By David Hargreaves
The Reserve Bank is to give an unscheduled "update on its economic assessment" next week in a surprising move that suggests it is planning to cut interest rates at its next Official Cash Rate Review on August 11.
The markets have not been expecting a cut to the OCR, which stands at 2.25%.
Partly based on this expectation, plus the uncertainty stemming from Britain's Brexit vote and other international developments, the Kiwi dollar has been soaring to levels far above those forecast or desired by the RBNZ.
Now it would appear highly likely that the RBNZ does in fact intend to cut the OCR on August 11. Next week's statement - signposted by the RBNZ in a brief advisory note put out this afternoon - may well be to prepare the market for such an outcome.
As the marketplace began to digest news of the RBNZ's surprise move, the dollar started to lose impetus and a short time ago was just above US72c, down from US72.8 before the RBNZ advisory note came out.
One reason cited by those in the market for expecting that the RBNZ would not drop rates next month has been the incendiary state of the housing market and fear that a further rate drop would pour more petrol on it.
More macro measures coming
However, the RBNZ did last week give broad indications of plans for more macro-prudential measures to be introduced. These include a single loan-to-value ratio lending restriction for investors to be introduced by the end of the year and some kind of 'speed limit' on debt-to-income ratios, probably next year.
The RBNZ's wording of next week's announcement as an "economic assessment" would appear to be sufficiently broad to allow the central bank to move outside of its 'monetary policy' area (inflation targeting) and talk about the housing market, which is generally a 'financial stability' issue.
It's possible the RBNZ will use next week's statement to reinforce the fact that new macro-prudential measures are very definitely coming. This could be done presumably with the hope that such comments would balance the potentially inflammatory impact of another rate cut.
Deutsche Bank NZ chief economist Darren Gibbs said if the Kiwi dollar were to remain at "anything like" current levels over coming weeks, the RBNZ would be forced to significantly mark down its inflation forecast – and to some extent its GDP growth forecast – in the 11 August MPS.
"That being the case, we think it would be hard for the RBNZ not to deliver the further OCR cut it first signaled in the March MPS. And for the sake of consistency, the RBNZ would likely be compelled to signal additional easing beyond that, notwithstanding real economy indicators that presently suggest that no further easing is required at this stage (including today's job ads, PMI and consumer confidence readings)."
'Displeasure with the exchange rate'
Gibbs said the economic update on 21 July provides an opportunity to "communicate displeasure with the exchange rate in particular".
"We think it is more than likely that the exchange rate will be described as unjustified and unsustainable, and a significant drag on the inflation outlook. Certainly we think that the RBNZ would like to see the NZ dollar weaker before it sets the exchange rate assumption that will underpin the revised inflation forecast in the August MPS."
In its brief advisory today announcing next week's update at 9am on Thursday July 21, the RBNZ said the update was being issued "given the longer-than-usual gap between Monetary Policy Statements (MPSs) as the Reserve Bank moves to its new release timetable this month".
"This [update] will not include an Official Cash Rate (OCR) review decision. The next OCR review will occur with the 11 August MPS," the RBNZ said.
The markets will inevitably take this most unusual move by the RBNZ as a clear sign that it does want to cut rates at that August 11 review.
The RBNZ made its last call on interest rates when it issued a Monetary Policy Statement on June 9.
Because the central bank is moving to a new timetable for OCR releases, the next review on August 11 will also include a Monetary Policy Statement. However, the time between the OCR reviews is much longer than the normal period of around six weeks.
Couldn't wait
Given that much has happened globally since June 9 - particularly following Britain's market-unsettling vote on June 23 in favour of leaving the European Union - the RBNZ presumably felt it couldn't wait any longer to signal its intentions to the market. This is particularly so as the market has not been pricing in the possibility of a rate cut.
The uncertainty in global markets in the wake of the Brexit vote, plus acknowledgement of New Zealand's relatively stable economy and relatively high interest rates has seen the Kiwi dollar given somewhat 'safe haven' status and it has continued to climb.
As of earlier today the NZ dollar was some 8.5% higher on a trade weighted index-basis than the RBNZ was forecasting for the September quarter.
