Not so long ago, Reserve Bank (RBNZ) Governor Adrian Orr often appeared intent on pulling the rug out from under the financial markets.
Now, he's rolling out the red carpet for them.
Often times, particularly during the monetary policy tightening of 2021-2023 Orr and the RBNZ's Monetary Policy Committee produced Official Cash Rate (OCR) decisions and commentaries that seemed aimed at blindsiding financial markets. And they did.
If it was indeed a strategy, you can see logic in it. Upward spikes in wholesale financial interest rates due to the markets being caught off guard are useful if the desired effect is to get banks to raise retail rates - IE mortgages and deposit rates - to customers.
But now we've seen two consecutive OCR decisions - the last one for 2024 on November 27, and the first one for 2025 on February 19 - followed by media conferences at which Orr has given clear indications of what comes next.
In November Orr virtually promised a 50 point cut at the next decision - and this was duly delivered on February 19. And then in last week's post-OCR review media conference Orr again all but promised there will be follow-up cuts of 25 points in both the April 9 and May 28 reviews.
Assuming that comes to pass, on May 29 the OCR will be standing at 3.25% - a long way below the 5.50% level it was on till August of last year. The revised OCR forecasts contained in the RBNZ's February Monetary Statement (MPS) strongly suggest we might see a 3.00% OCR before the end of this year, and possibly as soon as the July 9 decision.
I've found the change in tack by Orr fascinating. There's certainly logic being applied though. On the way 'up' for interest rates you may as well get there as fast as possible and if that includes having financial markets sometimes reacting in a fairly volatile way, well that's fine, it just means mortgage rates will go up faster.
But on the way down you want things to be a bit calmer, structured. Volatility is good for driving rates up, calmness is good for sending them down. If the market 'knows' OCR cuts are coming then this will help to put downward pressure on wholesale interest rates.
It could, however, be that the RBNZ is a little more nervous than it's letting on about how quickly the economy can recover from the effects of the interest rate hikes. And that might explain the telegraphing of OCR moves so that wholesale interest rates drop - and so that banks keep reducing mortgage rates NOW, thus giving householders more money in their pockets.
The RBNZ wanted to slow the economy so that the friction and heat, and resultant inflation, saw particularly through 2021-2022 would abate. The RBNZ, however, did not want to kill the economy, even though there was the frank admission it was looking to engineer a recession.
The GDP shocks
The GDP figures for the September quarter released just before Christmas were a nasty shock, showing as they did a 1.0% fall for that quarter and a revised 1.1% fall for the June quarter.
There was a lot of detail in the pre-Christmas GDP figures release. But in simple terms, we now have in front of us a picture of an economy that was travelling better than previously thought up to the middle of last year. But the drop-off in activity in the middle part of 2024 was much, much more precipitous than had been thought.
In layperson's terms, the economy's now not in a very different position to where we thought it was, but the recent past has been far worse than was widely believed. And that's a worry.
Economists reckon GDP probably turned mildly positive in the December quarter. The RBNZ picks that GDP grew 0.3% in the period. Not flash at all, but a positive number.
And there are definitely signs of life. Retail trade figures released this week, for example, showed a seasonally adjusted 0.9% rise in sales volumes in the December quarter. That's only the second quarterly rise since March 2022.
The business community is more optimistic about prospects in coming months. The exports situation looks very favourable when we look at things like the current high dairy prices. And the much lower Kiwi dollar is good news for the exporters. But not the importers, of course. And the global geopolitical situation is currently looking about as flammable as we feared it might be this year. Confidence can be brittle. The situation still looks very fragile.
So, how can the fledgling signs of a recovery be converted into something more substantive?
What about those mortgage rate reductions?
Well, a key factor will be how quickly those with mortgages get interest rate reductions and have more cash to spend in order to make the economy's wheels turn.
With Kiwis anticipating falls in interest rates this year, mortgage holders have been going shorter and shorter with their fixed terms, which, as we know has resulted in some 55% of the $370 billion mortgage pile due an interest reset in the first half of this year and over 82% of it across the whole of 2025.
