The cut that wasn't needed

The Reserve Bank has delivered its last one. And now it is done, the next move is up

10th Nov 16, 2:11pm by David Hargreaves

By David Hargreaves

It will probably go down as the interest rate cut that wasn't needed, delivered to avoid disappointing and confusing the market place.

The Reserve Bank had widely telegraphed a cut in the Official Cash Rate to 1.75%, so went ahead, despite recent events suggesting such a cut was possibly not the right thing to do.

However, I won't argue with the RBNZ's call because it has at least been consistent. Late last year and early this we saw some volatility largely because the central bank appeared at times fairly contrary - with statements strongly suggesting no more rate cuts then being followed by cuts.

That said, we now again have a situation in which the RBNZ is indicating there will be no more cuts.

This time it is a bit different though because this indication comes from the fact that the central bank is now explicitly forecasting the future expected level of the OCR. Previously it forecast the 90-day bank bill rate (which is heavily influenced by the OCR). But by not directly publicly forecasting the OCR itself, the bank could leave itself a little more wiggle room.

It's attempted some wiggle space with its first set of OCR forecasts, by setting the future level at 1.7%, so, indicating a 20% chance of another cut. But clearly, that's not the intention at the moment.

The perils of forecasting

The RBNZ's forecasts suggest in fact there will be no movements at all in the OCR before the end of 2019. Frankly, I'll believe that outcome when I see it.

If you go back to the RBNZ's forecasts in December last year (which were then of the 90-day bill rate), these suggested that the OCR would be over 2.5% now, as opposed to 1.75%.

Go back to December 2014 and the RBNZ was indicating an OCR of over 4% now.

This is not to denigrate the RBNZ's forecasts, it is more in a way of saying that things change very quickly and attempting to say where interest rates will be in future is an inexact science.

Barring some very significant global upheavals (extremely possible, of course), I'm happy to bet that the next interest rate move will be up - and I'm going to say it will be next year. I think signs of inflation are now emerging and these will start to crystalise more clearly in probably about the second quarter of next year.

A rising house market again?

Given that by that stage I reckon the RBNZ is going to be again struggling with a rising house market, then presumably the central bank would welcome such a thing.

And that is particularly the case if it doesn't get its wished for debt-to-income ratios cleared by the Government and added to the macro-prudential toolkit.

The Government is definitely showing signs of pushing back against DTIs. This must be frustrating for the RBNZ, which has now clearly decided that these are actually the weapon of choice to deploy against the housing market. The decision not to include DTIs in the macro-pru toolkit when it was created in 2013 is looking a bigger and bigger oversight.

As you would imagine RBNZ Governor Graeme Wheeler is being coy about the degree of push-back coming from the Government. But it was most interesting that he was prepared to indicate in his post-OCR media comments that the RBNZ didn't intend to use the DTIs at the moment.

This is an interesting view to express and it would suggest that the RBNZ has probably said that to the Government as well - probably in the hope of reducing the resistance to the move.

A weapon to fear

No doubt from the Government perspective though, it would fear that once the RBNZ had the DTI weapon it might in any case unholster it at a time very inappropriate for National's re-election prospects.

The RBNZ for its part is still showing (I think rightly) a lack of confidence that the current easing in the housing market as a result of the 40% investor deposit rule will continue for long.

If we get to the middle of next year and the housing market is igniting again - as I think it will - and there's no DTIs in the macro-pru kit - then the only direct-to-market option available to it might be to hit housing investors with an even bigger deposit rule. Less directly of course, the RBNZ may well consider hitting the country's banks with the need to hold more capital against their mortgages - a move I think should be made anyway.

There's no doubt though that the only Christmas present the RBNZ wants this year is the DTIs. I think it's going to be disappointed.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

41 Comments

by Boatman | 10th Nov 16, 3:31pm 1478745095

Huh , why did they bother to cut , if we are at a turning point ?

Its all nonsensical , the awful truth is there is deflation everywhere other than Auckland houses , land and building materials , and increasing the cost of money (interest) will further depress prices .

by Boatman | 10th Nov 16, 3:37pm 1478745464

Maybe the RBNZ are using same opinion pollsters that the US media used when deciding who would win the Presidential election.

