David Hargreaves thinks the Reserve Bank is pushing against gravity - and gravity will win

David Hargreaves thinks the Reserve Bank is pushing against gravity - and gravity will win

By David Hargreaves

So, Reserve Bank Governor Graeme Wheeler has put his snooker cue back in the rack and that, as they say, is all folks.

While our central bank has through its public comments left open the possibility of further interest rate cuts next year, its detailed projections in the December Monetary Policy Statement show that it is currently planning on no further moves in the Official Cash Rate - either up or down - between now and December 2018, which is as far as the forecasts go.

I have for a little while been in the camp of those (Westpac has been prominent, more recently joined by ASB) who reckon that the RBNZ will indeed be forced to go lower with rates next year and I've seen nothing from the latest MPS to change my mind on that.

On the contrary, I'm now more convinced than ever that the RBNZ will have to drop those rates again.

Probably the ONLY thing that will save the RBNZ from such a course now is the US Federal Reserve. It seems to be a fairly locked in certainty that the Fed will raise its rates next week (and surely all hell would break loose now if it didn't). Assuming it does, then the statement and supporting commentary that come out along with the decision will be real important.

For our RBNZ to have a chance of holding the line on its current assertion that 2.5% is the low point for our OCR, it will need the Fed to be reasonably 'hawkish' on the prospect of further US rate rises next year. I'm not sure it will be, nor can it be, because I think commodity prices - notably oil - are likely to stand in the Fed's way. If oil prices keep drifting lower, it's hard to see the Fed being able to maintain an 'up' bias for US rates.

The, I think, rather extraordinary references in the MPS document - right at the front - to the Policy Targets Agreement that Wheeler has with Finance Minister Bill English says to me that the RBNZ is piling excuse after excuse for why it will not be meeting its inflation targets.

None of the economists comments that I read after the release of the previous MPS document in September indicated any kind of belief at all that the RBNZ would get within cooee of the inflation projections it made then. At that stage the RBNZ was heroically forecasting 0.7% rises in CPI inflation for both the March and June 2016 quarters. This steroid-fuelled bout of inflation would have seen the RBNZ hit the 2% midpoint of its 1%-3% target by September 2016. 

Move on three months and certainly some reality has bitten. The RBNZ's now picking a (still quite heroic, I reckon) 0.6% surge in the March quarter followed by a more restrained 0.4% lift in the June quarter. However, the 2% midpoint will not now be hit till December 2017, some 15 months later than the RBNZ thought just three months ago.

I still don't think they've got a show of even meeting those targets - and hence the excuses. I think there's going to be some pretty earnest discussions between the Governor and the Finance Minister in the early months of next year. A lot will depend on English's attitude. I suppose if he can be talked into not pushing for inflation to particularly meet the 2% midpoint (which remember is something the RBNZ actually wanted) then the pressure comes off somewhat for further rate falls. But if he does want to meet that target then the pressure will most definitely be on.

The primary reason I don't think the RBNZ will get close on those inflation targets is that the Kiwi dollar will continue to misbehave - relative to what the RBNZ requires.

The RBNZ's December forecasts for the future track of the Kiwi dollar are now rather higher than they were in September, but I still think the RBNZ's going to be very disappointed by what actually transpires. At time of writing the NZ dollar is about 4% above where the RBNZ is forecasting it will be in the March quarter.

Now, a lot can obviously happen in a short time frame, but if the Fed's message next week is not fairly hawkish then there's no real immediate reason why the dollar should close the gap between what the RBNZ's forecasting in three months time and where the Kiwi is right now. Indeed if the Fed goes all 'dovish' on us, then the gap could very foreseeably widen.

And of course a lot of importers who will be getting to the end of forward currency agreements at very high kiwi dollar rates now and in January will be able to take advantage of any spikes in the Kiwi dollar - such as the one that has occurred today - to lock in future rates that are considerably better than the RBNZ would have been anticipating. And if they get better Kiwi dollar rates than the RBNZ expects, they don't have to raise their retail prices as much as the RBNZ expects and inflation doesn't spike the way the RBNZ expects.

