Where does the Reserve Bank's mother of all u-turns leave our immediate outlook for interest rates?

Where does the Reserve Bank's mother of all u-turns leave our immediate outlook for interest rates?

By David Hargreaves

Earlier this week ASB's chief economist Nick Tuffley wrote that a Reserve Bank cut of interest rates today would be a "u-turn of the tyre-shredding sort that has the Police impounding vehicles".

How true.

I was 100s of kilometres from Wellington at 9am today but I could hear the scream of tyres, and I've still got the smell of burnt rubber in my nostrils.

Graeme Wheeler, you are now officially The King of the U-Turns.

The speech given by RBNZ Governor Wheeler on February 3 was the speech of a defiant man with absolutely no intention of dropping interest rates in the foreseeable future, let alone a mere 36 days later. The Governor insisted there would be no "mechanistic" approach to interpreting the Policy Targets Agreement he has with Finance Minister Bill English.

What was today's rate cut if not 'mechanistic'?

Wheeler's February speech, following on from, what was in my view, an equally bizarre speech last October, has ensured that the RBNZ's credibility is now really on the line, if indeed it has not already been shredded like the tyres of the car Wheeler was driving this morning.

I believe in all the circumstances that the RBNZ cutting rates was the right thing to do. But the way in which you do things can almost be more important than what you do sometimes - particularly if you are a central bank whose every twitch is watched by an avid financial marketplace.

Generally central banks 'lead the market'. They use raised eyebrow inferences to let market participants know what is likely to happen and ensure there is no volatility. Today's announcement was like an unprompted kick to the lower regions - and it got pretty much the same response from the markets that such a kick would generate in someone of the male gender.

And the RBNZ's got recent form in this 'plenty of surprises' way of operating.

For example, in December the RBNZ cut rates - but contrived to push the dollar higher (exactly the opposite effect to that desired) by making remarks that could almost have been read as: "That's your cut mate, and you ain't getting any more."

And then there's the inflation forecasts.

Just last September the RBNZ was forecasting a steroid-driven 0.7% kick to inflation in the March 2016 quarter, followed by another 0.7% in June, which would help to drive annual inflation back into the middle of the RBNZ's 1%-3% target range by September of this year. I really struggled at the time to understand how such forecasts could have been made and didn't think the RBNZ had a chance of meeting those targets.

Well, to the surprise perhaps only of the RBNZ, those figures were tweaked downwards in the December Monetary Policy Statement. The March quarter was now forecast to produce 0.6% inflation, followed by 0.4% in June and with annual inflation now not picked to meet the 2% target mid-point till the end of 2017.

And now, according to the March MPS released today, inflation in this (March) quarter will be just 0.2%, followed by just 0.3% in June. So, the RBNZ has moved its forecast for March quarter inflation from 0.7% to 0.2% in the space of six months. The RBNZ in fact launches into a defence of its forecasting in the latest MPS, putting its inflation forecasts against 12 other (unnamed) inflation forecasters and showing it was more accurate (or that should be not as badly inaccurate) as most others.

I would contend, however, that the missing point from that argument is that a lot of forecasters probably take their cues (perhaps incorrectly you might say!) from what the RBNZ is forecasting at any given time. Yes, the RBNZ leads market perceptions.

Personally, I don't think the RBNZ should be spending too much time trenchantly defending a change in its forecast, from 0.7% quarterly inflation to 0.2% within just six months. Instead it would be more productive to find out just why the RBNZ's methods of measuring the creation and transmission of inflation don't appear to work any more.

The RBNZ was today to some extent playing down suggestions that the decision to cut stemmed from the sharp drop in inflation expectations measured by the RBNZ's own survey on February 16, which showed expectations of inflation two years out dropping to 1.63%. Clearly the results of this survey rattled the bank, with the Governor having previously said not many days before that inflation expectations were "consistent with inflation settling at 2% in the medium term".

Personally I do wonder why the RBNZ is so apparently fixated with such a measure that it could apparently ignore so many other pointers toward a need for lower rates - but then reacts when this one indicator in particular turns against it. To me, it looks inconsistent and it does nothing for the bank's credibility.

So, where to from here?

I had been in the camp of those picking a low point of 2% for the Official Cash Rate in the second half of this year. Now, feasibly we might be there as early as by the end of next month.

Therefore, I would now say all bets are off. The RBNZ has shown today it will after all be 'mechanistic' about the inflation target. Central banks around the world have been driven into a spiral of down and down with rates. We might now be drawn into that spiral.

I honestly reckon you can't now rule out our rates perhaps being as low as 1.5% before the year's out. Watch this space.

As for how much lower they could and should have been in the months (actually years) before now - well, don't start me on that one today.


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I reckon the RBNZ is seriously worried about :- deflation , falling commodity (milk) prices and the stubbornly high Kiwi$ .