Or maybe, like the US media , they believe their own bull .....

They need to 'fess up to the fact we are in a deflationary environment , and simply confirm what we already suspect

I am putting off the purchase of a new car as I believe the prices will come down further next year . If you think a new Toyota at 2 % is good , wait until its being offered at 0% .

by Alter Ego | 10th Nov 16, 3:44pm 1478745887

My zero % cars have stood me in good stead for the past few years. I just run em into the ground, then buy anuvver. The running costs have fallen like a stone. The purchase prices are always negotiable, never buy a new car, or any new over priced product.

It is never worth it, unless underdapreciated to make sense.

by Boatman | 10th Nov 16, 3:53pm 1478746381

The actions of the RBNZ are a disgrace !

Do they think we are stupid ?

They cut the OCR knowing full well that the Banks have no intention whatsoever of passing the cut on to borrowers .

To suggest the cut was to "avoid disappointing the markets" , is absolute nonsensical when they knew it would make no difference to borrowers if the banks simply kept the money and took it as additional margin.

Its an appalling state of affairs .

by Grant A | 11th Nov 16, 11:35am 1478817312

There would have been a NZD hike without it Boatman, and an even bigger spike in swap rates. The correct argument you should be making is that they probably shouldn't have so strongly signaled the possibility over the past few weeks.

by gingerninja | 10th Nov 16, 4:09pm 1478747369

I don't agree that is non-nonsensical. If the markets were expecting a cut, they would have priced that in to their value of NZD, if the OCR hadn't been cut as expected NZD may have gone up more notably in value.

The RBNZ do not want the banks to pass on the cuts. They are trying to halt the housing market, not inflate it!!! Why on earth would they want the banks to reduce mortgage rates further?

And there are other places that banks can lend other than housing. Like how about small businesses or enterprises that might actual add value to the NZ economy?

I agree that it's all an appalling state of affairs but not for the reasons you have described and I agree whole heartedly with David Hargreaves here that this is all too little too late. RBNZ and the government should have introduced DTI ratios years ago. Where on earth would they set them not that house prices in some areas are already 11x incomes. And even 5x incomes is looking standard nationwide. Well above what is considered affordable.

by Boatman | 10th Nov 16, 4:36pm 1478748972

@ginger , you are wrong , the banks lend to 80% of Kiwi small businesses against the security of the business owners house .

Anyway I never said the cut was not being passed on to Homeowners , I said borrowers , and there is a distinct difference between the 2

by gingerninja | 10th Nov 16, 4:47pm 1478749669

@boatman that doesn't negate my point or make housing any less productive or less of a drag on the long term health of the economy.
Or do you believe that everyone swapping houses with each other for increasing level of debt is productive? And if small business lending is also, 80% hinged on housing value, then there are literally eggs in one basket and one basket only. Increasing the risks again.

Unless again, you think that it is sensible to have all the economic eggs in one basket? I really believe that for the longer term health of NZ, NZ-ers need to diversify their investments. To not be so housing focused. And banks lending is a way that is not so wholly focused on house value would help that too.

by Boatman | 10th Nov 16, 5:01pm 1478750467

Fair enough , but the fact is the banks are treating the OCR cut as a windfall by not passing it on to borrowers (of any kind) , and that is wrong

Firstly , the RBNZ knew this was either likely or certain to happen .

That even I knew , as a layperson, from media reports that it was very likely to happen means that the RBNZ knew the banks would keep it for themselves , the RBNZ are very well informed about the intentions of the Banks

by gingerninja | 10th Nov 16, 6:21pm 1478755296

I think it's much less subtle than that. Previously RBNZ has said they'd like to drop the OCR but were concerned that lower mortgage interest rates would inflate housing prices further dangerously. They were actively hinting that they did not want mortgage rates lowered, but would like to lower the OCR. The banks have done what RBNZ wanted them to do.
And as you can see by the escalating swap rates today, the banks believe that there are risky times ahead. The banks are likely going to need more capital in the future. More reasons that the banks would not pass on the OCR cut.

by Grant A | 11th Nov 16, 11:54am 1478818459

Boatman - where are the banks making a windfall gain when they don't react to the RBNZ guidance ?