Now that the RBNZ has put its cards on the table about what OCR cuts can be expected this year, a lot of people are facing the decision of where to next? Do they stay 'short'? Or go 'longer'?
Looking at the advertised 'special' rates for new residential mortgages we can see that already since the peak of late 2023 the popular shorter term rates (six months-two years) have dropped by between about 160 basis-points (for six months) and about 200 points for the one and two year terms. (I did those rough calculations based on the RBNZ's monthly compilation of new residential mortgage 'special' rates combined with current rates on interest.co.nz.)
From its peak of 5.50%, the OCR has currently been dropped by 175 basis points, with another 50 virtually promised by late May.
That means by the end of May we will have had combined OCR cuts of 225 basis points (bps).
However, already before we've got into March, popular mortgage rates have been dropped 200 bps from their peak levels.
Mortgage cuts front-loaded
That tells us the mortgage cuts are being front-loaded ahead of OCR cuts.
It suggests mortgage rates may not have as far to fall from here as some existing mortgage holders might hope.
What do we think mortgage rates may go down to? Say 4.5%? Maybe 4.25%? That's a lot lower than the 7+% rates seen till quite recently. But it's still well above the 2.2% to 2.5% rates seen in mid-2021.
In terms of what people are currently paying, the RBNZ's yields on loans figures, showing what banks are actually receiving from mortgages, tell us that the overall yield only started to fall, slowly at the end of last year.
As at December (latest available figures) the total yield on mortgages was 6.29%, down from the peak 6.39% in October 2024. However, the fixed rate yield has barely moved thus far, having dropped just one basis point from its peak, to 6.33% in November and then staying static at 6.33% in December.
Clearly, as we see some of the torrent of mortgage resetting during the first half of this year, and we are talking about an average of more than $30 billion a month worth of mortgages to be reset, those yield figures will start to drop more meaningfully.
After last week's OCR decision and MPS release, financial market pricing has very neatly aligned with the RBNZ view and a low point of somewhat above 3.0% is seen for later this year, followed by a slight rise next year. But market pricing can be wrong. And it wouldn't take much to change things.
Inflation 'under control'
The RBNZ is confident it has inflation under control - although there are those who wonder if it should be that confident. The RBNZ is itself now forecasting that annual inflation as measured by the Consumers Price Index (CPI) will rise from the 2.2% reported for the December 2024 quarter to 2.7% by the September quarter of 2025.
That's still within the aimed for 1% to 3% range, but is well above the explicit 2% target. The RBNZ's current working assumption is that domestically sourced inflation will continue to ease, while the spike in the 'headline' figure will be due mainly to higher oil prices and the lower exchange rate.
The RBNZ tries to 'look through' one-off impacts of overseas sourced inflation. Where it can come unstuck is if spikes in the 'headline' inflation figure then lead to an increase in inflation expectations. While the RBNZ's latest Survey of Expectations showed the 'experts' see future inflation comfortably settling in and around 2%, the companion Household Expectations Survey showed the average householder is less convinced. To say the least.
Clearly, having engineered what turned out to be a pretty nasty recession, the RBNZ is keen to believe that it can now be 'hands off' with the OCR and inflation for the foreseeable future.
But what if it's not the case? And what if something crops up between now and May that undermines the RBNZ 'promise' of 25 point OCR cuts in both April and May? It would put the central bank in a tricky situation.
Having seen the economy have a rough time in 2024, we all want 2025 to be better. And it could be. But nothing's guaranteed.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
19 Comments
“The RBNZ did not want to kill the economy.” Ok reduce the charge to manslaughter then. It can be neither overlooked nor forgotten that there was a blatant overreaction, a crash dive of the OCR, at the onset of the pandemic. Supposedly intending to protect the housing market but instead precipitating a stampede into property investment and/or speculation, and resultantly sky rocketing values. Then, courtesy of the accompanying wilful money printing, once inflation really got the bit between its teeth, the OCR too skyrocketed back up. It is difficult to accept that there was much method in the madness. Instead it appeared like a series of knee jerk reactions, both slow and fast.
