Reserve Bank Governor Alan Bollard's eyes will be glued to Europe as he keeps the Official Cash Rate on hold at its record low of 2.5% next Thursday, economists say.
ANZ and ASB are both expecting the Reserve Bank to keep the OCR on hold until December 2012, while Westpac economists this week moved their forecast back from June 2012 to September at the earliest, and maybe as late as December. Meanwhile, markets are actually pricing in a fall in the OCR.
Domestic issues won't have any impact on the Reserve Bank's OCR view on Thursday, with a gradual recovery here not creating inflationary pressures enough to worry the central bank.
'Lower OCR peak'
Westpac economists Dominick Stephens and Michael Gordon said the main channels of contagion for New Zealand from the Euro crisis were likely to be through export prices and the cost of overseas funding.
"The real concerns are around the global economy, and in particular the escalating fears of a euro zone break-up, with a resulting wave of sovereign and bank defaults across the continent. While the situation is very fluid (and developments in the last week have been much more positive), it’s becoming clear that even the best case scenario will be one of poor global growth," they said.
"Europe is already heading into recession, Asian growth is slowing significantly, and the US is struggling to gain any real momentum.
"In the last two OCR reviews the RBNZ has maintained a surprisingly constructive tone on overseas influences, even while acknowledging that “there is a real risk” that global activity slows sharply. But we think the RBNZ is set to significantly downgrade its world growth forecasts this time – the November Financial Stability Report, while not commenting directly on monetary policy, indicated as much – with the obvious implications for monetary policy," Stephens and Gordon said.
Meanwhile they expect the Reserve Bank to indicate a lower peak for the OCR than in September.
"Weaker world growth forecasts and tighter credit conditions could amount to a substantial change in the RBNZ’s interest rate projections compared to the September MPS. An eventual return to a normal level of interest rates will still be on the cards, but at a slower pace. We expect the peak in the 90-day rate projections to be shaved down from 4.3% to more like 4.1%, and the pace of tightening to be slowed relative to the September MPS (which indicated 140bps of hikes through next year)," they said.
Markets pricing in OCR cut
ANZ economists this week pushed out their first expected move in the OCR until late 2012.
"Of course Murphy’s Law could apply and aggressive collective action globally could remove current dislocations across markets. However, to bank on action being a permanent solution as your central scenario simply seems a stretch. We expect the RBNZ to come to the same conclusion in the December Monetary Policy Statement next week," they said.
"Of course the NZ rates market is actively pricing an OCR cut so the spectre of slow and gradual hikes, though a long way off, is not market connected. We’re not concerned by this. Markets will be markets: they play a risk-return game, and if we see the OCR moving down it won’t be by 25 basis points. It was only in July that the market thought the OCR could approach 4 percent by the end of 2012!
"We’re relatively bearish regarding the global scene but are mindful of marketdriven swings and the support NZ is getting via a lower currency. In such a situation it’s the spirit of one’s view that matters. Pushing out prospects for a hike until late 2012 is really saying the OCR is going nowhere for a long time," they said.
'Domestic recovery very gradual'
ASB economists, who also this week began picking December 2012 for the first move in the OCR, said the Reserve Bank would focus on offshore developments. They said the domestic situation would change the Reserve Bank's outlook:
"Recent domestic developments also indicate little urgency for the RBNZ to raise the OCR. Recent housing market data indicate some slowing in the recovery in house sales in recent months. Meanwhile, credit growth remains weak, reflecting continued caution amongst households and businesses. We expect the recovery in household spending and business investment over the coming years will be gradual," ASB economists said.
"Core manufacturing activity growth slowed over Q2, following robust growth over the previous 2 quarters. The outlook for manufacturing remains relatively upbeat, and we expect to see continued, albeit more modest, growth over the coming year," they said.
"Inflation indicators point to continued breathing space for the RBNZ on the inflation front. Medium‐term inflation expectations and pricing intentions have continued to ease. Q3 inflation was below both market and RBNZ expectations. In particular, there was little sign of a pick‐up in construction cost inflation. To the extent the RBNZ has highlighted its concern that post‐earthquake rebuilding activity in Christchurch will boost construction costs and flow through to wider inflation pressures, the Q3 result will be of comfort for the RBNZ.
"The RBNZ pared back its growth forecasts at the September MPS, largely reflecting its expectation rebuilding activity would occur later next year. Domestic economic developments since then have been slightly weaker than September MPS forecasts. Given the large degree of uncertainty at the moment, we do not expect substantial revisions to the RBNZ’s domestic outlook. Instead, we expect the RBNZ will highlight the increased downside risks to the domestic growth outlook from recent offshore developments," ASB economists said.