by Sluggy | 11th Nov 16, 8:38am 1478806683

And how screwed up is that really. It has taken me 6 years to get to a point where the bank will lend against the security of the business only.
How in any way shape or form is this helpful. What it says is, if you don't own a house, you can't run a business - great way to grow a country and make a difference.

by JT | 10th Nov 16, 4:13pm 1478747598

First the RBNZ comes out and says they cocked up the stats. Then offers a cut they know wont be passed on.

by Boatman | 10th Nov 16, 5:02pm 1478750571

Correct JT is disgraceful and they should face some consequences from doing this to the economy

by gingerninja | 10th Nov 16, 4:44pm 1478749484

From interest.co.nz summary of what happened today;

"Wholesale swap rates leaped today, up +6 bps for 2 years, up +18 for 5 years, and up +25 bps for 10 years. That is serious steepening folks! At one point earlier in the day, these rates were even higher. The 90-day bank bill is down -2 bps to 2.09%."

This means that the banks currently believe that there are higher risks ahead and are pricing those into their swap rates.

by cut.it.out | 10th Nov 16, 4:58pm 1478750309

interest rates going up that'll be the day we've still got 1.7 in cuts to go just to catch up with the rest of the world...it is still a are to the bottom isn't it...?

by Boatman | 10th Nov 16, 5:05pm 1478750726

Someone should ask Mr Wheeler directly why he lowered the OCR when he had good knowledge the Banks would keep the money as a windfall ?

Why has no one asked him this awkward question ?

Are we too scared or too polite , or too stupid ?

by gingerninja | 10th Nov 16, 6:24pm 1478755475

I think the subtext here, is that they all see the housing bubble bursting and causing damage to the banks, so they are encouraging the banks to increase their capital and brace for bumpy times ahead. And certainly not make lending cheaper or easy.

by Boatman | 11th Nov 16, 11:27am 1478816874

Okay , if this is the case, why the hell don't they just say so ?

by boofta | 11th Nov 16, 10:40am 1478814040

Its called being complicit

by boofta | 11th Nov 16, 10:42am 1478814120

Is called being complicit

by Squishy | 10th Nov 16, 5:40pm 1478752813

The Reserve Bank seems to have lofty inflation expectations.

by kiwimm | 11th Nov 16, 10:12am 1478812363

You won't see more inflation if the cut is not passed on. A cut in addition to DTI rules would ensure the extra money goes into the economy rather than more debt

by gingerninja | 11th Nov 16, 10:40am 1478814024

What the RBNZ is trying to to is devalue the NZD, and at least this morning, that has happened.
If the NZD devalues you could see inflation. The cost of all the imports will go up, so those goods will cost more. Plus, exports will likely increase, which will mean more money in a lot of NZ-ers pockets to spend.

Inflation and the health of the economy doesn't just rest on housing. I know that's hard for the average housing-addicted NZ-er to contemplate, but there are other routes to economic prosperity and there are most certainly other causes for inflation.

by Cowpat | 11th Nov 16, 11:01am 1478815287

Gingerninja economic prosperity will be achieved by debasing a currency , I could think of a few South American countries(amongst others) who would disagree . Why is there a blind assumption that we will have more money in our pockets if exports increase. Food prices fell this morning , NZD/USD down less than a cent from Mondays open , the RBNZ has little influence on talking down our currency. The concern would be trying to talk it up..

by gingerninja | 11th Nov 16, 11:32am 1478817149

I don't have the time to point out each of your llogical fallacies. I really don't, as fun as that would be.

But just briefly, NZ is not South America. No one is attempting to dramatically debase NZD, just bring it back to its true value. NZD is being used for easy carry trade and as something of a safe haven. The value of NZD is now completely divorced from its inherent value. Obviously we can all agree that in general RNBZ has been mostly ineffective in their goals, but it would also be wrong to say that it would have been better if they had done nothing.

