"All hell will break loose" if the Reserve Bank leaves the Official Cash Rate unchanged at 2.75% on Thursday, according to Commonwealth Bank of Australia strategists.
CBA is the parent of ASB, which recently changed its pick for the path of interest rates and now believes the OCR will fall as low as 2% next year.
CBA senior interest rate strategist Jarrod Kerr and senior currency and rates strategist Peter Dragicevich said in a strategy note that the "central scenario" of a 2.5% OCR has been signalled by the RBNZ.
"And we believe the central scenario will be delivered this Thursday. In every decision there are pros and cons, risks and rewards. The risks of remaining on hold outweigh any rewards. The Antipodean transition from goods exports, to service exports requires a weaker currency. The drop in New Zealand’s terms of trade requires a softer currency to alleviate the blow to domestic incomes. A weaker currency also stimulates key exports in tourism, education and other manufactures (and the same can be said for Australia)," the strategists said.
"Should the RBNZ decide to hold the cash rate above their central scenario at 2.75% Thursday, then all hell will break loose.
"The currency would spike at least 1‑2 cents higher, and the [wholesale swap] rates market would be unforgiving in a 15 to 25bps move higher," they said.
Kerr and Dragicevich said the strength of the NZ dollar against major trading partners on the trade weighted index was deflationary, and currently 7‑to‑10% above the RBNZ’s forecast track.
"Most of the RBNZ’s forecast return to 2% inflation is based on a bounce in tradables inflation. We believe the strength of the currency has significantly reduced the likely bounce in tradables inflation.
"It is time for the RBNZ to use its main policy tool. The path of least resistance is a rate cut to the telegraphed 2.5%. The rates market would move ~10‑15bps lower in a controlled (front‑loaded) move, and the currency could lose as much a cent. Job done..."
But meanwhile, ANZ economists continue with their outlying view (among economists - though not in terms of market pricing) that there won't be and shouldn't be a change in rates this week.
In their latest weekly Market Focus the ANZ economists said an improving domestic growth backdrop was a key reason they would be holding fire this week.
"Certainly a cut is possible, given the low inflation environment, El Nino risks and stubbornly high NZD. But cutting the OCR in order to get the NZD down when the economy is in fact firming is spitting in the wind – upwind," they said.
"If the economy is weakening you at least have a chance, as you are spitting with the prevailing economic breeze. Changes in monetary policy can have very transitory – if not outright contrary – impacts on the currency. Task one was to get growth back on track; the RBNZ can tick that box. Task two is for that to flow into inflation. That’s the current uncertainty. Inflation is being buffeted by structural and cyclical forces that have diluted the reliability of traditional real economy / inflation linkages. We’d wait for more clarity and be guided more by inflation outcomes from this point.
"RBA Governor [Glenn] Stevens summed it up pretty well when he recently told markets to 'chill out' and wait and see how things unfold after Christmas. Central banks like to be proactive, but it sometimes pays to abide by the old 'when in doubt, do nowt' view as well."
51 Comments
Same here - a revaluation of my Kiwi assets is always welcome, need something to offset poor income potential from over priced bonds and risky, unrewarded bank deposits. Banks are always seeking a funding holiday from the citizen depositors. More so now the foreign wholesale funding for low grade bank debtors has dried up - should be a law against it.
Farmers hardly fought to address compounding capitalisation of interest diminishing productivity of their increasingly overpriced production assets. That failure alone caused farmers demise, as it was a signal to suppliers and councils alike to profit share in their faux riches. Until they fix it why should I be concerned?
I agree - but how can they fix it without going down the plughole.
We really have been a collective set of lemmings charging willfully to that cliff edge. My impression is that much of the additional debt taken on by farmers recently has been to fund the infrastructure and mitigation necessary to sustain the unsustainable production targets/practices.
All the while the easier, less stressful and less costly option of reducing the impact of farming on the environment by reducing stock numbers and retiring marginal land is where we will likely end up anyway, I suspect. But the debt will remain and the social costs will multiply.
