going to raise rates, but will talk like they are going to.

I am not really knowledgeable on this topic. Perhaps someone can help me.

If the Fed increases their rates in December what is this likely to do to our 4 year to 5 year mortgage rates considering the New Zealand OCR tends to dictate the floating and short term mortgage interest rates.

Reason why is that I am trying to judge when the best time it will be for me to refix my mortgages to a 5 year rate.

Anyone have thoughts on what events will influence the raising or reduction on 4 year or 5 year interest rates? thanks

Historically, staying on float is the cheapest option over the long term.

We are currently in a slow deflationary spiral. No central bank intervention can stop it, they can only delay or slow it, or introduce retarded policy like ZIRP which will (after crossing a threshold) accelerate it.

So, the current pieces in play are low interest rates, causing capital (& labour) misallocation, via speculation inflated asset classes (specifically houses and stocks).
This misallocation results in less money for growth, so companies don’t expand much, they mostly stagnate (and buy their stocks back with debt to raise the share price and make it look like growth).
Rents and mortgage repayments go up, wages stay the same. Without going into more detail or examining the other factors, this alone has the effect over many years, of people’s disposable incoming being reduced. This means people slowly spend less at shops. Businesses make less money, and contract - shop employees get fired. Unemployment goes up. Unemployed people can’t pay mortgage repayment and sell their houses. This is fine for a while, but once we pass a significant threshold of people in an economy, then it will cause house prices to drop slowly. Then, people see houses in their neighbourhood selling for less than they paid, and they start to sell as well. This triggers a landslide of sales, and 'oops' - there goes the housing bubble.
Congratulations, you are now stuck with a mortgage which is greater than the value of your home.
If this is a situation you don’t want to be in, then who cares what 5 year rate is on offer now or later - sell the house now and rent for the next 2 years!
Of course, that may not be possible, and you may have enough equity already to not really care. However if you are a millennial like I am, then you probably have a lot of equity to loose!

Here is an interesting article which may give you insight into how close the average American is to reaching that 'cant keep paying to mortgage threshold'

TLDR - sell your house now. Otherwise, wait a few more months, cause Wheeler is a dirty keynesian and will inevitably drop NZ OCR as the deflation continues (which may just keep our bubble going a little bit longer before it pops spectacularly)

You would be mad to sell your house in Auckland and rent, good luck getting back into the home ownership market. Yes I sold a house back in May but for a family of four we have four houses, a bit over exposed to risk in the housing market so time to cash up. Interest rates are set to fall even further, get a good short term fixed rate. my partners mortgage comes up in March and I'm still predicting two rate cuts before then.

"So, the current pieces in play are low interest rates, causing capital (& labour) misallocation, via speculation inflated asset classes (specifically houses and stocks)."

This is of course your view. Capital will be allocated depending on the best return. If there is no demand for more goods, no one in their right mind allocates capital to invest in new plant to meet a non-existant [future] demand. So what we are seeing is capital being mis-allocated not because they can borrow low but because there is no where else offering a "reasonable" return.

"over many years, of people’s disposable incoming being reduced." sure due to a number of factors, mostly I suspect non-tradable inflation is what is eating at the static wallets as rents and mortgage payments are pretty slow to increase (in fact mortgages are going lower).

"Wheeler is a dirty keynesian" no he is not, if he were the OCR would not have gone up and would be much lower right now. He will drop the OCR sure as yes a lack of inflation continues but that is sound, yes keynesian economics. Otherwise what? he should raise it? make deflation a sure thing?

Its' not the low interest rates that cause Capital misallocation... its the excessive credit growth that results in increased spending...which causes Producers/manufacturers to increase production..(to invest more )
Trouble is.. that increased spending thru borrowing is pulling forward tomorrows consumption into today... ( it may be a highly unstable level of demand. )
Producers/manufacturers are just responding to the signals of the mkt.... which because of credit, can be misleading...

The bar for "return on Capital" is probably set by the prevailing level of interest rates.... I think..

just my view on things..


Potentially increase them as a rising Fed will see capital flow to the US (in search of better returns and a safer $US) meaning less $ available for 5 year mortgages in NZ. Also $US would increase making $NZ less attractive to capital inflow.

The big question is will the Fed raise its rate in December? There is talk of no raise and potentially further QE (money printing) or even a negative Fed rate (see Sweeden). If this occurs 5 year rates will continue to drop. That's the gamble.

Take the doomsayers with a grain of salt. They hate the thought of a falling OCR as it will eat into their deposits. If they had their way the OCR/FED/RBA etc... would have a rate of 15% and they would squeeze every last cent as the world crashed.

Agree, "they would squeeze every last cent as the world crashed." and also expect a Govn guarantee on their money, from the tax payer and ppl losing jobs.