I'm not even going to respond to the export comment because there can't be any logical or fact based argument behind that it and arguing with someone on those grounds is futile. If you honestly believe that the export industry in NZ doesn't relate to its economic prosperity then good luck to you. Believe what you like.

by Cowpat | 11th Nov 16, 11:39am 1478817596

Gingerninja , you appear to have sufficient time to rant and reword my commentt. What is the NZD true value, remembering that currencies are a zero sum game, how can it be completely divorced from its inherent value?

by Grant A | 11th Nov 16, 11:53am 1478818394

Cowpat - I tend to agree with your sentiments here. Any suggestion that the NZD is grossly over valued is historic. A county's prosperity comes from having as strong a currency as is possible that still works for the economy and for its exporters. The current value of the NZD isn't far from "fair value" from most calculations, and from my observation and work with exporters, most are finding it a more than fair mix of monetary conditions which is always a balance between the currency and interest rates. There will always be some that need it lower in their industry at various times in the cycle (dairy until very recently) but you can never accommodate everyone at the same time.

The NZD's about right at these levels, and we can't forget that the only reason the RBNZ wants it lower is nothing to do with growth and income, its all to do with the fact that it seems the only way they can get tradables inflation up to try to met their inflation targets - and that's why they've been prepared to take the medium term view on the target as they know its not needed for much else currently, and are wary of the damage being done by too low interest rates.

by Boatman | 11th Nov 16, 11:31am 1478817068

Okay , devaluing the Kiwi $ may be a good thing for exporters , but the increase in the cost of everything we import is not helpful either .

If they think a weaker Kiwi $ will increase inflation , they are wrong , the adjustment to a fallen Kiwi$ is a once off event , and will not be inflationary in the long run

by gingerninja | 11th Nov 16, 11:40am 1478817641

It's not as simple as that though.

It's also about investment in infrastructure, businesses, etc etc. If it is well known that a currency is overvalued, then it is less attractive for investment. Investment, long term, also pays back in GDP. When export grows, it's causes productive growth, jobs, opportunity etc.

Lack of infrastructure spending in NZ has the potential to be utterly crippling in the future. You can see that even now with house price inflation and NZ's inability to keep up with demand for housing. If there was more investment in NZ to facilitate the growth in roads, schools, hospitals, training for tradesmen, this would create jobs and wealth. It would also bring house prices in line with wages.

Just being able to buy imports cheaply is no substitute for real growth.

by SmoKey | 11th Nov 16, 9:37am 1478810251

So, no interest rate hike for deposits/savings ? Pushing people to look at other options, including houses ?
Or, is this a pre-emptive move to save Banks from the coming crisis ?
What if the Fed starts increasing the rate, now that the Election is over and Trump is promising to spend more on infrastructure projects ?
So many questions, few answers.

by gingerninja | 11th Nov 16, 9:48am 1478810917

And low and behold the news today is that NZD has weakened (what RBNZ was hoping to achieve) and the cost of borrowing has risen sharply internationally, with China showing further signs of weakness. And yet the amount of people on interest.co.nz still not understanding why the banks aren't passing on the OCR cut? Read between the lines people. The message is very loud.

by SmoKey | 11th Nov 16, 10:17am 1478812646

Every one keeping the powder dry, aye ?

by gingerninja | 11th Nov 16, 10:35am 1478813706

I would say they are desperate for the housing market to cool and flatten. The longer the bubble lunacy continues at the pace it has been, the greater chance of a massive implosion. They are hoping a nice soft landing to rest on for a few years. However, they can't rule an implosion because of high global volatility, so they are having to go into panic mode. The banks are trying to claw back as much capital as they can against the huge debts they carry in housing. Borrowing costs are going up for them, so at some point, borrowing costs are going to go up for mortgagee's. Many home owners are so painfully leveraged that any increase in the mortgage rate will cause massive b%#t hurt. So i reckon they are all looking at very risky times ahead. A lot will depend on how China copes with America's antagonism.

by Grant A | 11th Nov 16, 11:05am 1478815516

Gingerninja - the NZD move has zero to do with the RBNZ rate cut and 100% to do with the fact that the US Dollar is up 3% in the past 24 hours on the election fall-out, You're totally right though, its what the RBNZ wants and won't need further rate cuts in this cycle, in fact, if it wasn't for the fact that they had so strongly signal'ed to the market over recent weeks that one was coming, I'm sure they would have loved not to have moved yesterday in light of what's happened since.