The truth is this is the delayed reaction to the QE fiasco by Ben Bernanke some years ago , money is relatively worthless now , and there is relatively little scarcity of anything it can buy

Not really 'now officially The King of the U-Turns[' Just The Prince.

Kuroda is still The King because his empire is much, much bigger.

'But if nobody expected negative rates out of the BOJ last night, there's a good reason for this: just one week ago Kuroda himself said on the record that he has "no plan to adopt negative rates now"


Did he fall, or was he pushed? Did he lie, or did he change his mind?

Now awaiting the reversal of the Fed's rate hike and Canada going negative.

At some stage a large portion of the populace will finally recognise that the 'clowns' have no idea what they are doing or what to do next. The system is broken and cannot be fixed.

Till then, the game continues.

So this time the data pushed the decision over the line and all the commentators switch sides like its half time. My personal mantra helps to keep an even keel...... when things look bad they are never as bad as you think but likewise when things look great they are never as good as you think.

An element of surprise is an important attribute of a central bank governor & Wheeler has adopted the stance of Stevens, the smart money called their bluff. AKL house prices on 8.5X Income multiple!! When jobs dissipate, mortgages default, migration flows reverse & the shortage no longer exists.

RBNZ thinks they have $NZD ammo with 225 basis points up their sleeve... oh dear; $NZD has thrived on & rely on the interest rate differential for relevance but the NZ fiat is based on one export & if rural properties plummet 40%, the $NZD will be buying <$0.50 again. The currency wars that the RBNZ doesn't publicly subscribe to are rampant... its a dog-eat-dog world.

To quote Mr Dylan:
Come senators, congressmen
Please heed the call
Don't stand in the doorway
Don't block up the hall
For he that gets hurt
Will be he who has stalled
There's a battle outside ragin'
It'll soon shake your windows
And rattle your walls
For the times they are a-changin

It's time to long $NZD:XAU.

Dylan is an economic genius

Tweeter(Bill) and the Monkey Man(John) were hard up for cash
They stayed up all night selling cocaine and hash(milk+butter +assets)
To an undercover cop who had a sister named Jan
For reasons unexplained she loved the Monkey Man
And the walls came down
All the way to hell
Never saw them when they're standing
Never saw them when they fell


You're a man of the mountains, you can walk on the clouds
Manipulator of crowds, you're a dream twister
You're going to Sodom and Gomorrah
But what do you care ? Ain't nobody there would want marry your sister
Friend to the martyr, a friend to the woman of shame
You look into the fiery furnace, see the rich man without any name.

The world of research has gone berserk
Too much paperwork
Albert's in the graveyard, Frankie's raising hell
I'm beginning to believe what the scriptures tell

Good to see that our posters are so erudite and even a bit arty and soulful.
Not all Mammon..

While money doesn’t talk, it swears

"It's Alright, Ma (I'm Only Bleeding)"

BabyBoomer Dylan-ites.

Talking Heads did a pretty good synopsis of our situation with "Road to Nowhere".

Talking Heads did a pretty good synopsis of our situation with "Road to Nowhere".

NZ is a tiny bit-player, but will get caught-up in the turmoil when the heavily-manipulated markets finally break.

'Why This Sucker Is Going Down - The Case Of Japan's Busted Bond Market

The government of what can only be described as an old age colony sinking into certain bankruptcy sold 30-year bonds at an all-time low of 47 basis points. Let me clear here that we are talking about a record low not just for Japan but for the history of mankind.'


Monetary policy is a man-made symptom of the bigger game at hand & the Saudi's are changing sides... http://www.zerohedge.com/news/2016-03-07/will-russia-end-controlling-73-...
If only the west let the best invention in human history do its work.... the market.


I resist all faux outrage from bankers and analysts when central banks surprise the market - in either direction. There is nothing in the central bank's mandate that mentions anything to do with policing or suppressing equity, currency, or fixed income market volatility. Bankers in previous generations (think Volcker) were prepared to squash equity markets to carry out their economy-wide mandates, and to hell with opinions of participants.

Volatility has become some byword that people are encouraged to recoil in horror from. Maybe if the central banks focused less on smoothing pricing in asset markets, the woes of the last decade wouldnt have been as bad.

It's all self-interest from parties who either have a vested interest in being perceived as correct (bank economists), or asset holders (large financial institutions) who want central bank moves to maintain the value of their assets, rather than act for the long term health and balance of the economy.

Dead right and when have interest rates risen seriously for an extended period of time since 1982?

One just has to stick to the well trodden path of the irrefutable good sense bond trading guide.

Theft how ever you dress it up, is still theft.

Fraud-u-lent banking is the problem, central and otherwise.

When it all comes down to forcing the interest rates downwards, to fix a problem that is worldwide already acknowledged to have dismally failed, then joining in to the detriment of others, just compounds a stupidity, on another stupidity.

Nothing new today. Self interest, no interest, huge profits. Just wait until it all bites you in the ass.....when the shite hits the customer, in the well milked pocket.