Another great variable is the immigration rate. I think it is going to continue to surpass forecasts for the next 12 months. If it does then this should continue to put downward pressure (as Bill English concedes it has done) on wages - so, another deflationary impact.

The big, big wild card is El Nino. If that's bad, as it could well be, then it could really hit economic growth next year. And that's likely to be bad for jobs.

Putting it altogether I don't see any way that 2.5% could be the bottom for the OCR. I would even now question whether 2% will be the bottom.

The key point will be whether the powers that be decide to effectively throw away the inflation targets next year, coupled with the whole question of how much good can you do by continuing to cut and cut rates. But the fact is we've still got higher rates than many other places, so, it's difficult to avoid the conclusion that we simply will have to do more cutting, inflation targets or not.

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?

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Well, the poor old RBNZ can't tighten up immigration, & loosen up Govt spending.
That's the governments job.


The Reserve Bank is on a hiding to nothing. They have to decrease interest rates to increase inflation while we have a Government hell bent on allowing as many immigrants as possible into the country. This is contrary to what Wheeler wants and what is good for NZ.
If more immigrants equals a better standard of living for the majority, then countries like Bangladesh would have a good standard of living. More immigrants equal lower wages and higher house prices. It is only good for the truly wealthy National party backers.
Wheeler and Key are not working together to reduce house prices and lower interest rates.

Dropping The OCR should have two fold effect, 1 put more money in peoples pockets to spend on consumer goods and 2 make our dollar less attractive a lower it both together should produce growth and inflation
1 is not as effective because every spare cent is going into housing costs
2 is not happening

Actually the Governor really just continued a tightening bias. Relative to global conditions monetary policy is very tight - unsecured lending at 17%, floating mortgage very high at 5.75 (not much different from when the OCR was 5%!, also fiscal policy is tight. NZ is on a very unusual course, opposite to other developed countries. Notice how reluctant and defeated the RBNZ leaders were in reluctantly 'cutting' interest rates (actually just reversing last years very unwise hiking mistakes).
They show all the signs of a ship adrift, not understanding the global forces and the dangers of creating a 1930s depression by clinging onto 1980 paradigms.


Absolutely on the money.He is still stuck in the 80s and can't adjust to a rapidly changing world.The frightening thing is that he will almost certainly be reappointed if this lot are still in power.It's not a pleasant prospect

Those are your views

Are you both forgetting that Bollard cut interest rates by 1% from 3½% to 2½%, in response to the 2011 ChCh earthquakes, not in response to global events

The question is who were the beneficiaries of Bollard's 1% rate cut. Time and events have shown that one single rate cut became Bollard's "helicopter ben's" moment as Auckland went on a spending spree while central government sat back and watched, while (many) Christchurch residents have had their lives upended and remain so to this day

This should be a case study in how to create a problem
All Wheeler did when taking office was to identify that distortion, reverse the cut and target the cause and not the symptom - AKL prices

In the face of implacable indifference and resistance by Govt, Wheeler blinked

So who are the beneficiaries this time round with this cut?
Are employers going to increase employment and produce more local goods for consumers to spend on, or will they simply consume more imported $2 shop items, simply exporting the benefits overseas

Response to the cut was the NZD exploded UP 2 cents against the AUD instead of falling. Exporters got hurt. Who did it help?

Some truth in what you say Mortgage Belt, we do seem to be in a ship of fools. It's a tangled web though. Clearly borrowing more to buy houses off each other is really stupid but that is the result of the RBNZ policy.

As a country we are a debtor nation that cannot keep up with it's interest payments and I think this means we need to periodically sell off assets to pay the interest. One way of doing that is to open the doors to new migrants with money. It's better than just selling to faceless foreign corporations.

There doesn't seem to be much said about this as "current account" is mainly used to baffle and confuse. Bureaucrats are not renowned for creative leaps as they are selected on factors like reliability and diligence, this tends to select against those who are more creative and sporadic. There must be solutions out there.

Revise inflation calculations to better reflect housing costs. Problem solved with the stroke of a pen.

and then what?

Use that "justification" to put up the OCR?

high immigration keeping wages in check and more of peoples pay packets being spent on housing i can not see consumer spending increasing, unless more is borrowed on the house due to the low interest rates.

