With the market mostly expecting the Reserve Bank to sit on its hands next week, David Hargreaves speculates that the central bank will aim to to catch out the market - with another OCR cut

With the market mostly expecting the Reserve Bank to sit on its hands next week, David Hargreaves speculates that the central bank will aim to to catch out the market - with another OCR cut

By David Hargreaves

There's no doubt the folk working at the Reserve Bank must feel a bit like the mixture in a sausage making machine at the moment.

The pressure is on from all sides.

Perhaps never have the central bank's monetary policy and financial stability roles argued with each other as much as they are at the moment. This raises the possibility again in my mind that it might be a good idea to carry out a root-and-branch review of the Reserve Bank Act - which now seems overdue to me. We need to sort out more clearly exactly how the two main roles of the bank fit together - if indeed they do still fit well inside one organisatiion.

But looking at the right now, the RBNZ's in the midst of deciding whether to cut or hold interest rates next Thursday (28th).

The inflation figures released earlier this week were seen as being extremely significant in informing the RBNZ on its decision. In the event the result came in perhaps slightly in favour of a 'hold' verdict for the bank, since while the current inflation's still very low, there were signs of emerging pressures.

It's a live one

Certainly most economists, while agreeing that the OCR decision next week is still very much 'live,' seem to now feel that the RBNZ will be happy to sit on its hands.

Well, while having to accept that my record on this is not good - I didn't pick the first cut in this cycle in June of last year, nor the one last month (though not many did) - I'm going to disagree and say I think the RBNZ WILL cut next week.

One of the arguments against another immediate cut is the strong resurgence of house price pressures in the Auckland market coupled with continued strength in the regional markets.

The new tax rules introduced in October followed by new RBNZ restrictions focused on Auckland housing investors in November caused a pause in the Auckland market momentum that could have been missed if you blinked.

The March figures from Barfoot & Thompsonfollowed by those from QV, and then devastatingly so from the Real Estate Institute showed that not only had the RBNZ measures not dampened the Auckland flames, but that they had arguably helped to fan a previously non-existent fire in the rest of the country - by encouraging frustrated Auckland would-be investors to dip their toes into regional New Zealand housing.

No doubt that Reserve Bank Governor Graeme Wheeler would dearly love not to drop interest rates while the Auckland market's ablaze and the rest of the country's starting to distinctly smoke and flicker. But of course rising house prices - in the context that we are currently seeing them anyway (given the inflation pressures from the rising prices are at the moment fairly benign)  - are a financial stability issue. And with the RBNZ seemingly coming under more heat from the Government to fulfill the monetary policy part of the deal - and get inflation somewhere back near the almost forgotten 1%-3% targeted band - using the OCR to lean against the housing market would not be viewed well.

But it's not an MPS...

One of the justifications given by economists for why the RBNZ will NOT cut next week is that it prefers to wait till the release of its Monetary Policy Statements. The next MPS comes with the following OCR decision in June.

But I wonder if the RBNZ feels it can wait that long in the face of the strength of the New Zealand dollar. At the time of writing the Kiwi currency was about 4% up on where the central bank was picking it to be in this quarter - and that's having revised its predictions sharply upward. The 70.9 pick on the Trade Weighted Index for the June quarter as at the March 2016 MPS was some 8.5% higher than the level of the Kiwi dollar expected by the RBNZ just six months earlier in its September 2015 MPS.

One trend that seems to have emerged from recent RBNZ releases - and one suspects it is a Wheeler initiative - is a seeming desire to really catch markets 'off-guard'. There's no question the March OCR cut did this, coming only weeks after Wheeler had given a speech effectively outlining reasons why he did not want to cut. The effect was that on the day the Kiwi dollar was really hit. Such a (surprise) strategy rather goes against the more traditional RBNZ approach of 'leading the market' ahead of time with nuanced, raised-eyebrow language, so that the market is already aligned with what the RBNZ's going to do before it does it.

This new approach, if that's what it is, has already caused some antagonism among economists and it seems to me to be a rather dangerous game. You need to believe what the central bank is telling you and don't want to feel it is in any way 'gaming' the market. I'm not saying it is doing that - but some of what we've seen recently has looked very close to that.

Okay, but then we go back to the rationale that says the RBNZ would be very wary of fanning the house market flames and that an April cut may be difficult to explain without an accompanying MPS. Good point. As is the point that the RBNZ's signalled 'bottom' for interest rates in this cycle is an OCR of 2% - and a cut in April gets us there. But I don't think it would be too hard for the RBNZ to drop rates to 2% and then signal potential for a further cut - given that many already think the low point will be below 2% anyway. For what it's worth I reckon we will see 1.5% by the end of the year.