Interestingly I spoke to a lady from Fonterra a few weeks back who said the reduced milk price is slower to affect the farmers in Europe because 60% of their income comes from government payments for environmental protection. I know in the UK when I was last there I kept hearing stories about farmers who were getting good money to "set aside" fields (ie spray with roundup). The wonders of the EU. Contrast that with here where we expect farmers to pay for fencing off streams etc themselves. I much prefer our system but it's hard when the competition are extensively subsidised.
The funny thing about ag subsidies, not only in the EU but the US as well - despite the subsidies the farming class in those economies don't outwardly appear to be what are considered by their respective publics to be a significant wealth/asset owning class in the same way that they are perceived here (and I say perceived here - as by no means do I think that perception is in most cases correct given the debt levels). There seems to me to be more 'honour' (in the sense of farming being an 'honest' living/earning) conveyed by townies in those communities for their nation's agricultural producers. When I first arrived in NZ (1978) we had that attitude as well here - socially we thought of our farming friends as really hard workers; 'salt of the earth' type people. That notion has eroded over time and I really wonder where it all went wrong.
"and I really wonder where it all went wrong"....Having farmed about the time when you arrived in NZ, and a bit prior and after, things got a bit hectic when people got letters after their names. Have to admit that I became a purveyor of "non essentials" to the salt of the earth. Would have been better if they had listened to their parents and grandparents about our precious land. I did get an ag qualification back in the day, and it still seems what was learned makes far more sense than this road farmers are being sent down now.
RogerRuthannomics a la Milton Friedman style, may have something to do with the transition.....repealing land aggregation act..."green eyed monster of envy", having faith in the free market, so long as it is empowered and controlled by the aforementioned political ideology.
The value of land was once more closely tied to its productive value, but in the last 20 years it's about capital gain, which brings a new dynamic to agriculture.
Kate, I would say that a lot of additional farm debt, especially in the last five years or so would be on upgrading farm effluent systems. I personally know of many farmers that borrowed six figures for these systems. The cost of a pond, while it can be significant, is not the most expensive part of upgrading an effluent system. Infrastructure and software to run these systems can be very high. In our area it has to be engineered by a qualified engineer - not a requirement by all Councils though.
As I heard a farmer remark recently. "Given the ever changing goal posts that are Regional Council rules, you don't spend to meet today's standard, you spend to guess what a higher standard will be when you consent comes up for renewal again."
It has been said that farmers have spent $1billion in the last 5 years on environmental good works.
http://www.radionz.co.nz/news/rural/278683/what-are-farmers-spending-on…
As you make a sweeping (and somewhat naive) generalisation and say reducing stock numbers is less costly and less stressful - what should farmers be reducing stock numbers to? The average stock units per ha in our area is around 2.8.
But CO our countryside is not a factory floor. If a business wants to treat it as such, then whatever mitigation is required must be fulfilled. You would find businesses in town constantly upgrading to meet council requirements. Why should industrial size farming be any different?
My comment was about debt levels in farming Belle. A lot of debt has been taken on for environmental rule changes - its not a complaint. The difference between town and country rule changes is that urban authorities are being given up to 20years in our region to get their stormwater/sewage systems up to standard. Businesses in Southland have had very little, if any, change in the Regional Council rules in recent years.
I agree re mitigation must be fulfilled, but have to say that non dairy farmers in Southland are struggling with that concept under the draft rules proposed by ES. Some of the draft plan ideas: Consents required for any cultivation on land on 20degree slopes, 20m buffers along waterways with more than 15degrees of slope when cultivated, no more than 15% of landholding to be cropped (which has the potential to put professional graziers out of business), fencing off all waterways (all sheep by 2021). New tile drains to have constructed wetlands/nitrate filters installed at the end etc etc No cultivation allowed above 700m absl. At least they asked for feedback on the draft, so it will be interesting to see what they present as their notified plan next year.;-)
Yes, CO, it's the cumulative effect of all the additional regulatory-imposed costs - many of which have to do with effluent treatment, water quality, consents applications and processing and on and on. It must be disheartening. The point I'd make is that central government imposes these costs on the one hand and then stimulates intensification and complexity on the other. It's as if they and the co-ops and the advisers and the suppliers and the banks are the beneficiaries of this increased production push - everyone but the producers themselves. It looks to me like the deliberate ruination of the non-corporate agricultural sector.
