David Hargreaves thinks if the RBNZ is indeed forced into cutting interest rates it will seek some trade-offs

David Hargreaves thinks if the RBNZ is indeed forced into cutting interest rates it will seek some trade-offs

By David Hargreaves

Well, thank goodness we got that out of the way early.

It seems the Reserve Bank might after all cut interest rates this year. Not that it wants to, mind.

The 'dovish' shift in stance by the central bank in its latest OCR was welcome, though wouldn't have been necessary if  the bank hadn't fluffed its lines in its December OCR statement when it to some extent followed on in tone from a rather odd speech Governor Graeme Wheeler made in October. The RBNZ set its stall out in a pretty inflexible way and is now having to move the stall, huffing and puffing as it goes.

Wheeler makes his annual scene-setting speech next Wednesday (February 3). I don't think I'm building it up when I say that in my view it's Wheeler's most important speech since he took the Governor's job.

With the next OCR review - which will include a full Monetary Policy Statement - not due till March 10 Wheeler is going to need to bridge the gap in terms of market information on just where the RBNZ is sitting at the moment. Tough job. I just hope that what we don't get is what we've been getting a bit too much of from the RBNZ recently, IE the central bank telling us what a tough job it's got.

I digress slightly but many years ago a family friend found himself sitting on a domestic plane flight next to a very prominent politician who for reasons best known to himself (the politician that is) began to complain abut how much work he had and what a tough job he had - this said while brandishing a sheaf of papers for effect. The family friend's response was to the point: "Well, you wanted the bloody job."

The point is, we don't need telling that the RBNZ has a difficult job at the moment. We know. It is an extraordinarily tough environment. But what is the bank intending to do about it?

The big development for me in the latest OCR statement was the comments about the housing market. Theoretically the OCR is a monetary policy issue and housing (unless we are specifically taking housing-related inflation) is a financial stability issue. And never the twain shall mix. But mixing they are again. The thread of logic, the if you like internal dialogue, of the RBNZ seems clear here. If circumstances really do dictate that the RBNZ has to drop interest rates again, what is that going to do to house prices? How does the RBNZ balance any interest rate cuts (which in theory will fuel the housing market) with a need to rein in house prices?

The comment specific to housing read thus: "House price inflation in Auckland remains a financial stability risk. There are signs that the rate of increase may be moderating, but it is too early to tell. House price pressures have been building in some other regions."

Care needs to be taken not to read too much into bald statements. But the fact that the RBNZ has made such statements, bald as they may be, is that there is a context to them, a reason for making the statement.  I take the comments about the Auckland market to suggest that the RBNZ is not yet confident that measures it put in place in November are having sufficient impact. In fact, I would go further and suggest that perhaps the RBNZ's already believing that those measure are NOT going to do the job. New figures issued by RBNZ later in the day might tend to bear that out. The second comment about "other regions" I definitely take as a sign that the RBNZ's getting ready already to reverse its decision ease the "speed limit" on high loan to value lending in non-Auckland parts of the country.

The big question therefore for me regarding Wheeler's speech next week is whether he will wade into these housing related issues - and point toward what the RBNZ might do. Is the RBNZ ready to play its hand yet? If it is not next week then it can't be too far away.

We know that Treasury is keen on debt-to-income ratios and that the RBNZ's gathering information on them. It could be that these are going to be introduced rather sooner than anybody thought. If the RBNZ feels it might be forced to start cutting rates in June, then would it want to look at the very least at getting a framework for introduction of loan-to-income ratios set up by then?

I get the distinct impression the RBNZ had set its line in the sand that it didn't want to cross - namely a base OCR of 2.5% - and that now that's likely to be breached it wants more comfort about how to cool the housing market.

So, this is the trade-off we are looking at this year. If interest rates are going to have to give, then the housing market is going to have to give too. Watch this space.

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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I think there is evidence of an auckland slow down, some (westpac) even saying its more abrupt than intended. The reinz index data is showing prices falling 5% + in a matter of months (oct, nov), they would not want this to continue or else your looking at 30% price falls over a 12 month period.

I think this will also stop regional price rises in tracks also as cashed up aucklanders hold off expanding into the regions, and news articles on falling auckland prices give local regional buyers an excuse to hold off despite very tempting mortgage rates

I was in Sydney last week and was told the average house price there had dropped by 3% in the last month.
They had the same house buying frenzy from investors as we did.
Their housing boom started about 6 months before ours. Many investors who bought over there in the last 6 months are starting to realise they have made a mistake and will loose money.
I am convinced the same will happen here in Auckland

So, what points does this write-up add that were not already stated (in non-archaic language) in this morning's OCR statement?