Much has changed

There's perhaps another wild card in here too. Remember that courtesy of a Newshub MediaWorks leak - which saw news of the OCR cut in March communicated to some people ahead of the official release - the RBNZ has now torpedoed the long-standing practice of releasing information under embargo. This does mean that the ability to communicate the finer nuances of an OCR decision ahead of its release to the market has now gone. So, in my view the practical effectiveness of the MPS as an informational tool is reduced.

This means that the one page OCR announcement is going to mean exactly the same to a market participant at 9.01 in the morning as a full MPS statement does. The reason for the RBNZ to wait has therefore been diluted.

But what about the houses? Well, the fortunate thing for the RBNZ with this OCR review is that it's got the Financial Stability Report coming up on May 11, less than two weeks later. And, yes, I know, that's financial stability not monetary policy, but, see earlier in this piece about the difficult juggling act and the intertwining going on at the moment!

If the RBNZ is confident it has got its lines sorted out for the FSR announcement, I don't think it will have any problem cutting interest rates next week. I would further say that if we DO get an OCR cut next week then we can be reasonably confident that something fairly substantial aimed in the way of the housing market will be in that FSR. It's probably too early yet for a definitive proposal, but I would expect to see a fairly clear signposting of the next step and which part of the  'macro-prudential toolkit'  the RBNZ intends to dip into - or indeed, whether there may be something new.

That's the logic, anyway. A cut next week and the foreshadowing of new housing-aimed financial measures less than two weeks later.

Anything less decisive than that would suggest a central bank that's really struggling to get to grips at the moment with the twin and conflicting monetary and financial stability roles. Action is needed yesterday.

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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Let them eat cake

The RBNZ like the Fed is irrelevant when it comes down to real outcomes.

This repetition and consistency of ineptness suggests the most basic problem is not just the various theories guiding each Fed incarnation, but the entire centralized system itself. It just doesn't work, it never really has, and there is even less now to suggest at some point it ever will. Read more


It seems in New Zealand we are destined to follow this inevitable slide to close to zero interest rates that central bankers all round the world have followed- led by the US Fed- despite now years of evidence that going lower from already low interest rates has no effect on economic demand and output, but blows asset and debt bubbles. Although Wheeler seems stuck mentally in the same orthodox paradigm, he at least has the defence that the Treasury and Bill English have tied him into that orthodoxy with really a one tool one target arrangement that they are sticking doggedly to. In the US 1937 history your article covers, at least their Treasury understood they were heading for another unnecessary crash, and were trying to encourage solutions, even if the best ones hadn't occurred to them. Their Fed was having none of it.
Here where we have an economy now built on selling real estate to the Chinese, Bill English can hide behind the short term effects of foreign money coming in for that purpose, while deflecting blame off to the RBNZ and Auckland City Council for the negative effects of his blinkered and conservative thinking.

Just pitiful.

There’s no sign yet the European Central Bank’s latest salvo against disinflation will work, market prices show. Euro-area inflation derivatives have sunk to new lows after President Mario Draghi unveiled last month measures from interest-rate cuts to expanded asset purchases, Bloomberg strategist Tanvir Sandhu writes.

The forward inflation-swap curve shows that the ECB’s target to boost the pace of price increases to near 2 percent isn’t expected to be met even in 20 years. The so-called HICPxT swap rates with one-year tenors beginning in the future flatten from the 10-year starting point onward, at around 1.7 percent. Read more


the trouble is now housing has got out of control the cuts are not headed to increased consumer spending but instead servicing of bigger debts.
its a game of musical chairs and evently the chairs get taken away and everyone falls to the floor

What do you suggest - we keep higher interest rates and currency than the rest of the world until our exporters can't possibly compete?


Our exports in general are basic non valued added products. That is the problem.Blaming the currency just exposes the harsh reality.

Yes but as soon as there is a weather/Pest/problem with "Basic Food" items just watch the Supermarket shelves empty and public panic follow leading to a reality check that "Basic Food Items' are actually essential due to being a non optional purchase.