It does not feel to me that another 50 of cuts and suddenly animal spirits will roar.., People are shell shocked re housing falls and job security. You can tell by the way political polling is moving that people are less then happy with National, that does not necessarily translate into actual voting, but people think National is not doing enough to right the ship.
In reality no party can replace the credit that was being magiced out of thin air from our housing Ponzi, but that's the sort of magic people got used to. Its as hard to give up as QE...
The next crisis is here, watch the US Equity markets, doubt is creeping in re valuations and their sustainability.
Is this the year your kiwi saver falls 20%?
Got to be correct sometime, right?
I've spent most of my adult life saying "Houses can't keep going up in price in NZ", the fundamentals don't justify it. And I've been wrong about 38 out of the last 40 years. So, yeah, about a 5% accuracy rate right there.
Stock market is the same in my book. 30 times price-to-earnings ratio, is another way of saying I'm happy to accept a trifling return on my money before tax; in many cases only the expectation of further capital gains can 'justify' current share prices.
Until they can't.
But the answer to the rhetorical Hargreaves question is?
NO.
Because ultimate scarcity is now in the driver's seat, and interest-rates cannot alter that, They can damp demand (particularly for the discretionary, but not for essential) but cannot conjure up that which isn't there.
That's where economics, and those who report from its blinkered confines, comes unstuck.
...continued from above...
SCOTT BESSENT - the new U$ Secretary of the Treasury (SOT)
And then came the planned jiggery-pokery with the balance sheet, where the U$ might play with their Gold Revaluation Account where the physical gold (which is more than likely not there anyway) might be revalued up from the current book value of $42.222/oz up to $3,300, or $5,000, or $50k, or as Judy Shelton* suggested why not even $140k or more and use some of those spoils to buy up Bitcoin to park some of the reserves into this giant Ponzi as well - BRILLIANT!
*(Fmr adviser to Trump #45 and mentioned by some that she might be a contender for Federal Reserve Board - that said the next scheduled vacancy doesn't come up until January 3, 2026 - Powells Chair expires May 15, 2026 - the board terms are staggered 14-year terms)
Well, I have to say, it was a giant stretch for me to imagine that Trump could have dredged up a SOT dumber than Janet Yellen, but Bessent certainly fits that bill - he has dropped himself right in it in assuming that the ~8000 tons of U$ gold are still there in the 4-5 different vaults.
What he has done in his first public announcement is to massively expose an LBMA/CME physical delivery default that was already happening right under our noses anyway. In desperation and a 3-month 'delivery' wait the LBMA is issuing paper warrants (guaranteed by the Fed) for future delivery = A DEFAULT - PURE AND SIMPLE.
With Trump's policies to date how on earth could yet more financialisation of the U$ economy possibly address a Rust Belt issue that stretches from the Great Lakes to Virginia, a total debt of close to $1 million per tax-payer, and a casino economy with arguably the most dysfunctional GDP profile on planet Earth?
There is every indication that the deficit spending will be a minimum of $2 trillion for 2025, and that is assuming the status quo doesn't deteriorate. With Trump's Hare Kare 'policy' there are many scenarios out there that point to it being closer to $6 trillion. It also assumes that the RoW is dumb enough to continue buying U$ debt when Trump just declared a trade war on the entire planet.
There appears to be an attempt to buy time and even offering paper gold contracts at massive discounts is not flying - surely anyone with an IQ above room temperature, knows that the physical is simply not there to deliver. What this scrutiny has driven is an even more intense race into gold in anticipation of a major revaluation.
Bessent seems blissfully unaware that massive flows of gold from West to East have left next to no gold to meet unexpected U$ demand. Neither does Bissent see that London is no longer the recognised physical gold trading hub - beginning on May 28, 2024, the new standard for settlement became the next business day after a trade, or T+1.
Now that the physical trade is decentralised this tool is no longer in the hands of the City of London private banksters. Gold orders can flow into the BRICS-centric physically-backed global exchanges
Bessent seems oblivious to the fact that both the U$, and UK have been heavily betting against gold for more than 50 years and that multiple leasing and rehypothecation have been routine to try to hide the fact that their currencies only have ~1.5% and in the case of the £, 1/500th of their purchasing power remaining.