Suspecting added macro tools eg income to debt ratios in pipeline. And if auck prices start ticking up I think theres a good chance we'll see them. I'm hoping enough has been done and auck prices can slowly moderate so the rest of the country can get on with life, and lower interest rates, lower exchange rate too

Policies need to be in place to limit the leverage
DTI's or more extensive LVRs should have been bought in ages ago.
The GFC is abnormal and the interest rates are abnormal, providing too much leverage.
And the government is bent on running immigration rates at a level above that the construction sector can absorb. RMA changes aren't going to happen over night - supply/demand balance through that mechanism is eons away.


If you want to stop house price inflation, REDUCE THE OCR BY 1.0%,
That's right; the reason why banks are falling over each other to lend money is because our OCR is high by international standards. There are billions of $ overseas that are not getting any return from their bank and need a home. Where ? Well, a 1st world country, with a stable government, reasonably non-corrupt and offering 3% return... NZ of course. Our banks HAVE TO LEND OUT this huge amount of cash, it's the way they make money.
To make my point clearer let me take it to the extreme; imagine an OCR of 0.5% in NZ tomorrow. Capital would flow out of NZ faster than you can say "help" the banks would write no new loans at all and property prices would collapse. Yes that's extreme but it shows the point

But, but ,but, you can't do that, it might work. We much prefer half measures that don't.

Seriously though, the NZD would fall, exporters would do well, productive employment would soar; Auckland real estate agents, bankers and lawyers would suffer. Can't have that.

Serious question
Can you articulate your reasons why a 1% cut in the OCR would cause employment to soar
Why and how and where

Ah, yes, I said "productive employment" not employment. Meaning employment in the productive sector, you know those old fashioned jobs that actually make stuff, real or virtual (ie food, buildings and software). Employment might very well fall in the wealth transfer businesses like real estate agents and lawyers. This distinction is excluded from the discussion but cuts to the core of the problem.

Cutting the OCR by a serious amount (ie, not tiddling about) is the politically easiest and fastest way to get rid of unemployment, but also the worst. The best is redesigning the institutional arrangements that determine how society functions and into whose hands wealth flows. Unfortunately, this is not really possible under MMP as National's failed attempts to de-fang the RMA have shown. The intermediate way is to run a budget deficit, either by spending more or by taxing less.

I could go on but it might get a bit long.

Our banks HAVE TO LEND OUT this huge amount of cash, it's the way they make money.

Links to the sites recording the cash repositories, please?

SH:- Can you enlighten me
With $billions NZD $ transacting overnight in London - does any of it actually end up in NZ?
I doubt anyone buys NZD for the purpose of receiving interest
I'm no specialist in this - that's why I ask

All NZD settle and deliver in an approved counterparty bank in New Zealand via an agent in London, as USD do in New York.

Interest can be earned and paid via open position counterparty currency swaps (O/N or term) in the FX market.

Investors normally purchase coupon carrying debt instruments to earn regular term NZD interest payments. Familiar securities are corporate - unsecured?, government, supranational Kauri, Uridashi, Eurodollar issuance.

Hmm, interesting comment. Any evidence that these banks ARE getting such hoards of overseas cash/capital? Bank of China might be or should I say ...may of done, but the rest? You do make a very good point though, our higher than everyone elses but still record low OCR is attractive to those outside this country for sure, as is our dollar to some. I suspect though that with every OCR decrease in NZ you will just get more speculators wanting to borrow unless the banks fail to pass that along or the LVR is again changed by the RBNZ in regards to investors. And the greater risk as I said before is that savers and depositors here will all give up on (enough) mass thus threatening that stability you speak of. The OBR is there for a reason that implies they (RBNZ) see the risk as much as anyone else keeping track. Worse case scenario's do/can happen

there are a number of countries with higher interest rates than NZ, why would the Chinese put on deposit in our banks, can understand the buying of property, no tax better return

Here is an indication that they do not have bags of loot.
Its all been dividended away. Gone.

"There's certainly more capital raisings to come from the banks this year," said Sean Fenton, who helps oversee $2.4 billion as portfolio manager at Tribeca Investment Partners. "While the lenders will try to maintain the illusion of dividends and issue more stock along the way to boost capital, increasing capital and increasing bad debts at the same time can put pressure on dividends."


If there is a crash in the house values and the banks are adversely affected, will they be bailed out, a la 2008 ?

US banks? EU banks? AU banks? NZ banks?

In short, yes I think they will....but just what the political fallout will be afterwards from the voter will be interesting.

Last time the voters were told that it was for saving the economies. And they accepted it, didn't they ? Same may happen again ?

in short yes, the ties to the government run deep


"Overall I would expect fixed mortgage rates to fall."

The problem Wheeler has is that we have a Government in power that is hell bent on increasing immigration and turning a blind eye to all the damage this is doing.
As far as housing is concerned, we could have interest rates much lower if the Government was not so intent on an almost open door immigration policy.
As far as I can see, the only reason we have an open door immigration policy is to keep wages down and house prices up. This is exactly what wealthy National party supporters and backers want.

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