"All hell will break loose" seems considerably over the top in terms of language, such that it's hard not to suspect some bank self interest in the CBA's position. I also would like a lower NZD, and there does seem a clear connect between an overvalued dollar and relatively high interest rates, but will the NZD really rise 1-2 cents if the RBNZ merely holds? The Fed rise now seems certain, failing Armageddon in the next week according to CNBC, so our relative position will improve somewhat in any case.
Agreed. The rhetoric out of CBA is way over the top. Neither scenario should have a significant affect on the NZD in itself - what's more important is the guidance, i.e. do we see RBNZ opening the door to a move below 2.5%, or do they hold firm with this as the final target (either with or without an immediate cut)?
deflation everywhere,
http://www.theautomaticearth.com/2015/12/what-deflation-quacks-like/
interesting article and it backs up my thoughts that too much leveraged debt piled into non productive assets (housing) takes money out of the consumer spending economy and eventually will hurt the country.
but you didn't need to be a rocket scientist to work that out you only had to look to recent history to learn that lesson i.e spain, Ireland, USA and our NZ finance companies that were all lending on property that fell over
Is there really deflation everywhere....????
In NZ we have wage rate growth....
In USA they have wage rate growth...
Commodity prices collapsing is not a great proxy for measuring deflation.... Commodities are notorious for extreme Boom/Bust cycles... ( driven by supply/demand extremes)
So even thou we are in a deflationary deleveraging environment..... Govt spending and Central Bank money printing has been a countermeasure to this...
AND... so far so good.... considering just how bad a deflationary implosion can be...
my view
I think your been listening to BE spinning again wage inflation in NZ is very low, and overall inflation is near on nonexistence
http://www.rbnz.govt.nz/monetary_policy/inflation_calculator/
Wages
of $1.00
in quarter 1 of 2014
would have been
$1.03
in quarter 1 of 2015
Just like "my orange juice has gone up a lot" except its a bigger sized sample.
I am not sure if its deflation but desperation / firesale pricing.
In terms of cycles, yes however when the cost to produce is above the firesale price the business will fold and wont be there next time around.
you might want to check again national only just got in with a cup of tea in Epsom and a dunne biscuit.
its only JK popularity that keeps them in power if that slips too much its so long. 47% v 45%
http://www.electionresults.govt.nz/electionresults_2014/
that's why they need to step up sort some of the big issues out otherwise we will end up with a three headed beast.
Yet JK brought Judith Collins back.
a) She is a hard right winger who doesnt exactly have the appearance of being honest, and comes across as a nasty piece of work, the middle voter is going to raise an eyebrow on that one.
b) She is supposed to be competent, lets say she is, what does that say about the 60 or so National MPs? not a lot of good then most of them.
c) What does it say about National trying to look centre-right when a right winger is returned so fast?
However the one saving grace for JK and National is Labour is still lost and the Green's are still off in la la land with them. Hell I am a green party member and I dont like them that much and I almost dont vote for them (as much as that means labour as anything).
A tiny little percentage is the vote Act got, you probably havnt figured out its a waste yet. 10% Green and 23%? Labour isnt a tiny percentage. Now I'll agree that the Green's are misguided on their to far left stance but the thrust of their argument is mathematically sound ie we are on the one and only finite planet.
maybe they are a wee bit worried about what they can see coming
http://www.cnbc.com/2015/12/07/australias-rba-must-balance-growth-with-…
Pound Sterling commentary:
"The main reason for the move is a drop in inflationary pressures: although inflation rose to 0.4% in September, beating expectations of 0.3%, it was not enough to change the overall view that the economy is stuck in a deflationary rut."
https://www.poundsterlinglive.com/nzd/3037-new-zealand-dollar-strength
How could 2% inflation ever be achieved now?
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