There's now a "very good chance" the Reserve Bank will cut the Official Cash Rate to as low as 1.5%, according to Commonwealth Bank of Australia strategists.
This suggestion, contained in a CBA global research Kiwi Trade Note goes somewhat further than the current view of economists at CBA's New Zealand subsidiary ASB, though they changed their view this week from an expected OCR low of 2% and say the odds "have now tipped towards a 1.75% low in the OCR".
At the moment the OCR is at a historic low of 2.25% following a cut by the RBNZ on March 10. The cut came as a surprise to many because of comments by RBNZ Governor Graeme Wheeler on February 3, which appeared to portray him as a reluctant cutter of interest rates.
CBA senior interest rate strategist Jarrod Kerr and senior fixed income strategist Philip Brown say in their note that the risks facing the New Zealand economy are heavily tilted to the downside. They head their comments: "Wheeler the reluctant - well no more".
"We expect the RBNZ to cut in April to 2.0% and and then use the June MPS to explain a change in tack to 1.5%," the two said.
"The RBNZ’s two downside scenarios, outlined in the March MPS, show a move to 1.5%. The RBNZ’s previous downside surprise scenarios have become central scenarios for the past 18 months. We expect no different this time around," they said.
"We now see a very good chance that the RBNZ cuts the cash rate to 1.5%. The risk is the RBNZ tries to stay ahead of currency markets and cuts consecutively to 1.5% by August."
Kerr and Brown say they have upgraded their weighting in Kiwi interest rates from “raging bulls”, to “break the limits long”.
"We have heightened our conviction on Kiwi rates following an extensive marketing trip to middle earth. Governor Wheeler has proven himself responsive, not reluctant, but a little remiss," they say.
They outline three themes, which they say are "resonating with RBNZ officials, and Kiwi corporates".
The first is that the Kiwi dollar is too high, with the American dollar is largely to blame.
"The sharp turnaround in [US] Fed rhetoric reflects a high sensitivity to the USD and global developments. The Kiwi dollar is also too high against the AUD. The RBNZ can at least attack the Aussie. And like an All Black front row, the RBNZ must be the favourite here."
The second theme is that inflation expectations are too low.
"Tradables inflation is largely to blame. The currency is not helping with the reversal. Inflation expectations are falling. And expectations have become more backward looking. Mechanically, 2‑year ahead inflation expectations will continue to fall with the last CPI print. The auto‑regressive nature of expectations is frustrating for a central bank using forward guidance."
The third theme is that negative interest rates in some places mean lower lower bounds all round.
"The [Bank of Canada's] recently published “Prudent Preparation: The Evolution of Unconventional Monetary Policies” delivered a revised lower bound of ‑50bps for Canada’s policy rate. The BoC operate an effectively identical OCR to the RBNZ (and RBA).
"The BoC’s work strongly suggests a theoretically negative lower bound down under. Whatever we thought the lower bound was for the RBNZ’s OCR, it is much lower, and theoretically negative. We are all merely a spread to each other after all," Kerr and Brown say.
29 Comments
The Banksters are probably right in their judgment of the RBNZ. They (RBNZ) told parliament a couple of weeks ago that OCR cuts were the right medicine for the economy in both growth and slow periods (my words). They are in a hurry to get to zero like all their scummy Northern hemisphere mates.
They are laying up real big trouble for us here in this "monkey see monkey do" cut policy. One reason NZ inc. Is doing so well presently is because people took the opportunity to modernise plant and expand operations when the NZD had its long run at realistic high values. To vandalise the dollar and make debt near free only encourages old losers. Ruin can be the only result, eventually, from this modern post-gfc central bank free money era.
I'd say April has to be another cut. NZD is just kicking off by itself and if they don't cut, currency market will take that as a cue that things will be alright for longer and send the NZD up. Carry trade is what's pushing NZD, once that risk to benefit goes away, carry trade will find a home somewhere else.