When Kunslter says he suspects bankers and financial types will come to a nasty end, I agree. There will be a lot of bitter and ruined ppl with nothing else to lose looking for them, bound to end well.

The fed purchases bonds QE. When a QE purchased bond matures who receives the proceeds? If they pass it onto govt, we'll then, QE is paying for govt spending. What a play!

Yes... I never thought I'd live to witness that... what is essentially the monetization of Govt debt....

Only ever read about it in history books..... ( usually with unhappy endings.. )

"Doing nothing" is what the Government is doing with the housing crisis in Auckland.
If this Government got off its backside, instead of pandering to its vested interests, the Reserve Bank could reduce interest rates by at least 1% by now.
If they reduced interest rates without National doing anything about fixing the housing crisis, then we will have massive social problems in this country with the inequality that would ensue.

ShPhoenix, you seem to ber very knowledgable, what's your background ?

As a matter of principle,even though the US are big and influential, I believe we should all take our destiny in our own hands and not wait for others (the US FED) to make calls

From what I have read there is no way the US fed. Reserve will raise interest rates . Ever! The USA is so indebted to raise rates would bankrupt the country.

agree, they have had two prime times this year and let both pass with different reasons for each. they now have a slowing economy, asset bubbles (mostly stocks) any raise now could tip them into recession

So they should have raised despite time showing that their economy would actually slow? how does that make sense?

the two times they had to raise by .25 bp the conditions were ok in the US, first time they were worried about grexit which didn't happen, second time they were worried about china imploding which didn't happen.
the market had priced in the rise both times and what would have been a short sharp downslide before recovery by ripping off the plaster quickly has now got harder as the plaster has become stuck on like glue

The debt actually isnt that bad or un-managable. If the country were to ever recover (fat chance) then the increases in tax take would allow the debt to decline over time. Of course the massive cost of its military spending which is what is really breaking it may stop that.

Apple Tree, think a bit longer term - Process goes, ...you get alot of debt, you push interest rates lower, assets prices go higher, you get more debt...you print money to push interest rates even lower....then you have hugely too much debt...financial market dump your bonds,..long term rates rocket higher...assets prices collapse...your currency plunges...inflation takes hold...the central bank is forced to hike the cash rate to support the currency...and in that scenario they're forced to pump it way higher than you could have imagined...result...naively bankrupt borrowers who were previously claiming that zero interest rates and money printing can last forever,...damn cheap assets for those to buy who understood that history inevitably repeats itself, its just this time its on a massive global scale that could still have quite some time to play out, or come tomorrow.

Lots of assumptions, and I dont think are correct. In terms of debt it seems to me that the markets dont care about what the level is (wthing reason) so much as your ability to pay and not default ie that they see someone will backstop you.

Also sequence, Alan Greenspan pushed the OCR lower and lower to keep the economy going. Eventually the Fed had to go to QE as it was no longer possible to go lower and debt ballooned. (BTW did Greece push their OCR lower and lower? no their debt climbed and so did their interest rates)

Then we see the "confidence fairy" trotted out.

Then we see that inflation will one day raise its ugly head.

How very Austrian of you, very typical of financial types it seems.


History in the past has repeated itself, to a degree, but human history for the last few thousand years and especially the last 150years has always been one of more and more energy being available, that now is set to reverse.

Sure ppl have bought assets at inflated values, gambling they will go up for ever (ppl also did the same with tulips btw). So the assumption is by some is its low interest that did it (ignring the drops were done by a libertarian, how ironic). Somehow ignoring all the other factors as blaming the Fed is easy and fits the ideology, especially as it fits the ideology.

"timing" I agree with you on that, been thinking that for 7 odd years. Then the shale play keeping oil prices (and the oscillations it has caused) in check for a bit was not factored in.

It will indeed by massive, just look at the syrians running to the EU and that is in effect just one country that has run out of oil and then seen CC finish off its agriculture, bound to end well. Like I said "swamped lifeboats"

I remember back not long after the GFC when the greens were pushing for a NZ QE program and JK Called them looney. he said it eventually leads to hyperinflation down the track (which is conventional thinking).
since overseas countries could see deflation they saw it as a way to get inflation but it has not worked that well as most of the funds have gone into assets and not production or consumption as intended.
inflation will come once they turn the tap off, point is how long before that happens and what form will the inflation come on us, will it be a steady rise or a tidal wave

QE is not printing. It can be removed from the system by simply calling in the debt hence it should not be inflationary long term (I will accept that remains to be seen).

The Green's were however wrong, NZ's OCR was and is still high enough that it can be dropped in response.

JK said that? well hardly surprising given its similar to some of his other clueless comments.

The tap is preventing deflation, and gets turned off when we recover, ergo we will see inflation that is in theory a given as it happens in a recovered and booming economy. Of course I dont see a significant recovery and hence conventional inflation as such is gone. Now extreme scarcity in essential goods like food can indeed cause hyper-inflation.