A high dollar, as well as causing problems for exporters - including the struggling dairy industry - helps to act as a depressant on inflation. And the inflation rate has now been below the RBNZ's 1%-3% targeted range for nearly two years.
New inflation figures are due out on Monday, but these are expected to show annual inflation running at only about 0.5%.
52 Comments
Makes me cry. Here again we will have the normal obfuscation, mixing of monetary and banking stability objectives, compounded by poor forecasts to justify the continued high NZ interest environment. The exporter will continue to be screwed mercilessly because the RBNZ refuses to use other instruments than interest rates to manage banking sector stability risks. What about LVRs similar to the UK? Think RBNZ - think please for the future of NZ.
You know what makes me cry?
People saying stuff like this:
"..the RBNZ refuses to use other instruments than interest rates to manage banking sector stability risks."
The RBNZ uses pretty much every other tool and power it has (apart from open market operations) to control the banking sector. The overnight rate/OCR is a aggregate money supply tool, not a regulatory tool; so what are you actually saying, exactly?
The crisis we are facing is not an issue arising from monetary policy. Any economist will tell you that. Hence, the ability for the RBNZ to fight it is significantly constrained.
The housing crisis is one borne of, primarily, restricted supply. Secondly, it is also of demand from immigration/desire to reside in Auckland.
These are two issues that the RBNZ has no ability to comprehensively control. Sure, they can use tools to somewhat manipulate it, but not cure it. It is central and local government policy that is required.
So, tell me - why is everyone here so dead set on beating on the RBNZ every chance they get?
I know you aren't all economists, but please do those of us who are a favour and gain even a basic understanding of the concepts involved with articles you are commenting on.
The future direction for many people within the NZ economy is dictated by the RBNZ and its decisions.......people who have skin in the game rely upon the PTA and financial stability decisions made in Wellington as these affect their short and long term plans, goals and ambitions.........and you nymad seem to think that people shouldn't comment because they are not economists and therefore lack the basic understanding of the concepts involved.......but how many economists actually have the basic understanding of running a business, preparing cashflows and budgets, sourcing funding, exporting or importing products?
Economists are notoriously bad investors but their field is a part of social studies so they can't be blamed for that. The fact that so many economists fall for neoliberalism and fail to look outside of it is a concern.
Where RBNZ has seriously failed is that it is within their power to adjust risk weightings and they can adjust those for housing. Yet they haven't. RBNZ is helping to blow a big bubble by failing to act to provide financial stability.
Yes, I totally agree. Planning revolves around the RBNZ decisions.
However, these policies/decisions are never going to be optimised as long as the core issues are not resolved. The extent of their power at the moment is to p**s on the bushfire, through no fault of their own. They currently have numerous risk areas in the economy that they have to address with only one key policy tool.
I'm not against people commenting. I'm against people jumping on the National Party rhetoric bandwagon and staging linguistic witch hunts against the RBNZ without appearing to have adequate understanding of the complexities of the situation.
Have you ever actually considered that the National led Government might know what parameters and settings they need to achieve their objectives? The PTA is part of the overall settings and if bureaucrats can't follow the instructions and expectations required then they should either resign or be made to go.......
I can tell you right now that real financial stability comes down to the SME's doing well, keeping people employed, generating enough in taxes so the status quo system can be maintained..........you might want to remember that the business world and populace can exist without a central bank and without economists and there is nothing complex in understanding this at all!!
Nymad,
Personally, I applaud your bravery in admitting that you are an economist. If you have not already read it, I can recommend "Misbehaving", The making of Behavioural Economics by Richard Thaler, in which he elegantly shreds many of the theories beloved of what i might call, classically trained economists. For example, he refers to what Kahneman calls 'Theory Induced Blindness'. As he writes; "This theory induced blindness now strikes nearly everyone who receives a PhD in economics. The training the students receive provides enormous insights into the behaviour of Econs, but at the expense of losing common-sense intuition about human nature and social interactions".
I am not an economist, but I do know something about stockmarkets and I long ago realised that the Efficient Market Hypothesis was utter bunkum.