Seems sensible to me David. Just wonder what powers the RBNZ thinks it has to stop the international tide of interest rates. Central banks version of King Canute! Ultimately the Bank will have to give exporters and the exchange rate an even break to allow the economy to adjust.

ah, put into my calendar to remind me on just how [in-]accurate the RB's projections are/were.

You must be assuming the data the RBNZ relies on and draws on is accurate

Amateur hour guidance by the governor. Completely ignoring his mandate on inflation.

It would seem the currency markets agree with you in terms of what should happen. That's the only reason I can think of for the NZD to appreciate markedly on a day when the RBNZ surprised at least some people with a rate cut. In my view the medium term answers lie more in a fiscal response than in more rate cuts, but that is a separate topic. Under conventional wisdom, interest rates cuts are the only way to generate inflation. Yet at a global level they have pretty clearly done the opposite, in financing massive spare capacity, but not generating consumer demand to match.
For NZ, the greatest damage is done by the exchange rate, and Wheeler seems to understand that, but seems unwilling to contemplate even marginally non conventional means to solve for the issue.

As I said on Tuesday, the big money bets were in, anticipating no move, and, should there be a cut, watch the stops go off immediately, and that's what happened. They sure did. Now it will settle down

What confuses me about these people is they don't do more of what works, they do more of what doesn't work.

I thought the requirement for NZ banks to have 80% of their borrowings at 1 year or more looked like it worked. It solved a financial stability issue. So why not extend it to 80% at 2 year or more, in stages, at the same time as reducing the OCR (and hence the exchange rate)? Do more of what works, do less of what doesn't.

And if the bank doesn't make its targets, what will happen?

Will there be a written warning? A pay cut? Will the governor be sacked?

Reality is that deflation shocks can occur from both demand (e.g Great Depression) or supply side (Industrial Revolution). No guesses to say which types of shocks are more desirable. Since it seems to be more supply side led e.g. internet shopping, oil prices, immigration - is the current low inflation we're experiencing really a problem that needs tackling with monetary policy or any sort of fiscal response for that matter.

National refuses any fiscal response. Ideological or answering to higher powers?

Or served by blinkered bureaucrats who cannot think creatively?

Why would consumer spending increase ? the smart people with a mortgage would keep their repayments the same or even increase them to pay it off even faster. These OCR cuts are knocking years off peoples mortgages. There are also more rate cuts to come, another in Q1 2016 is my prediction to help keep this party going, although in world terms everyone is already drunk and is about to start throwing up ! 2016 could be an interesting year globally. Almost time to fix that mortgage for the long term.

True, have been fixing for 1 year at the most, and in the past 2 years have shaved 7 years off my mortgage.

I think there is plenty time to fix for the long-term, the governor says he sees rates staying at 2.5% until the end of 2018. I think they will fall further, but I don't see him raising them much before the end of 2018 or he will look as though he is really out of touch, or should I say even more out of touch.

Wheeler is caught in a time-warp.In his universe,inflationary pressures just have to be there-somewhere-even when there is no evidence for them.He simply can't adjust to a low inflation world.He clearly doesn't really understand how technology is changing things.
Her should start by looking at the RBNZ's own long-term inflation graph which very clearly shows that inflation has been on a downward slope since 1992.A similar trend has been inplace in Australia,the UK and the US for even longer.Thiis is structural,not just cyclical.
3 months ago,Wheeler believed that inflation would be back to 2% by Sept. next year,but now it take till Dec. 2017.To me,he he has lost whatever shred of credibility he still had.

Brent Crude under $40 last night, immigration soaring, China possibly to devalue (more than its been doing lately), Baltic Dry Indexes back to GFC levels- deflation everywhere. Doesn't Wheeler have Google?

Just trying to talk up the market/economy. Not a new thing, surely.

Very irresponsible to give a 2 years guarantee of the policy ?

I have been saying this for ages time income to loan ratios are brought in.
this is also the reason the OCR is becoming less effective, the extra money is going on deleveraging not consumer spending
"Statistics New Zealand data ­reveals about 20 per cent of Aucklanders are spending 60 per cent of their income on mortgages. Forty per cent is generally considered the high end of the affordability scale"

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