by gingerninja | 11th Nov 16, 11:20am 1478816429

Yeah well RBNZ lack of effectiveness in terms of lowering NZD is well documented. But i don't think the rate cut has zero effect. If they hadn't moved, as you say, the markets would have reacted to that too.

by Grant A | 11th Nov 16, 11:29am 1478816988

Yes true Gingerninja, they'd set themselves up to have do that to spare themselves a NZD spike

by Chris-M | 12th Nov 16, 8:01pm 1478934066

Our history of oscillating between between boom and bust, high interest rates and low is a fundamental symptom of a system which is being poorly controlled. So no, we certainly did not need this interest rate drop. It is made worse by the fact that there is not a strong relationship between the parameter that they are trying to stabilise (Raising inflation) and the correction signal (lowering interest rates). Lowering interest rates appears to increase savings which is counter productive, and increases asset values which are not included in the measure of inflation. (i.e what you are trying to control) It is also meant to lower the exchange rate, which theoretically raises inflation. The trouble with this is that our currency is also strongly affected by a bunch of other stuff and is notoriously hard to predict let alone control. The only connection between the inflation rate and interest rates seems to occur quite a while later, when asset values rise so high that the wealth effect kicks in, and by that time we are heading into a bubble situation. (does this sound familiar) The time lag and indirect nature of the relationship between cause and effect explains why the economic parameters overshoot and we get the boom/bust oscillation from which we (and more especially the USA) have been suffering.
At best this is a pretty weak minded and amateurish effort at stimulating inflation and it's failure to do so over the last 8 years bears testament to this.
This problem is just a subset of another whole group of concerns about how we manage our economy, banking, productivity, why it is necessary to have positive inflation and the problems that raises. But that is another very large set of concerns and considerations

by Brendon | 12th Nov 16, 8:53am 1478894011

I think we are getting to the limits of Monetary Policy. By itself it cannot keep the economy ticking over. In particular, the Reserve Bank cannot fix the flaws in the housing market and its ability to mitigate the damage is pretty limited too.

Currently all the government and 'powers that be' are doing is trying to cover over the cracks. Deny there is a problem is the establishments mantra, to further their individual political, employment or business careers for one more cycle. The unknown question is how long they can play that game before some sort of Brexit/Trump type event overwhelms them? Given we now have President elect Trump I think the chances of some sort of 'revolutionary' event has risen not fallen. NZ has to honestly face up to the tensions and inequities in our society and make some hard decisions about effective reforms. A few weeks back I wrote the following paragraph in an article for Interest.co.nz.

"Housing affordability in New Zealand and in many other places around the world is getting worse.

This exposes difficult choices. If the value of New Zealand’s housing continues to rise, if there is no price correction, this will widen the socio-economic divide.

The property owners, the landed gentry will benefit and those without property wealth will suffer.

Long term, refusing to acknowledge this widening socio-economic divide means the chances of some sort of radical revolutionary response rises.

Unlikely in this modern day, to be guillotine wielding revolutionaries of the Parisian type – more likely to be something like the anti-establishment outburst of the Brexit or Trump variety."
http://www.interest.co.nz/opinion/84331/brendon-harre-says-become-faire…

by Squishy | 12th Nov 16, 9:42am 1478896935

On the other hand the Reserve Bank is still failing to generate significant inflation within the economy or meet their inflation targets. Their forecasts are heavily reliant on inflation picking up without any change in monetary policy in the near future which is a departure from the experience of the last couple of years..

Regarding forecasting think about where are in terms of market cycles we've been in generally upwards market since back in June 2009. In a historical context does it seem likely a market cycle would go on for 10 years to 2019? Where would you put your own money on this?

by retireby50 | 12th Nov 16, 8:43pm 1478936597

Revamp the RMA to allow building / construction on Sundays and increase available time of 16% allowing those who want to work the flexibility to do so. Why would you bring international comanes in to commoditise an already tough industry. 7 day construction would reduce holding costs for development projects too.... lower building costs !!!

LAY DAY ON SUNDAY IS GONE ..... motelliers work Sundays, retail works sundays, factories run Sundays, customer service works sundays, wtf why can't residential builders work Sundays ?