Just in the last 25 years, similar to the euro, the dollar has lost 90% of its value, sterling 92.4%, and the yen 93.2%. We should know where this is headed - it used be dozens of BIS-centric countries that were assisting in the suppression of the physical gold price and they still weren't successful - now it is only two - the UK and the U$ and they have been caught monumentally short - we now have a full-on default on physical delivery that can no longer be spun away.
These clowns were so carried away with their ability to game the casino (FGS they even call it The London Gold FIX) that they thought they could carry on this charade indefinitely.
Well guess what - we are seeing the beginning of a perfect storm and a bear squeeze of epic proportions because the gold has largely gone east, and just about anywhere - apart from the utterly clueless Five Eyes (U$, UK, Canada, Australia, NZ) - the first two bet the farm against gold and when push comes to shove, NZ and Canada have zero gold reserves and Aus a pathetic ~79 tons, when they are one of the leading gold producers on the planet.
It is as if these fools did not get the Basel III memo that physical gold was to be designated a Tier 1 balance sheet asset alongside U$ Treasuries - when that happened the BIS signalled to the entire planet that they were throwing ALL fiat currencies under the bus - that should have been the wake-up call that an organic supply/demand market-driven price discovery for physical gold was well on its way.
I don't see how the U$ gold audit can prove anything, or restore confidence, a comprehensive gold audit would have to include all leasing, rehypothecation and futures contracts as well, and most of this is so opaque, it is impossible to audit - which begs the question, perhaps the Fed is telling the truth when they claim it can't be done - chalk that one up!
It looks to me that there is less than a snowball's chance in hell of the authorities ever knowing the true figure, let alone Joe Blow public. The gold 'in' Fort Knox is only a side-show anyway, as IF it was all there it would only amount to 2% of the world's mined gold.
If the official gold held by all of the CBs on the planet was valued at $2,950/oz, then it would come to around $3 trillion - which is less than Apple's market cap at a mind-boggling $3.6T, the same amount as that of NVIDIA, and slightly more than Microsoft at $2.9T.
To me, this suggests two things - those market caps are crazy high, and physical gold is massively undervalued.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
LEASING GOLD - IS IT JUST LIKE LEASING A CAR?
The U$ is panicking now because leasing gold is much like leasing a car - the lessee takes delivery of the asset and uses it - however, we would assume that the lessee wouldn't sell the car to a third party because the asset is simply not theirs to sell.
Not so in the business of gold leasing - in this Wild West debacle, the habit is for CBs to lease out their gold for a profit yield, and not worry about repatriating the asset in the foreseeable future, because they were so great at naked shorting the physical market, that at any time they assumed they could go back into the market and replace their stock - and they were keeping this charade going for a long while - remember for instance the 'Brown's Bottom' gold price at $250/oz.
Essentially there was a bear market in gold - ie in 1980 the price was $850/oz and the prior announcement when the price was $282/oz, meant that the traders, drove the price down to $252 in July 1999 - in 17 auctions the UK sold a total of 395 tons at an average of $275/oz.
This will work................ until it doesn't - beware the black clouds on the horizon.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
OH DEAR - IS THE PERFECT STORM IMMINENT? - well I can think of 11 factors off the top of my head, and there will be many more that I have missed.
#1 The BIS January 1st 2023 designation of physical gold as a Tier 1 balance sheet asset, which should have prompted any CB with half a brain to gold stack, especially if they could at the same time move out of reserves that involved counterparty risk.
#2 The dramatically labelled "Basel III Endgame" - an international regulatory accord for reforms designed to mitigate risk within the international banking sector by requiring banks to have more capital on hand. So while the total capital ratio (Tier 1 + Tier 2) remains at 8%, as it’s been since Basel I, the composition of what banks can use as that capital is changing, with a greater emphasis on higher-quality forms of capital.
That would mean the way banks calculate their risk-weighted assets (the denominator or bottom figure in the capital ratios) would change.
