The Reserve Bank of New Zealand (RBNZ) should hold off raising interest rates until June 2012 due to an unstable global economic outlook and the high New Zealand dollar, the New Zealand Institute of Economic Research (NZIER) says.
The NZIER's view is half a year different than expectations from economists at New Zealand's major retail banks, who are picking a resumption in Official Cash Rate (OCR) increases from December 2011 as the Reserve Bank removes its March 50 basis point 'insurance cut' in the OCR, which currently sits at 2.5%.
If the OCR remained at 2.5% until mid-2012, that would mean floating mortgage rates, which are closely tied to the OCR, would remain lower for longer, while fixed rates would be determined by the market outlook for the New Zealand and global economies during the next five years or so through wholesale swap rates.
'Risks abound'
Releasing the NZIER's June 2011 Quarterly Predictions, principal economist Shamubeel Eaqub said although the New Zealand economy was on the mend, weak global growth was threatening this recovery.
"An abrupt slowdown in the Australian economy, renewed recession fears in the US and a spreading sovereign debt crisis in Europe will soften global growth. New Zealand’s economic growth will be slow," Eaqub said.
NZIER expected economic growth of 1.4% and 2.6% in 2011 and 2012 calendar years, respectively. This was consistent with a slow and gradual economic recovery, with continued deleveraging.
RBNZ should not hike rates for some time
The Reserve Bank should not raise interest rates while the global economy was so vulnerable and the New Zealand dollar so high, Eaqub said.
"We now expect the RBNZ to raise interest rates from June 2012 (versus March 2012 previously). Interest rate increases should be delivered cautiously, as most (83%) of mortgages are short term. Even a 1% point (100 basis points) interest rate increase will raise the annual mortgage bill by NZ$1.4 billion or 2.2% of annual retail spending," he said.
Canterbury impact becoming apparent
Meanwhile, the economic potential of the Canterbury region may be permanently smaller than before a series of earthquakes hit from September last year.
"The Canterbury earthquake has not affected recorded economic activity much. But other indicators suggest the impact is real and large: 26,000 private sector job losses and around 2,000 population loss through overseas migration," Eaqub said.
Global fears
NZIER was particularly concerned by the recent deterioration in the global economy.
"Exports had been a key support to the economy. A renewed global slowdown, particularly without the buffer from Australia, will weigh on export prices and volumes. Tensions in global markets will also see the NZD remaining higher for longer, further weighing on exports," Eaqub said.
(Updates with video interview with Eaqub)
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30 Comments
This is a slap for National, little growth .....I think he's pretty realistic right now.....and he's open on the risks and he sees how fast its deteriorating globally....and as he says OZ isnt there for a buffer for us......
He also talks about core inflation at 2%....and its staying there IMHO.....not the CPI which is meaningless for policy purposes.....
Jobs going no where....
Its a stand up to JK.....
regards
Im pretty sure the NZIER isnt a Govn dept but an "independent" organisation who produces articles/output because they think its of...er...value....mostly this sort of stuff seems to be propaganda. and Neo-clasic failed economics mantra....
"NZIER is a non-profit organisation. We fund our own independent economic research on economic issues that we think the public should be debating."
Its probably not as bad as the retarded right think tanks in the USA which are worthless except for right wing canon fodder.....Ive seen worse "forcasts" at least it isnt as loony as teh banks ones.....it might even be fairly accurate this time....
regards
Central government is likely by far their largest client (unless they've changed their business model of late). I recall my first experience of them when working in CG - their consultant came in, sat down and asked - "okay, how do you want me to write this up" - or something along those lines - meaning, past experience suggested to him that as a senior government servant, I wouldn't want 'independent' analysis, rather I'd be looking for research that supported the Crown's position.
Independent experts - hahahahaha.
But its a professional economist....so he's there with few others (Steve Keen, Paul Krugman etc).
What I like is he is aknoledging the risks, the negative things....once you have done that you can quantify them.....even discard them after consideration but keep an eye on them....
To many economists seem to be on Prozac for my taste...
regards
Will we see the OCR fall next year?
