The Reserve Bank will not only have to cut rates in August but leave the door wide open to one more cut thereafter if it wants to gain some traction over the currency and to maintain its own credibility, BNZ head of research Stephen Toplis says.
Toplis said the BNZ economists "yet again" found themselves in "the somewhat hypocritical position" of calling for the RBNZ to cut rates, from a consistency perspective, while being of the view that doing so is not optimal for the long term stability of the economy.
"....Unfortunately for the RBNZ it is finding itself in a deeper and deeper hole from which it shows not only little sign of escape but also very little sign of taking control of its own destiny.
"On the one hand it has an out of control housing market that it has contributed to by lower interest rates and by reducing LVRs to non-Auckland buyers but which is fundamentally driven by population growth (in part migration driven) and a paucity of supply. Neither of which, the RBNZ can deal to.
"On the other hand the strength of the NZD largely makes New Zealand a victim of its own success. New Zealand simply looks a better place to store your hard earned cash than just about anywhere else in the world so folk keep buying New Zealand dollars. When the next inevitable economic downturn occurs this money will leave our fair shores but that looks a while away. The RBNZ can’t do much about this either," Toplis said.
He said that over the past week or so financial markets became completely distracted by the state of the housing market and its implications for prospective interest rates. Their attention on inflation as the primary driver of RBNZ monetary policy actions became greatly diminished.
"This process was exacerbated by the macro-prudential policy speech delivered by Deputy Governor Grant Spencer, which markets interpreted as saying that housing market concerns and their impact on financial stability would subjugate inflation (read: deflation) concerns for the time being. This was not our interpretation of the speech but we warned that by not correcting this misapprehension the RBNZ was lending tacit approval to the market reaction which resulted in a surging NZD and reduced market pricing for an August rate cut."
Toplis said he believed that in its economic update this coming Thursday the RBNZ will, indeed, try to correct that apparent misapprehension.
"And certainly the market has come around to this way of thinking with the NZD falling around 2.5 cents against the USD and the market raising the probability of an August rate cut to around 75%.
"The market reaction so far should, of itself, be a clear indication to the RBNZ that simply letting folk know that currency appreciation is not a one way bet can have a significant impact."
But Toplis said it was now up to the RBNZ to follow through.
"We believe Thursday’s statement will reiterate strongly the fact that the NZD, even after its recent depreciation (which was given another shove by the news that the CPI had come in below expectation), remains well above the levels assumed in the Bank’s June forecasts. Indeed, at a TWI of 75.6 it still sits 5.5% above the level it was assumed to average through the September quarter of this year. This will unequivocally reduce the RBNZ’s forecast track for CPI inflation over the next twelve to eighteen months."
14 Comments
RBNZ may have to drop rate on 11 Aug so may increase the LVR for Auckland and also for rest of country that is for sure and if wisdom prevails will have worked with finance minister to introduce to loan to income as even govt in favour so better to announce now than waiting till end of year.
The Reserve Bank will not only have to cut rates in August but leave the door wide open to one more cut thereafter if it wants to gain some traction over the currency and to maintain its own credibility, BNZ head of research Stephen Toplis says.
What's the next "white gold rush" type malinvestment sector of the New Zealand economy the RBNZ can blowup? Housing is done, except for indebted elites and dairy is over for everyone.
We're due a new cargo cult agricultural commodity. I keep seeing articles bigging up sheep milk. Inexhaustible demand in China, apparently. Yeah, right. Where have we heard that before.
Or kale. That seems to be fashionable. Medical marijuana? That one might actually make sense. Blackberries? We'd have to change the name and market them as a cure for erectile dysfunction.
There are of course less circuitous tools that could pressure downwards the currency, and increase consumption or infrastructure spend, that do not require the commercial banks to blow up massive asset bubbles. A catch for the commercial banks is that these tools would to some extent disintermediate them from the process of creating money.
But they would seem a lot better than blowing more bubbles with yet lower interest rates.
I doubt the RBNZ will go to them, as they seem a very orthodox bunch, possibly captured by the commercial banks, but it would certainly be gratifying for the RBNZ to at least explain why they do not consider such tools.
Excuse my ignorance but is there any hard data to show that cutting interest rates further at these very low levels will increase inflation.?
For instance from what I hear those who live on their pension plus term investment income cut more from their discretionary spend budget each time the rates go down so that the amount of actual hard cash in the economy is in fact going down while that borrowed against houses is going up.
Also is the inflation measure sound. My uninformed guess from looking at the grocery bill is that petrol is masking the real increase in every day costs. Of course I can't do an in depth review of the grocery shopping bill as that would result in me having to do that dreadful task myself and getting a good ear bashing as well.
Excuse my ignorance but is there any hard data to show that cutting interest rates further at these very low levels will increase inflation.?
Absolutely none - the whole theory is predicated upon 50 year old ideology. The excuse being previously tenured academics can price money as they want while fabricating it's creation for experimental reasons, because they might know what's best practice.
Japan's experience for the last 25 years proves otherwise.
The promise of “stimulus” is far, far more powerful, particularly when fresh and new, than it is in actual operation. Emotion fades, leaving reality as a stark wake up. Again, it’s difficult to grasp the full range of Japanese politics, but even this election doesn’t seem to be all that hopeful and optimistic. The problem with magic number theory and the commentary that supports it is that it offers its victims a false narrative to keep doing nothing but more of the same as if there are no other realistic options. Read more
Actually, there are some very good test cases for the implications of zero bounding overnight rates.
I don't know what you are trying to imply with the "whole theory is predicated upon 50 year old ideology". Keynesian inflation targeting was founded well over fifty years ago. And, it wasn't built upon 50 years of ideology.
More importantly, NZ adopted it in 1990 (the first to do so). So realistically, we only have a test case of 25ish years. Barely enough to rubbish the system completely. Look how long we stayed with other monetary systems for.
As for Japan, it has other problems that significantly contribute to its deflationary spiral. Their financial culture is very different to that of western nations. Not to mention, their inflation targeting regime is only a few years old...
None other than added house price inflation by further encouraging borrowing for such investment/speculation. Cuts to the ocr are more about propping up demand from banks to keep them solvent via a continuous saline drip of more/new mortgage loan lending. It's tough mate running perpetual Ponzi schemes
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