We actually need to move away from this deflationary Reserve Bank policy. It made sense when we were importing inflation, now we're importing deflation and making it worse with the policy.
What we need is some old fashioned currency printing, or the reserve bank to create electronic currency and put it into direct circulation without entering a real debt on RBNZ's books. All the private debt means less spending in the future and that doesn't lead to high inflation. Leaving currency creation in private hands isn't working in our best interest.
The one time running the "printing presses" hot makes perfect sense and no one wants to do it. What are they teaching in economics lectures these days?
The rbnz has other tools other than the OCR. And the govt has tools too. Rbnz needs to cap mortgages based on the income of the borrower. That will greatly de-risk housing. They also need to further increase investment property minimum deposit rates to say 50%. That will limit speculation. Govt needs to dampen market and bring in capital gains tax. It also needs to open up more land for development and deregulate the supply side so that building costs fall. Immigration needs to be set to zero in Auckland. Immigrants need to go to the depressed regions first, eg spend 5yrs in the depressed regions and then u can move wherever you want. Manufacturing/added value cos/ tech cos need to be attracted to nz. Give them 10% tax rate for first 5yrs and they must also set up in the regions. And finally, rbnz should build gold reserves and initiate a gold backed NZD within 5yrs. Geez I should be running the country!!!!
Furthermore, govt should initiate financial literacy for all school kids, unemployed and those at university and all people in bankruptcy etc. Plots of land should be set aside in each community for communal vegetable gardens run by volunteers. None of these ideas would take alot or cost alot to implement. And we would be a better society for it.
It's become a vicious spiral. Lower interest rates -> more borrowing -> lower interest rates to protect the borrowers -> more borrowing in response to lower interest rates -> ad infinitum ad nauseum.
Household debt has now passed 160% of income. To both the Reserve Bank and Government, protecting borrowers from the consequences of their actions is paramount, as the whole economy is predicated on it.
http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-household-debt
Its questionable that more borrowing due solely to lower interest rates is happening. What seems more likely is that greed is taking hold when people see 10~20% gains they buy, not that they see 0.5% lower rates.
When I took out my mortgage 20 years ago I was limited to 80% and 25years, I dont see that as unreasonable yet by 2008 it was what 95% and 30 years? Really then the horse has bolted, no voter FHB wanted to be left out of the market and that then became a vote loser. Depositors where happy they lent getting 7~8% 'with a "as safe as houses" feeling, did they query it? no, to busy enjoying the income.
Correct, and vicious cycle that will end in disaster. So obvious but so many with vested interests in politics and NZ media are in denial let alone the public themselves. When reality hits the finger pointing and call for bail outs will be on. No honesty or personal accountability will be considered. Only the blame someone else syndrome
Stamp duty on 2nd homes. 5%. Stamp duty on investment properties 5%. Stamp duty 20% on foreign buyers to help pay for all the new infrastructure. Loan to income restrictions on all mortgages capped to 4:1. That would put the brakes on things.
Govt doesn't want a housing cor reaction under its watch. Also more people benefit from the increases than don't and they are after the popular vote. Forget about protecting it's citizens from obtaining too much debt. Young kiwis without wealthy parents are the losers here.
John Key had so much promise yet has really been very dissapointing. Left a legacy of ridiculously high debt and house prices.
Grant they lost the vote by referendum 43% to 57%. That's how they lost it. Move on focus on the main issues. Was a shame I was actually in favour of a new flag however the process was a joke. To have 12 people in the panel and not one designer was only going to end poorly. Like designing a house without an architect. #clueless
Like most aspects of National imprudence, a waste of time, effort and money this flag waving lurk. A distraction yes, a sensible policy...No.
26 million is not small beer to salivate over, as they coerced you to lick the envelopes many times over...but you silly sods could have started a New Brewery and given away a few bottles of beer free to each and every Taxpayer and repeated the issue, over and over again. ..instead.