It's not out of the question given the impact of the quakes on the NZ economy has been seriously underestimated by Treasury and Statistics NZ.
The flow of insurance capital into Christchurch could have been used to make Christchurch an opportunity city, instead it's become a farewell ticket.
I never thought I would see this kind of mismanagement from a National Government, although if I am brutally honest, knowing some Ministers in their pre-Governmental roles, I shouldn't have been surprised ... (I was very tempted to write something here which I have deleted ... for now).
ChrisJ - As a recent ex-Cantabrian I wouldn't be surprised if a lot of investors, after the recent release of the strategy for the re-building of ChCh central city, have changed their minds regarding re-investing in ChCh. A $400 mn light rail system, a $290 mn swimming pool, a $200 mn conevntion centre. Also how can it cost $12 mn to grass over Cathedral Square? The CCC are in dreamland and I wonder how many possible future investors in ChCh come to the same conclusion.
While a light rail makes some sense while there is the space available its only when the city has a future its questionable. Mind you asian cities wouldnt think twice of doing light rail, it would be installed......290mil for a swimming pool sounds nuts frankly....ditto the CC...
HP seems to have gone quiet, maybe its dawned on him his expansion of the city limits is looking more pointless every day....
regards
Well Roubini sees the odds of another recession as worse than 50/50 and I think he's being optimistic....on that basis, yes I think a cut in the OCR is looking more likely than not.....so sit and wait.....
Hyper-inflation is looking like a longer and longer shot every day....
regards
although hyper-inflation is the result of a currency meltdown or a loss in confidence in the currency - not necessarily just extra high inflation.
I agree that there are deflationary pressures out there and as you well know higher cost of resources (oil) is naturally deflationary (peak oil) but i have been wondering lately that if we are truly at/near peak oil then once this becomes more mainstream and people realise that a growth based economy is about to hit a future of low energy then the whole stack of cards (financially) could come down.
What I mean is if people all of a sudden realise that loans won't get paid back (government or private) due to an accelerating contracting economy then will our whole fractional reserve banking system not collapse? Yes, intially deflation as people spend less and less on luxuries as a higher proportion of their income goes on necessities and then hyper-inflation once people realise that paper money aint worth sh...with govts printing money just to keep up with interest on debt after expecting growth to forever occur.
At the moment we have a situation where governments can't admit peak oil and as you see they wont even discuss it - basically they can't discuss it as they know panic will set in markets will collapse and the game will be up.
Anyone still in doubt that Bollard is following near zirp instructions from Bernanke and the banks.....while allowing inflation to eat away people savings...gotta save the indebted who gambled in the bubble...along with the bank balance sheets...not enough to just have the ratings liars there for a stream of BS about triple A this and triple A that.
The name of the economic BS game is "spin baby spin".....keep that BS flowing about growth while debasing the currency as fast as possible....must save the banks....no haircuts here....quick where's the next bit of carpet.
This is why wolly it pays to borrow, not save. If the govt really wanted people to save they would be saving too. Our whole financial system is based on debt, without debt we have no money.
The whole financial system is not yet stuffed but I believe it is time to change. We live in a planet with finite resources, and chase these resources with an infinite amount of money. It would be better if we managed the resources and forgot about the money.
No skudiv..it's the banks that want the RBNZ and the govt to allow people to borrow and splurge...and they use the threat of failed banks and market disasters to force the issue...it's intimidation and it works and it explains the RBNZ current policies to a tee.
We have a gutless RBNZ and an equally gutless govt in regard the money policies.
The banks use this power to intimidate govt et al to their advantage so that the whole economy can be farmed by them on into the future. That is the grand rort going on. The media are too scared or stupid to expose it. The banks advertise a cover up. The schools stay well away from mentioning it. The "I want it now" peasants are too dumb to know they are being farmed.
English and Key try to hide all this shite behind a wall of fluff about export earnings and commodity booms and heaps of employment to be created....but in reality they know bloody well what is going on.
We should stop the farce of calling this place a soverign country...it isn't...it is a bank owned farm.
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