Jimbo, It's a fair question. My answer, which I've given here a few times, never gets as many likes as the question. Broadly it is as follows:
Interest rates are a tool best used to encourage or discourage debt and investment, not really to drive or stifle consumer demand. In NZ most debt/investment is in housing, and much of that in used housing, so not actually improving the infrastructure at all.
Targets for monetary policy should be inflation, unemployment, and the current account.
Direct central bank to central government monetary stimulus would be a far more direct stimulus of demand, where there is a shortage of employment, or inflation. In NZ the best use of such stimulus would be first, to replace foreign borrowing by the government. (That foreign borrowing both has a cost, and keeps the exchange rate high). Second, to invest in infrastructure, and third if any leftover, (I wouldn't expect there to be) to give tax cuts.
Such direct stimulus would keep the exchange rate lower than it would otherwise be.
Any such amounts would be decided by an independent central bank, although it would need to work with Treasury on broadly how it was to be spent, as different channels will have different inflation/employment outcomes.
In my view a sweet spot for OCR rates is probably 4-5%. I understand jumping straight there would have a property crash effect, so not ideal. Far better we hadn't got where we are now, but too late for that. Best to hold and gradually increase over the next couple of years, and stimulate to compensate as noted above.
The world's central bankers are stuck in a bizarre head in the sand paradigm, reinforced yet again by Mr Draghi overnight admitting the very obvious above type scenario had not even been discussed in Europe.
ECB's Draghi: We haven't talked about helicopter money. http://www.cnbc.com/2016/04/21/ecb-keeps-main-rate-unchanged-at-00-perce...
They are instead in the insane world of negative interest rates. I would be deeply embarrassed if I were him to admit the most obvious solution had not even been countenanced.

Essentially Stephen, you're talking about greater Government control, albeit limited. I largely agree with the concept and Jamesy's comment which follows re exporters adding value rather than just exporting basic commodities. However I am less concerned about a property value crash. It is coming and the sooner it does the less it can fall, as prices keep going up when the crash comes the fall will be that much greater.

What you suggest seems reasonable. I suspect it is very specifically NOT ALLOWED, by the US and their subsidiary, the IMF. The US sees money as a central strategic issue, so banking and the military come first (industry exists to support the military in this view). So breaking the money rules would be treated harshly.


Exporters need to harden up and produce higher value product instead of just exporting commodities. There are export driven developed economies that deal with high exchange rates just fine, by exporting high value product.

There are also industries in New Zealand who just manage their currency exchange risk instead of bleating to the government whenever commodity prices fluctuate.

The problem is the real estate isn't like milk. We can't replace it.

What we're actually doing is selling our future.

I do believe a hedge and investing in trees will be superior...yet again.

Or to put it another way...you cannot see the wood for the trees.

As we drop, so do other countries, it is a race to the bottom.

And it has a very big hole in the throughput of the crap each produces.

Until it all stops, dead. I think that is is also called constipation or too big to fail to pass.

Until a little more liquidity is added to increase the flow. QE....Q.E.D...NIRP or just plain fudge it., between currencies.

Perhaps you should buy up molasses or some Kiwi fruit...I hear they also work wonders..

Get the picture...now.

"...showed that not only had the RBNZ measures not dampened the Auckland flames, but that they had arguably helped to fan a previously non-existent fire in the rest of the country - by encouraging frustrated Auckland would-be investors to dip their toes into regional New Zealand housing."

Which indicates where the real problem is, and until we address this particular issue - ie the attractivness of this asset class, its all tinkering

New Zealand won't get rich selling houses to each other

No but short sighted greedy Kiwis are getting rich selling to the Chinese. If you have ever done a sales course your told its the seller that has the power or control and NOT the buyer. Individuals could stop selling the country right now but are happy to take the money and run.

If a kiwi can get more money from a chinese person, I say go for it . But, i am mad at the government for letting so many in. Lets clamp it down, stop auckland turning into some generic chinese city.

But it adds more VIBRANT.

Exactly. The buyer can only make an offer, it's the seller who makes the ultimate call! It's New Zealanders who are at fault for trying to get an absolute maximum price for their houses when they sell them and thus driving up the market. It's New Zealanders who are at fault for "depriving their children of home ownership" and "Selling their country to the Chinese". If you want things to be as you say you wish them to be then stop relying on your government and take matters into your own hands by only selling your houses to other Kiwis and selling them for 3 times the average kiwi income. Then all kiwis will be able to afford a house, the house prices will increase with inflation/incomes only, and the country will remain in Kiwi hands. Are you up to the challenge? didn't think so. Greed is natural, I understand, so is globalization.

The RBNZ may or may not cut (market pricing of 36% chance seems a touch low this morning.. to me it sits more like 50/50) but the currency will form very little part of the decision making process, only figuring in the inflation calcs going forward. The RBNZ can do very little about the level of the kiwi, and they know this having studied the OCR's impact on it. They found out past 48hrs post the announcement there is little affect. Case in point, in March. They shocked the market, kiwi sold of significantly and ppl rejoiced a lower dollar. What happened.. within a day we were back to pre announcement levels and now we are significantly higher. The broader weak USD story powers on over all things domestically happening in NZ

Bang head against wall, nope no change, bang head again, nope no change again, I know!.....let's bang head even harder!