I rest my fingers....and two was just enough..

Sorry Farmers...etc...self inflicted.

Screw you.....screw your problem, black tea, coffee and back to dripping on my loaf, as using my loaf has always made me avoid all margins anyone else can inflict on my bleedin pocket.

No debt is worth it...especially yours. So do not expect me to bail out, your endless stupidity.

And you can put that in your pipe and smoke it...Mr Wheeler.

You cannot fix a debt problem with an OCR, with deflated interest in applying it across the bleedin Board...Fonterrors and otherwise....I am not interested...

Rant over.

Gee I feel better already. No fat, no crap, no interest in someone else's appetite for debt, but then..I have said this all before...in so many different ways...cannot get blood out of a stone.

So do not keep on trying.!?

"The idea is to manipulate the number of units to access more goods and to prosper; manipulations haven’t been working lately and the economists have no idea why."

So lets ban cash....

"Illegal money transfers have been made electronically, in their billion$ by HSBC and other giant banks. The largest recent single user of US currency is the US military. Summers conveniently ignores the greatest criminals are the bankers, who pay themselves, not with used, non-sequential $100 bills in brown paper bags, but with electronic bonuses."

So why is the middle class only kept alive via debt?....and yes all those new arrivals to the middle class lounge in Chindia got there on a massive tidal wave of debt....

"In Debtonomics, purchasing power is the relationship between resources and the ‘work’ needed to make them available. Because resources DO the work as well as being made available BY the work, consuming resources also consumes our purchasing power at the same time. This mirrors what is observable in the real world and explains why adding ‘money’ hasn’t accomplished anything, we keep getting poorer all the time."

Run faster Alice!

"Today's announcement was like an unprompted kick to the lower regions "-........yes but by the IMF David as you will see Wheeler attempt to follow the prescription as laid out recently by the IMF in a call to arms as it were..........you say Wheeler did an about turn , I say his action was to ......panic....as directed and attempt to relieve impact of falling commodity prices destined to stay lower longer.
The IMF have become more than a little direct in their recommendations toward Central Bank policy ,in fact they have become downright kick in the nuts with their suggestions and are no longer bothering with diplomacy in delivering the medicine.........wouldn't you love to see their advice to the BOJ beginning with .."Don't panic Mr Mannering"

In all this you'd have to wonder how Fonterra's hedge position is going ?
Scenario..secure line
(Theo) John Boy ?
(John Boy)Theo ,whats up
(Theo)Whats up ? were up shit creek that's whats up !, can't keep fooling them
(John Boy) so whadda we do ?
(Theo) Dunno I'm fresh out,I'm already screwing the locals to the eyeballs
(John Boy) yeah well it's not illegal...... ah...here anyway
(Theo)Cant you get Wheeler to soften things up and buy some time ? cut the hedge maybe ?
(John Boy) Risky, but Ill see what I can do yeah?
(Theo) you'd better get Billy Bob to let the yokels know not to plan on any rebounds too
(John Boy) yeah yeah,Im on it.......youd better get your Pr machine to start earning their money,I'm get a pasting at Q&A time and I don't like those oiks getting any traction at my expense, I got a flag to sell.
(Theo) understood, well let's know uh
(John Boy) yeah, you'll read about it...time Wheeler earned his money Im thinking
(Theo) yeah well, talk soon
(John Boy) yeah, err maybe.

The End.

Thanks Henry...nice to see you..!

Needs some changes to emphasize the dutch accent more ;-)

You are right of course Justice.....problem is you get the accent you lose the humor......I'm sure Theo would agree........

I gather V3 is to be scaled back a tad - I hear V0.5 was mooted as the new slogan but the hair product with almost the same name shut down the idea

Fitch: Macro Pressures to Persist for NZ Banks Despite Rate Cut


That is hardly an encouraging conclusion for under rewarded, at risk, OBR exposed, unsecured depositors. What was the RBNZ governor thinking?

I suppose the ECB's catastrophic failure to lift inflation or now even project anything but deflation can be viewed as a possible failed template. Read more


Someone who obtains a loan or mortgage from a bank is a "borrower" at the moment the funds are received, but as time goes on and they are obliged to fulfil their obligations and make periodic payments, whether it be interest, or interest plus principal, that same someone is now a frequent compulsory depositor who is well rewarded, and not OBR exposed


Someone who has no debt, deposits more than they withdraw, is simultaneously a depositor and a SAVER

I think you are referring to the SAVER

Strange how over time, zillions of electrons are expended on the travails or benefits or needs of the indebted while next to ZERO are expressed about the risks the savers are forced to swallow in order to salve the conscience of those who have to be seen to know what they are doing, and, at the same time fund the indebted

there a some good U turns,Hitlers decision not to invade England when he had the opportunity.
and some bad ones,Custers decision not to attack at Little Big Horn.Somebody loses no matter what.

The US FED will eventually have to do the same.

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