While the 8% figure might look the same, the changes to the capital ratios' numerator and denominator and new buffer requirements mean that 'Basel III Endgame' would increase capital requirements for the banks targeted by these regulations.
Estimates have varied, with the higher ones coming from the banking lobby, but the biggest banks would need to increase the amount of capital they have on hand by up to 20% over what they keep in reserve now.
#3 The self-induced bear squeeze where last-minute panic sets in and an attempt to try to load up on gold in the U$, now that Bessent has been wrong-footed by in effect causing a monumental chorus within the US to audit the Fed gold which is a complete waste of time without doing a comprehensive audit of all of the vaults.
The 1974 "audit" was a farce - only one of 15 vaults was audited - the last real audit was in 1953 - an easy date for me to remember because it was the year before I was born.
#4 Before January 1 2023, spot FX gold traded on an unallocated cash-settled basis, with long/short positions settled amongst the LBMA market-making bullion banks with only a tiny percentage of the hundreds of tons of gold traded each day ever physically delivered.
After some 50 years of price suppression where central banks borrowed/leased gold and sold it into the market - it was hoovered up by the more astute CBs and in particular the BRICS-centric countries - basically gold went on a one-way trip - Eastwards.
The ultimate irony now is that the tonnages topping up the commercial airline flights at a cheap transit price fly BOE/LBMA gold into the U$, but it then flies out East again as more and more entities stand for delivery on their gold contracts.
#5 There is now a race to repay existing leases because even the legacy press is reporting the likelihood of a breakout in the gold price (and silver) in 2025.
#6 Physical gold is increasingly being sourced by the big players directly from producers and refineries directly into the BRICS countries. CB sovereign physical gold does not require reporting, and to escape sanctions/tariffs etc a large barter trade is evolving. This further reduces access to physical in the West.
#7 The cash-settled COMEX exchange has become a way of obtaining undervalued U$ gold just as all of the dealers are in a short squeeze - they took far too hefty short positions and never held enough physical to cover themselves.
#8 Lots of funds around the world can't invest in physical gold and they thought they could buy the "next best thing" - ETFs when they are nothing more than a dodgy financial product with enormous counterparty risk.
In effect they are buying shares in a trustee, eg the SPDR Gold Trust. The trustee then uses a custodian, in this case HSBC, to source and store the gold for them. As the custodian is tasked with sourcing and storing the gold on behalf of the trustee, they are a major counterparty.
Quoted/paraphrased from Forbes (of all places)...
"Herein lies the first problem. Many investors buy gold as portfolio insurance against a systemic failure in the financial system. As GLD is intertwined with one of the world’s largest banks, it doesn’t fit this purpose. If HSBC became impaired, GLD shares could be negatively impacted.
But the problems go deeper. Custodians like HSBC use sub-custodians, such as the Bank of England, to source and store gold. So, in addition to carrying custodian risk, investors also have sub-custodian risk.
Sounds like a lot of counterparty risk. But there has to be rules in place to protect investors if something goes awry—right?
Ah, no, sorry - based on old LBMA rules, there are no written contractual agreements between sub-custodians and the trustees or the custodians. As a result, the ability of trustees and custodians to take legal action against sub-custodians is limited. Therefore, the trustee is on the hook for any negligence. But trustees are insured against such events—correct?
It turns out that trustees don’t insure their gold holdings. They leave the responsibility of insurance to the custodian… And the plot thickens. Custodians only insure the contents of the vaults for limited general insurance cover. Such coverage falls greatly short of the value of the gold held inside the vaults.
Putting it all together, if anything happens to any of the counterparties, the investor has zero recourse. Besides carrying major risks, there is another issue with gold ETFs - they have no Exposure to Gold!
The GLD prospectus states “GLD represents a fractional undivided interest in the Trust.” When you invest in a gold ETF, you are buying shares of the Trustee. You are merely a shareholder of the trust, not a gold holder.
As such, GLD shares represent a paper claim on gold, not gold itself. This negates a major reason for owning it - protection during crises. If the economy collapsed and brought down a part of the financial system with it, the Trustee will settle your claim in cash, not gold.
