By Roger J Kerr
Today’s super low inflation numbers for the March quarter will only intensify the debate as to whether short-term interest rates in New Zealand controlled by the RBNZ should be reduced, increased or kept the same over the next 12 months.
Many will argue the near to zero annual inflation rate is as good as the deflation pervading in Japan and Europe at this time and therefore interest rates should be cut for the good of the economy (particularly exporters, as a cut would lower the NZ dollar value).
The argument against cuts and in favour of the status quo and increases in interest rates later on, is that the sharply rising values in the residential property market increases consumer demand though the wealth effect and thus is a major risk for future inflation.
Of course, a cut in the OCR at this time would add fuel to the property market fire by further reducing mortgage interest rates.
As always, there is no one single answer to this extreme dilemma the RBNZ finds itself in. Deputy Governor, Grant Spencer’s speech last week sent a message to the Government that they have to do more on the policy front (tax, RMA) to address the risks that the speculative investment into the housing market presents.
The RBNZ looks set with the next phase of their macro-prudential tools to force the banks to charge higher commercial interest rates for mortgages on residential investment properties. That additional cost will be passed on to the tenants in increased rents and is unlikely to dent the pursuit of tax-free capital gains by the speculators. In the end, natural supply and demand forces that are driven by price, and determine price, correct themselves. The question is whether the bubble bursts with serious collateral damage, or it can be managed to slowly deflate.
What should the RBNZ and the Government do right now do to prevent a nasty bursting of the housing market bubble disrupting financial stability and the economy?
What the RBNZ should do
Normally in this situation the RBNZ would be shunting interest rates up to slow the economy and house price inflation. They cannot do that as it would just push the NZ dollar higher when the rest of the world is cutting interest rates and printing money. The overall value of the NZ dollar, the TWI Index, has returned to its highs of 80.00 with all the major cross-rates increasing and the NZD/USD rate moving up to 0.7700. The RBNZ cannot cut interest rates and cannot increase interest rates.
Therefore the only monetary policy option left is to force the NZ dollar value down. It will require more than just jawboning words of “unjustifiably high” and “unsustainably high” to scare the currency traders and depreciate the NZ dollar. The time has come for the RBNZ to intervene again directly in the FX markets by selling the NZ dollar, as they did last August.
The pre-conditions and prerequisites for currency intervention are currently fulfilled in my book.
Specifically, before intervening the RBNZ will need to be satisfied that all of the following criteria are met:-
- The exchange rate must be exceptionally high or low; Tick! - RBNZ TWI assumptions are 75.
- The exchange rate must be unjustified by economic fundamentals; Tick! – The RBNZ has been telling us this for a while now. Dairy prices and the Terms of Trade Index are down.
- Intervention must be consistent with the PTA. Tick! - The inflation rate is not going to be forced above 3.00% by selling the Kiwi dollar down to 0.7200 and the TWI to 75.
- Conditions in markets must be opportune and allow intervention a reasonable chance of success - their judgment call – However, a nudge lower in the NZD/AUD cross-rate right now would stimulate a massive unwinding of long NZD positions against the AUD i.e. heavy consequential NZD selling.
The risk of RBNZ intervention forcing the NZ dollar lower on its own accord is elevated once again.
What should the Government do?
They have been trying to increase the supply of land for new house builds in Auckland with some success. They will not control immigration or bring in a capital gains tax. They could give the IRD more enforcement powers over those investors trading residential properties and who are not declaring the income for taxation on such business activity. They could also do more to encourage economies of scale with standard house construction designs/materials to lower the build cost to Aussie levels.
The Government would be better advised to address these issues than merely applauding the NZ dollar nearly reaching parity with the AUD as they did last week!
24 Comments
"The time has come for the RBNZ to intervene again directly in the FX markets by selling the NZ dollar, as they did last August."
You must be joking surely! . The RB hasn't got enough money to ever force down the dollar. There are people in New York, London, Surich etc who could buy and sell the whole of the NZ economy without batting an eyelid. The UK tried that years ago and the US hedge fund speculator George Sorros broke the Bank of England. What hope has Wheeler?