Underneath it all I can tell you from the pit where us renters reside, there is a building fury amongst us as a group. I keep thinking I'm hearing the same thing Stephen Hulme has said above - Let them eat cake.


Another lone voice

Problem has always been and will continue to be the voicelessness of a large swathe of people who are not connected together as a block who can then exercise their joint power

It's called divide and conquer - government knows that the individuals who are affected are divided

The flaw in the NZ Herald article is she is trying to buy a median-priced house

No such thing - that median of $800,000 is derived from a group of houses ranging from $500k through to $1 million plus

Bit like trying to have 2½ children - no such thing

This is our Copernicus re-run; the real world isn't following the proscribed model anymore. Just as the church hierarchy did to deny it in its day, the Church of Economics is also at the 'head in the sand denial stage'. Fact is the endpoint of our fiat experiment is nearer every day, and the truth is if you don't create real things of real value, you have no value. Middle managers beware, automation has you lined up next.

Ultimately the "Masters of the Universe' have promised far more than this little planet can deliver in the form of future benefits..pensions being one of them... so people shouldn't be surprised when those promises get destroyed.

PS most in the financial industry are now creating negative value. ZIRP, NIRP, QE, PE ratios, share buy backs = FAIL. Hence the two largest welfare sinks in the world are Wall St and the City of London.

Not sure why everyone is blaming Wheeler - the rest of the world is a basket case (for which he is not responsible) - and what he does is not going to make much difference. I say put interest rates up and watch them squeal. Damn the torpedoes, full speed ahead!!

How can they do this when house price inflation is out of control?

Because the economy is more than just house prices.

I do hope so. Hope he drinks some concrete, hardens up and does a 50bp cut this time.

RBNZ: "surprise! we did F....all again!" Your'e.......... welcome, just following the government example

What a shift we have come to, DH? When the RBNZ openly resorts to trickery and falsehoods to conduct its business. Constitutionally, we are well on our way to becoming another Uganda or Rhodesia.

Do you really think that the Auckland housing market will be affected much - whether the OCR is 2 or 4 or 1.5 or whatever?
The drivers are: immigration, foreign buying, 110k international students, lack of legitimate business margins for SMEs, public/consumer distrust of all other investment vehicles, accidental mom&pop landlords when upgrading house, tax incentive, capital gains etc. interest rates are a small component of motivation.
Look at the UK, Germanu, USA - interest mortgage rates of 2%. No greater or lesser effect on housing mania.

I agrree globalisation is the key to propping up the ponzi. What has been the purpose of Obama's recent trip to England? To try and keep the new world order going? His speech against Brexit, and his threats to reduce trade with them if they leave the EU, shows how desperate their grip on the world economy is. The popularity of Trump is also a major threat. I wonder if these things are the biggest threat to Auckland property.

"Ponzi" that word is sooooooo overused. In a Ponzi scheme you end up with nothing. When you buy property Auckland, or anywhere you end up with a house at the end of the mortgage. This house can be sold or rented out at your discretion. "Ponzi" is a nice buzz word but you'd do well to learn what it actually means.

Negative equity is nothing. In fact it is less than nothing.

In the almost certain scenario that Auckland mania pricing eventually corrects back closer to intrinsic value (ie: rental income) it's quite likely the bottom rung of FHB will be left with nothing. The only question is timing.

Anyway it's a lame strawman. From wikipedia:

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.

Sounds an awful lot like a speculative housing bubble doesn't it?

People who talk of ponzi schemes and imminent house price blood-baths don't really understand the international situation. As I have stated before in a globalist world whole cities become essentially desirable suburbs. It was always expensive to buy in the best suburbs now it is expensive to buy in the best cities.

Very high house prices are actually a blessing. The news this week reported that Syrian refugees are arriving in NZ and are going to be resettled in Wellington and Dunedin. A little while ago there was news of Afghans being tormented in Hamilton and begging to be resettled in Auckland. Refugees will be resettled in places other than Auckland. Believe me if we 'solved' the housing 'crisis' and built suburbs of nice affordable houses in Auckland some bright spark would start resettling thousands of refugees and beneficiaries there. We know from observing poor neighbourhoods in Europe and America what happens if the demographics along with income levels significantly changes.

Cities like Auckland need to remain exclusive and the only way to do that in the modern world is through price tag. Can you think of another way? If you want to live in Elysium Auckland you need to have the money for a deposit or rent.

Actually I dont think you understand the global situation. Sure we see some "elites" running around buying up property with 1s and 0s as there is nothing else worth "investing" in. However that property has to give a return which means selling it to a bigger fool or generating an income. Trouble is there wont be the earners with enough $s to pay either way.