I have been highly critical of the Reserve Bank for some years, though I would certainly admit that they have not been helped by the government's inaction.
Yes, not sure whether we really disagree here. What is happening is that the RB is being forced by its banking stability objectives to try and hold interest rates up to try and suppress house price rises and in the process messes with its monetary policy objectives set by parliament to maintain inflation between 1 and 3 percent. As a result, they fail both to maintain inflation at the required level and it would appear the risks of a housing price fall are rising which raises banking stability concerns. Irts a lose/lose situation for them. What I am arguing here is that there should be some separation between the monetary policy and banking stability instruments of control. It is impossible to control both objectives with interest rates as they are attempting to do at present. Having spent much of my life as an international monetary economist its seems rather obvious to me.
Might be a dumb question - as I certainly don't have the esteemed background you do in this subject. But why do lending rates on residential property need to be linked to OCR? If lowering OCR is meant to be used as a tool to stimulate the economy, and the economy is businesses, why can't we raise interested rates on residential property and lower lending for business activities?
the RBNZ has other mechanisms to control specific lending by the banks IE capital holding for specific loan types, LVR, LTI.
the OCR is a blunt tool that affects every type of lending and also can affect the exchange rate (many other things can negate this)
in the past it worked to boost the country through consumer spending as home ownership was 70%
now not so much as home ownership has fallen below 60% and any extra funds are being channeled towards extra housing costs
one of the other major problems they do have is if the capital to purchase houses is coming from offshore and not local banks there hands are tied as its up to government to stem that flow which can also push up housing costs taking money out of the local economy
May be will give indication about change in LVR and also about Income to Debt policy, which were plaining end of year but seeing the housing market and need to cut interest rate, may act now.
As another rate cut without introducing any other measure will again push the housing market up, will be announcing some tools for sure before the OCR.
Also just Raising the LVR will not help as the time is right to add Income to Loan like UK to give a best short from RBNZ side, in absence of national party not doing anything to curb speculators. This would be the best response to national government from RBNZ and then also if the madness does not stop then can put the ball in national court.
Yes it very much looks like that the RBNZ will make a rate cut probably only when the Bank of England makes its rate cut (or not) later today. This whole Britexit has been a nightmare fiasco and it actually looks as though they're going to muddle through with it and leave the EU.
And yes if the RBNZ does cut the OCR rate to keep pace with the UK, I only hope we get to enjoy some of the similar ultra low mortgage rates. That's about the only thing left to enjoy in the UK now.
That's about the only thing left to enjoy in the UK now.
I enjoyed the karma the poms have experienced over the last 10-15 years. However I think Brexit will be best for them. I was hoping they would stay in the EU and eventually become another German province like Greece.
Are you insinuating that the RBNZ gives preferential treatment to dairy farmers? There is nothing but hard work stopping you from being a dairy farmer - dairy farms are even cheap right now if you want too. I can understand if you'd rather have your weekends free but no need to be cynical on dairy #enjoyyourlatte
Just a respose to Oracles comment.... sorry mate i don't drink lattes. I have far more sense to drink free instant coffe from work and take a cut lunch each day than waste money like that?
No im not inferring rbnz gives preferrential treatment to farmers. But i am inferring that everyone is responsible for their own financial decisions. And if you think dairy bankruptcies arent ocurring i suggest you look out the window and see for yourself. Soon it will be first home buyers and the greedy landlords too that will pay for their financial mistakes. No house is worth more than 3x annual household income. Especially the crappy nz home. If this nation spent as much time invedting in productive investments which add value compared to the amount we waste on non productive speculation we may actually get somewhere.
Oh but the speculator landlords are providing homes for us rentiers and we really need them. Ha like a hole in the head. Banks are at fault here. They need higher reserve requirements. After all they have alot of loans on their books for houses which are going to turn non performing. Italy of the south pacific here we come
The Reserve Bank is to give an unscheduled "update on its economic assessment" next week in a surprising move that suggests it is planning to cut interest rates at its next Official Cash Rate Review on August 11.
It is an article of orthodox faith that low interest rates mean “stimulus” and success, but history is proving yet again otherwise.