Yes, a load of codswallop. The RBNZ are a bunch of whiners. What about pushing up the real level of equity held by the banks from its pitifully low levels? Say 20% equity as a minimum, and no "risk-adjusted" fraudulent adjustments. Wait a minute, make that 30%. Result, banks with equity cushion, higher deposit rates, higher savings rate, lower household debt.
The RBNZ are a captured regulator. The banks don't need to do this openly, the $200,000,000,000 household debt does it for them. Of course the banks know this. Was it Jacob Rothschild who said "Give me control of a nation's money supply [ie fractional reserve banking] and I care not who makes the laws"? They are a caged tiger.
(NB Admin: Your new system doesn't quite work hence double up. )
"The time has come for the RBNZ to intervene again directly in the FX markets by selling the NZ dollar, as they did last August."
You must be joking surely! . The RB hasn't got enough money to ever force down the dollar. There are people in New York, London, Surich etc who could buy and sell the whole of the NZ economy without batting an eyelid. The UK tried that years ago and the US hedge fund speculator George Sorros broke the Bank of England. What hope has Wheeler?
BigDaddy (Olly?) It is a surprisingly popular myth that the Bank of England tried to lower the pound, but failed. They tried to hold the pound up, which is another matter entirely. Given the BOE has an infinite number of pounds at its disposal, Soros would never have bet against an attempt to lower it. Indeed the BOE has recently printed £375 billion pounds in order to lower the pound, and it is no coincidence that STG is now worth NZD$2, when not long ago, it was worth $2.50 and even NZ$3.
For once I agree with Roger Kerr.
Wheeler has all the tools necessary to bring the NZD down, but for some reason has only ever half heartedly used them. In fact half hearted would overstate it.
Stephen - How many billions of NZDs do you think the RBNZ will need to print and potentially push into the global system to affect the desired change ? Do you think that the QE programs of the US, UK and the rest have not, or will not have consequernces ? Do you think NZ is, or has been over the last 7 years, in a simialr position to those countries for more than 5 minutes. Do you think they would have done what they've done if they weren't ?
Grant,
Am not sure you are looking for an actual answer, as I suspect you are a little blinkered and so not really looking for one. So I may surprise you. If we are roughly a fifteenth the size of the UK economy, and they have printed NZ$750 billion, then proportionately we would have $50 billion to invest. Comparing with the Swiss, who really do have a rockstar economy, but have printed over $400 billion on their own, would give a significantly higher number still, but let's settle for the UK comparison.
Now if Wheeler spent say $5 billion buying genuine foreign assets trading in the markets (and didn't just do some kind of meaningless balance sheet swap with other central banks), and he announced that as his only tool left to try and meet his target of 2% inflation, he would keep doing this until the currency was fairly valued, my expectation is the markets would take notice. If the first $5 billion doesn't work, load up another 5 until it does.
In logic Roger Kerr is correct. There are good reasons not to lower interest rates further, and the government refuses to consider the actual micro tools that could work, so he is left with the currency tool that he very definitely has.
I note that right now he would get roughly A$4.9 billion worth of assets for every NZ$5 billion spent. I don't believe the NZD will charge through parity, especially with this kind of move. So although I wouldn't be in a hurry to sell these foreign assets, when the NZD got back to say A90cents, he would have made $500 million, for nothing. In fact he's created $5 billion of foreign assets for nothing- that's what the rest of the world are doing with our assets. He says the NZD is unjustifiably and unsustainably high, but does nothing about it.
By the by, the supposed $100 billion of NZD traded every day is a meaningless red herring.
In the end it is the real money flowing in and out for trade, and to buy Auckland houses, that makes the real difference. Throwing a $5 billion message into that process would be a good start. Go to $50 billion if the markets will let you. (but they won't, they'll get the message very quickly).It's all free.
Would the UK have done what we have done, and ended up with a ridiculously high pound, and kept their economy afloat by selling assets? I don't think so. They would have done what they have done.