Its simple when it comes down to it. Fiat / paper currency is an IOU for work which is energy and its a Q of trust. Once oil is gone there simply wont be the energy to underwrite the IOUs and that will be obvious, bye bye trust.

No, you don't understand.

LOL, no mate, but that is OK, sit back, we'll get to see who is right.

Let's reassess things in 24 months time and see who is right.

Last time I wondered around Auckland it didn't look much like your wealth selection criteria was working very well.

It's not perfect but we are working on it. Check out the waterview-connection. Soon our motorways will all be interconnected. It is going to become a Super-City.


Yes it does, except the real losers will be the tax payer after they are forced to take on the private debt. ie No Govn will fail to bail out the OAPs as that will be an election loser as the opposition promises to pay up. --edit-- or enough ppl will flock to NZF to make NZF the third biggest party and the king maker. As a tax payer I but especially my kids are f***ed frankly.

Here you go, some education, "A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors."

Quite a good match.

Generally with ponzi schemes there is no substance behind the investments and investor's money is just redistributed to other investors. If your house can be rented to cover the mortgage you will be okay. Sure you can take a haircut, lose more than everything if your deposit is small, but that is because you are not playing the game properly. Buying something that is too expensive for you. In the current environment it is better that people rent or buy somewhere else if they cannot afford to lose their minimum deposit.
We are not going to guarantee that you win in real estate. Huntly looks like a good bet.

Well this depends on your long term outlook as my outlook is just this - no substance. Now if you want to come up or point at a better description than a ponzi scheme be my guest but for me its a decent best match. ps "IF" is just it. there are so many medium and long term bad outcomes (peak oil, debt, demographics etc) piling up behind this huge over-price that my view is indeed there will be huge losses.

Personally I have got back to the point that I am almost debt free and out of the silly numerous financial ponzi schemes that is our financial markets, just 2 more months I think. So we'll get to sit back and watch how it goes, I have a decade I think.

Huntley, etc indeed bigger commute times and hence costs to get to where the work is. If nothing else these costs are taking money out of the economy hand over fist and hence damaging it. Stupid Govn cant see its crippling itself by doing nothing, but then BE always has appeared clueless to me.

In a ponzi scheme the early adopters do walk away with a profit. There are many scenarios where buying property can leave you with nothing but a bankrupt name tag to fit in your passport and future credit applications.

Trump's wall will improve property prices. New Zealand already has something better than a wall. This is why NZ is more desirable than a country in Eastern Europe. As an added bonus some people want to flee to NZ if Trump wins. I say, okay, only if you have a lot of money.

Having lots of money doesnt actually do much for our economy IMHO, ie make a good. From what I can see its a case of bring in the $s to invest in property or yet more importation of crap from china and selling it here at a mark up. Yes this makes for a solid economy.....not.

The property bubble and a ponzi are similar in that those who get in and out early might actually make some money. Those who hold on or enter late are hit by the bus they deny is coming. Denial is powerful. The other common feature is they suck in people who believe in their own cleverness.

Money is everything now. People complain that their children and grandchildren cannot buy houses in Auckland. What is so special about their children? Children in Africa and the Middle East are special too you know. Why can't they live in nice houses in Auckland and go to nice schools? Just because you were born in Auckland or your ancestors came over on the Mayflower or something doesn't give you special rights. No one promised them a future. Special rights are all about money now, it's the new world. These are the wages of diversity.
It sure is fun riding the tiger!

When you are heavily invested in a ponzi you will defend it till the cows come home. No one knows what will happen with this long term global zirp environment, because it's new territory. Once you sign up to a big mortgage with the bank you become a slave to the system. Your wealth can be easily confiscated by a few interest rate hikes or regulatory changes. Governments and banks are running the scam, this gives them the power to bring in new legislation that can no longer be challanged because you are owned, we have seen this in farming. I read a staistic the other day that in the US, if you have $10 in the bank and no debt you are better off than 25% of Americans ( hence the rise of Trump). Who today in politics in NZ represents the young people? The one's who can't afford to buy a home. This group is growing and they all have votes, this is not a feudal system, it"s a democracy. Why are we voting for the party that helps rich foreigners over NZ voters? How long can this continue? Maybe in the future, only the rich will be allowed to vote. Is this already true? As politicians now seem to only represent interest groups.

The only ones that would be hurt by an unexpected OCR cut would be speculators.

Not property speculators.

Care to elaborate?what about savers? Savers are important if banks and government want people to have good deposits

Can't wait. It will give me the incentive to buy more Auckland property. Awesome.

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