The interest rate fallacy holds; lower rates are accompanied by visibly “tight” banking/money conditions regardless of the level, acceleration or promises... Read more
Corroborating evidence can be witnessed here and here.
And to cap it off:
From the liquidation low on February 11, the entire WTI curve has shifted upward but far more so at the front end that is set by financing conditions. By June 8, the WTI curve very nearly flattened out in its entire length, front to back. Crude oil is supposed to trade in backwardation, so that it would “try” to get back to the condition is natural. It has been the funding intrusion of these “dollar runs” that distorted the curve into episodes of dramatic contango on the left side (while pushing or pulling the whole curve in between).
The level of contango has played a prominent role in determining domestic crude inventories. As “dollar” illiquidity grew, primarily in relation to Chinese connections to the eurodollar, and the WTI curve steepened at the front in heavier and heavier contango, domestic inventories surged. Read more
fight fire with fire. This is ridiculous. What different result do they expect to cause with yet cheaper credit?
I am seriously considering taking all my savings to my European bank, at least there my money is guaranteed up to 100k EUR per account. But here with the OBR and constantly punishing savers while fueling a systemic risky bubble? mmmh.. too much risk of a bail in for such a low reward.
Put them in the EU zoo? How bout chucking it into the NZD sea?
Icelandic Kroner 58.7 to 1 USD on 6th Nov 2007 ... 147.53 2nd Dec 2008. Why? Banking crisis of course. It's since settled in at approx 125 ISK to 1 USD. Retained value to (local only!) depositors is only due to officials deliberately stiffing international creditors. Good on them.
Now of course we're nothing like Iceland. It's not like we are on the edge of the world, naive but firm in our own intellectual "leading the world" supremacy, it's not like we have a fancy-pants international finance laundry, it's not like we have an enormous housing bubble, it's not like our citizens are chowing down the debt and regurgitating it on snappy new euro motors, and of course our currency definitely isn't overvalued at all.
Nah, it'll be fine.
You've not missed the boat on Gold, but its not on sale anymore. IMO, all NZders on a small island subject to international monetary policy should be holding 20% portfolio insurance against fiat corrosion. China is front-running this monetary end game; citizens encouraged to hold Alan Greenspan's "premium currency".
oh I dont think so. What is it in NZD? 3.1x the 2005 price, 2.5x the 1985 price. Compare those multiples to real estate and gold is ridiculously cheap. The problem I have with gold is that if central banks ever got in trouble and the SDR didnt work then they'd just confiscate gold or make holding it illegal. They've done that before right. Your gold hoard would significantly devalue overnight.
Canada, which released its interest rate setting overnight, and held rates , and is also concerned re financial stability( and also marked down its projected growth), in regard to its surging house prices, gave details about how Brexit was likely to have an effect. Given that Brexit was largely unexpected, I humbly believe that would be the purpose of the RBNZ update, .Why telegraph an interest rate cut to the fx markets , as this simply makes no sense. By lowering rates then financial instability will only increase, but then again all Central banks have gone schizophrenic , maybe New Zealand cannot afford lower house prices.
Sweden , apartment prices fell at fastest rate since 2008 in May House prices also declined. Their Central bank has already capped mortgages at 85 percent in June, introduced more vigorous repayment methods given the Swedes penchant for interest only loans and is looking to introduce 600 percent 6x mortgage to incomes. The talk is that Swedens house prices are at the tipping point. Bottom line, reduce credit multiples , you will reduce house prices. If globally we start to see house price declines in economies like Sweden , Canada , Australia , United Kingdom and possibly the United States and China , will Auckland house prices continue to rise.
The Singaporeans have been the best in controlling house prices without having the bust. Introducing LTV's and stamp duty.
http://www.globalpropertyguide.com/Asia/Singapore/Price-History
As I posted earlier, Spencer was full of it when he stated that the OCR doesn't influence the NZ $ anymore. Proof again in the comment above:
As the marketplace began to digest news of the RBNZ's surprise move and likelihood to cut the OCR, the dollar started to lose impetus and a short time ago was just above US72c, down from US72.8 before the RBNZ advisory note came out.
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