The real irony is the price of gold could be skyrocketing and the ETFs could be going bankrupt at the same time. Given these issues, long-term investors would be wise to avoid gold ETFs. Can you imagine the carnage when this monumental ETF con is exposed?"
#9 Some large insurance companies in China are now permitted to hold up to 1% of their investments in the form of physical gold - that alone would amount to ~$1 trillion of extra demand when there is already a massive shortage.
#10 U$ Mainstreet physical gold investors haven't cottoned on yet, and last time I checked physical gold was on average a minuscule 0.5% of their wealth portfolios - even a modest rise to 2% would create another massive shortfall of physical supply.
#11 Western economies have become addicted to low interest rates and easy money, but the result has been massive debt, overleveraging, and distortion in asset prices. They are sure to continue to inflate their way out of economic challenges because the alternative, default, would be too catastrophic. Central banks are between a rock and a hard place, unable to raise rates without triggering systemic collapse, but also unable to maintain the status quo without inflating the currency into oblivion.
This further invokes a flight into Gold and so the cycle accelerates. At $100,000 of debt added per second, the U$ is adding a trillion dollars of debt every 100 days - and that's only the fiscal challenge.
Last time I checked the total debt per tax-payer (including unfunded liabilities) was very close to $1 million.
Thanks for a very thought-provoking article, David - it certainly made me put my thinking cap on.
Cheers
Colin Maxwell
Damn - it looks as though my part I (3:48 post) has done a runner.
bang it on twitter (X now) i liked it.. don't agree all, but some yes
It was a very long comment, some may say crazy long, and now another one. I thought this was going to be the new standard!
Part 1 was there and I did do a speed read. Few will have the attention span to wade through it. There was an argument that many readers came for the comments, not even reading the articles, and that is because most comments are short and pithy. Short attention spans these days.
ignore it if its to long for your attention span... not everyone can cope with immersion.
Ain't no one got time for that.
“It is my ambition to say in ten sentences what others say in a whole book.” ― Friedrich Nietzsche
True a long comment. I read it. It was largely, worthwhile. Would though sooner have a contribution with a lot of thought, rather than one of too little thought. Surely there should remain on here a degree of the reader being able to discern for themselves?
I hear you, Zachary - to me though, this one is such an enormous subject of inter-related factors, that it can't be tackled using short comments. That's why I break the subject matter up into sections with headings, as some of these individual sections are trite knowledge for some readers, and they can just scroll through what they don't need to read.
Also when I do write I give it the entire nine yards, no self-censoreship and no punches pulled. I have no political agenda, and there is zero attempted monetisation of my thousands of hours of research which is both contemporary and historical.
My observations are far too uncomfortable to be accepted by NZ blogs which is why I am quite content to guest-write for an overseas site. I noticed, that there was some considerable hostility here when I first started writing, with multiple personal insults but that was like water off a duck's back to me, and it has largely disappeared.
However, if the admin is becoming uncomfortable with my contribution, I am quite happy to disappear quietly into the night - they just to need say the word.
Thanks for the feedback
Col
Breaking the subject matter up into sections with headings is good. Nothing worse that a wall of text. Wall of text is a red flag but so is overall length.
Part 2 is 2,592 words which should take someone ten or fifteen minutes to read. However, the subject matter is not a short story so I estimate a careful reading approaching thirty minutes.
Hopefully I have set a challenge for readers to give it a go. No doubt I will get replies with claims of finishing it in five minutes.
A last chunk of our youth workforce has left. A good chunk of those in training are thinking about it. We have more retired and less tax payers daily. Hard to see more debt having any winners other than bank shareholders.
More debt starts to get risky, not sure the banks want to much more....
This worth watching
https://youtu.be/Cl_JpCSvTpk The REAL Story of Donald Trump 4.4 mil views
so is this same guy history of the OSS and CIA
The “Deep State” Explained
Thanks for that link, IT GUY - very revealing.
I like that guy, he did a who is Joe Rogan one as well. worth watching as well, I like to be informed, I think this guy tells the truth.
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