QE is not printing. It can be removed from the system by simply calling in the debt hence it should not be inflationary long term (I will accept that remains to be seen).

If that were the case, for a net debtor nation such as the US, government debt yields would be significantly higher for those securities sitting on the Fed's SOMA, to offset early redemption risk.

Remind me, when were you last employed at a G-SIB treasury trading desk?

remind me when you last did non-austrian economics?



oh and yes its not that simple, i was simplifying.

So what?

How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve's large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve's asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful. Read more

I constantly need to remind you, this reality caused a massive transfer of wealth out of the general population's pocket into higher net present valuations of outstanding UST bond portfolios and thus ultimately into those of the Treasury scrip owners. Read more

Hence no redefined CPI inflation experience for the masses.

Steven... As a figure of speech...QE is money printing....

That article u have linked to is simply wrong... in my view..

The FED has exchanged Money for Bonds ( which is a financial asset )..
Just because the money is held as reserves at the FED...does't make it any less money.. ( In fact, they call it Base money.... cash + reserves).... This is the high powered money on which the Private sector banks create credit...
A bank can simply spend that money by writing a cheque against it.... just as u can write a cheque against money u have in your transactional account..

Banks could also, in theory, withdraw those reserves in Cash.. ( I'm saying this, just to make my point )

If the FED expands its Balance sheet... it can only do that by creating money out of thin air..... and it really is MONEY... not credit..... Only the FED can create or remove Base Money...

Why do you keep bagging Austrian economics...???
I have found many of the principles to be really useful in having a simple understanding of how mkts and economies work..


Here's a metaphysical head scratcher. The Europeans conjure euros, which the Swiss buy with their newly materialized francs. The managers exchange the euros for dollars (also produced by taps on a keyboard) and with that scrip buy ownership interests in real businesses. The equities are genuine. The money, legally and practically speaking, is itself real--you never mind having a little more of it. But what is its substance? We mean, how is it different from air?

You are certainly entitled to your view, and I certainly do not agree with your view.

Yes "money" is created, however that money is lent out (or that is the idea) and with leverage. In due course that money is paid back and hence the permanent stimulation that is true money printing is avoided, and hence inflation. The problem with this is QE was meant to be effective, but it was really meant to be a short term boost and then that is it, instead it seems to be an almost permanent undertaking. Why do they keep doing repeated rounds of it? because the world's economy cannot sustain itself let alone get back to growth as was expected.

The Q is why?

Well, oil/energy.

I bag Austrian economics because time and time again it has proven to be a very poor school of thought in predicting economic outcome of where we are today. In fact that is sort of correct, actually more like what ever the Austrians say it will be opposite.

"simple understanding" that is the crux, the world and the actual economy is not that simple, it is extremely complex and hence their simple model is fundamentally wrong IMHO.

You know Peter Schiff and his hyper-inflation and buy gold claims? went well, yes very well for many gold bugs, who listened to the $3000~5000 predictions currently down 30%....oopsie, hyper-inflation? uh no.

So for me yes sure look at Austrian economics but then look at the outcome and most importantly the logic on predicting the right outcome. ie they could be right but their logic has to show they were right and not lucky. Hence why I have ended up paying a lot of attention to Keynes and Minsky via Paul Krugman and Steve Keen. They actually have a track record of being correct with the logic behind it to give confidence it was not luck.

But sure use the model you like. I mean there are always 2 sides to a trade. If you are on one the other side of that trade to me that looks like good times for me (Washington post's predictions v Krugman).

NB Now that doesnt mean at some stage that I think gold will be a good buy, but I think if such an extreme state ever occurs you will be better off with lead.

Keep your eyes on the feds maturity reinvestment policy. QE is perpetual even though it has ceased.

Steven, I didn't say it would happen to the US, but it is well recognised process, and in the past few years, to varying extents and versions, it's happened to Greece, Argentina, and many emerging economies etc, an dits still early days - complacency that it can't happen is the risk, this is a massive global experiment never seen on this scale before. And risk management is what it's all about - so many are just plain punters without recognising it because of that complacency. Noone here, no one anywhere, knows now things will play out over the next 5-10yrs plus, yet the complacency of many who think they do is scary. I agree with Stephen Hulme, what good will another rate cut provide NZ at this point of the cycle - look at Australia, already hestitate to cut as its running slowly out of distance below it - and I know of very few businesses who aren't very happy at current interest rate levels, the sector that aren't are many consumers who have leveraged themselves up with unaffordable levels of debt over the longer-term to try to afford to buy assets that the low interest rates have actually promulgated - but lets have more of the same please.

Afar better and more logical reply thank you 5 to 10 well I think my views on peak oil are well known and that when it dawns on ppl will be earth shattering for economies imho

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