And even sold the National Brand Product, with me as the taste tester to make a bigger fortune, overseas than that wasted in one big Drip, by an even bigger drip..
Key feature is we could have exported the product made with pure water, pure hops, pure enthusiasm, But No...Not gonna happen... Would have supplied jobs and expanded as sure as.
And do not get me started on the Whiskey we could have ALL produced as Taxpayers for me to test taste....as well, before exporting the product overseas....beats milk into a cocked hat..
We could have called that National Velvet.
I could go on...but making us more ill-liquid is not what we voted Pollies in for..
I prefer my way...sell a product...and make a profit, not flag the money away...and make none.
Now I am not a total alcoholic, I have been a practicing one for years.....I am aiming for perfect....
However, I just used this as a simple example of what we could have done.........but didn't.
Even a hangover cure, would have been better than Nuffin at all.
And that was my Friday Funny, but how true is that, overall. National Brand items to make a profit, not a huge flippin loss. Or shall we just talk about Houses...again.
I am beginning to realize that is probably why the rbnz wants to try and get a lot of passive investment (savings/term deposits etc) out of the banks and into risky investments such as property/ business is to keep a false economy moving for a while longer. That's probably why they have made the decision not to protect bank account holders form the banks mismanagement by not having deposit insurance, under the same reasoning and hence more lowering of the OCR. That's what their policies are pointing towards, they just don't want to publically tell people not to save for a rainy day as it goes against common sense, as does their view on deposit insurance. Incredibly naive it seems. Hopefully I am wrong but what other reason is there.
To the people who want a blanket capital gains tax on property..there has to be some give and take. You can't just keep taxing people. They did that in the 70's and NZ collapsed from the exodus. Scenario...I earn $1. Depending on your tax bracket..Lets say it is taxed at 20%. Then I put the remaining 80c of purchasing power in the bank. (IRD tax the measly interest income at 20 %). I decide I need to buy food so I can stay alive to pay more taxes so I take 40c out of the bank for food. I take off 15% of my purchasing power for GST. and so spend 34c. I take out 20c for insurance and property TAXES (oh, I mean rates). Oops, need to reduce that to 17c after GST because my insurance is taxed!!(a common sense necessity to protect my investment, not really a choice) and the property taxes are also taxed at 15% (tax on a tax in case no-one has figured that one out). That leaves me with 20c for vehicle expenses to drive to the supermarket and visit my elderly grandma ( for that privilege I am taxed at the pump, pay road user charges and the 'doubled in price' obsolete immigrant job manufacturing machine of the WOF scheme..lets say 30% tax there, I've not got accurate figures), so I have 14c to spend . Therefore, out of that $1 I earned I was allowed by the govt. to actually spend 65c(for which I am humbly grateful). Don't bother saving anything left over, because as the greed of the banks cause liquidity problems (lending to unqualified morons that can't pay it back down the road) you will need to understand that any money left over in your bank is not covered by deposit insurance(unlike my house which would be pretty STUPID not to insure, and unlike the rest of the developed worlds banking systems) which means the rbnz does not want you to save in the banks, hence continued OCR drops.
On second thoughts, maybe I was wrong. We need to be taxed more so the govt. can spend more on essential services like flag referendums. Silly me.
In his book "The End of Alchemy", Money,Banking and the Future of the Global Economy, Mervyn King, former governor of the Bank of England, writes this; " the 10 year real rate expected in 10 years' time, has averaged little more than 1% increase in recent years and by late 2015 was still below 1.50%, well below any level that could be considered remotely 'normal'. Markets do not expect interest rates to return to normal for many years."
he is writing, not from a purely UK perspective, but globally. I have no idea where our OCR will end up, but simply reducing it by small amounts, will do little or nothing to restore inflation to its 2% target level.
Each cut has a diminishing effect on consumer behaviour, even if banks were to pass the cuts on in full and with higher wholesale funding rates abroad and with significantly higher bad debt provisions coming up, that isn't going to happen.
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