The Government would rather continue with their recolonisation policy not only forcing kiwis out of their own cities but also diluting the influence and power of the kiwis that built New Zealand.
Simple solution: reduce migration because migrants are effectively stealing our homes. Consider Auckland 40%? foreign born. Foreigners have taken far more homes than they have supplied in Auckland. Where will it end?
Invasion and take over by economic means rather than by war.
This is the funny thing, Europeans essentially implemented this policy and displaced the Maori populace upon settling NZ. The Maori people have been at a disadvantage since and are over-represented in lower socioeconomic groups because they lost their land and assets.
Now things are looking like it will be European New Zealanders turn to lose land and assets at the hands of the latest wave of immigrants. Just watch as kiwis will increasingly are out-bid by foreign buyers. As I have said before, it is my opinion that New Zealand's future (in the long-run) is to become a vassal state of China. It certainly seems to me that this is the way things are heading for better or worse.
Yes, I had been thinking the same thing, but I can't quite connect the dots. Something to do with US monetary policy over the last 50 years I think. Banking (and houses as collateral) has taken over from production. Production generates wealth, banking allocates it.
I totally reject your statement.
Maori benefited greatly from European colonisation, the only argument against this, is from people who want to extort the taxpayer and fools. If you reject what i am saying, tell me how it could have been so much better.
Secondly, there is no benefit to modern colonisation, through financial manipulation. If you think that there would be benefits from being run by communist China, please tell.
I read somewhere that within 15 years of the signing of the Treaty of Waitangi - Europeans outnumbered Maori. Can you imagine how unbelievable this trend would have been for Maori at the time? In other words, they were outnumbered in their own land within less than a quarter of a lifetime.
Then I read this the other day;
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11433861
Given I rarely venture out of my little corner of paradise to the big smoke (Auckland), I thought - wow - never would've expected that.. We really do live in a different world out here in the provinces. :-).
It would have been a steep learning curve, thats for sure.
The population of NZ was low though and the tribal wars had just killed 25% of all Maori.
Today, you could easily argue against more people and we are certainly in a good position to say no. Just lucky we aren't beside the Med, Italy have taken in 25k 'refugees' in 3&1/2 months.
Not sure about the stat re the tribal wars - but if Maori vs Maori did indeed see one quarter of their population killed - then it could only have been as a result of European imported firearms being introduced into the warfare arsenal. And this takes us back to your previous statement, that somehow Maori benefited from European colonisation? Yeah, right.
Not quite...
http://en.m.wikipedia.org/wiki/Musket_Wars
At the time of European settlement the Auckland area was, to my knowledge, only sparsely populated because whenever a Maori tribe had settled in that plum area, the neighboring tribes would attack it.
Also, do not forget the genocide committed by Maori on the Chatham island Moriori.
They 'print' the dollars, it is a key stroke on a computer and use those printed dollars to buy another currency. by creating more money each dollar is worth a bit less- hence devaluation. Countries do it all the time, not saying it is a good or a bad thing . But it is a thing.
Yes, it seems most of them haven't heard of Quantitative Easing.
Let the foreigner buy your assets and then devalue until they give up and go.
It is a great way of having a tax increase when you need one but tell the citizenry you will not. The added advantage is you give an income rise to the exporters and the government gets a nice little extra tax boost.
The RBNZ can only effectively intervene, if it prints unlimited amounts of NZ-dollars so that it can always beat the "market". Like the Swiss SNB had done for a few years before giving up and counting its losses. It is a placebo, a futile exercise.
Real change can be implemented by e.g. halfing migration and giving preference to skilled and entrepreneurial migrants over those who simply bring money. And by taking an open stance against destructive money printing policies around the world in the relevant fora like IMF, OECD, G-something.
Consider the effect i.e. a drop of 30 or 40% in house prices in AKL. A lot of speculators would get hurt and mum-n-pops investors would no longer feel rich. A suidice mission for any "elite".
No, they will wait until we get the inevitable repreat (only bigger) of the GFC and then blame it on circumstances. Politics is a cynical game, esp. when there is no true democracy.
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