26 Comments
Cut, cut, cut and ...... cut!!! Say NZMEA.
Cut OCR to match northern economies
The New Zealand Manufacturers and Exporters Association (NZMEA) is advocating an Official Cash Rate (OCR) cut next week in response to the problems in Europe and the USA. A cut would help to take some pressure off the currency in the short-term and add some kick to any OCR rises later on.
NZMEA Chief Executive John Walley says, “It is naïve to think that we will be insulated from the problems in Europe. While only around ten percent of our exports are sold there the impact of debt problems there will make it more difficult for New Zealand to borrow offshore.”
“The US Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank have agreed to lower the interest rate on US dollar liquidity swap lines by 50 basis points. Clearly other central banks are taking concerns in Europe seriously.”
“The terms of trade decline reported by Statistics New Zealand yesterday demonstrates the urgency of acting to help exporters. The more we earn offshore the better the position of NZ Inc if problems do strike. An OCR reduction would help with this.”
“A cut in the OCR now would also be likely to keep more mortgage holders on floating interest rates making OCR rises in a year or two more effective at restraining non-traded inflation.”
“We continue to promote a Reserve Bank Act that targets non-traded inflation rather than headline inflation, but an OCR cut, in line with what our trading partners are doing, would help keep pressure off the currency in the short-term.”
http://www.realeconomy.co.nz/233-cut_ocr_to_match_northern_econ.aspx
Chop chop RBNZ, get on with it. Use, 'The Ratios' Luke.
Les.
Les, in a free market you have to pay according to risk, think about that for a whole minute, because its coming our way.
Im in California, its a tale of two cities, one half don't understand whats happening they want football, a job, a credit card to buy a 80" tv and a new truck and they dont know what the hell is going on, they think housing has bottomed, they wait for the rebound. They dont understand Obama care, they dont get that their pension's have been blown on a whim to prob up Wall street. They cannot comprehend the wealth being made by the %1. They know if they lose their job they are buggered, no welfare and no heath insurance, they prefer ignorance.
The other side, I had a meeting with this afternoon. They know whtas going on, they know its corrupt, they know the pensions have gone, they just want to know 'how big a hit are they going to take'? what is the standard of llving going to drop by? will it be Italy or India? They know about the enegy crisis, they know that the soldiers coming home will have no work and they are very worried. They think their $ is going to fall significantly and thats our problem, they realise that consumption is going to collapse and thats China's problem, they expect civil unrest.
Andrewj, I think this first para reflects NZ as well....and I think it explains the election results.....ppl are praying JK can deliver growth so the pain of increased taxes and declining house prices is avoided and they can start spending on their CC again...and thats just the mild (negative) scenario.
Now we see that the banks are going neutral long term (no hikes, no lowering, yet) on the OCR in effect....12months to a hike speaks volumes....and indeed markets see it going lower......Italy and France have to clear 50billion each early next year, no one will buy but the ECB....I think then the pressure will be on to drop the OCR....
Even if the EU doesnt implode short term which will rock us severly (and personally I think its a given) their ability to buy our produce is going to be slashed...in turn that will effect our other markets....which in turn effects us....so we will be going into another recession....house prices rising? yeah right.....
regards
Cutting won't achieve anything, as has been seen abroad. Raise it NOW! Banks are going to raise their interests rates anyway due to their latest downgrade. A downgrade given due to a lack of "local funding". If you want local funding you MUST incentivize local savings!
I agree, that is the case for most but........who's fault is that exactly? People being mugs is no one's problem but theirs surely? The government have the power to dis- incentivize property bubbles and incentivize local savings. They just chose/choose not too and so does the RBNZ. Same applies to the NZD. What will dropping the OCR further achieve? Look at Japan, and now many other of the world largest economies. They have no way out but to either "default" , recreate a new currency ( won't work) or AUSTERITY . They can't win this and neither will the global taxpayer
Justice, the Reserve Bank did its part in making submissions to the government back in 2007, admittadly too late in the cycle to do any good, but there are too many vested interests in continuing in the current trajectory. The banks, the real estate industry, the lawyers, property investors, part-time houseflippers, news papers. Its just a train wreck waiting to happen. The good news is we're about to stop, the bad news is we're going to crash haha. Hold onto your safety belts.
Again, I agree, it was too late and they knew it, It was a 'token gesture' to make their own hands in it look clean. I wrote to Bollard and the RBNZ back in 2003 warning him along with many others i suspect. I got fobbed off . The RBNZ played a massive role in the NZ property ponzi scheme and still do to this very day. You say "too many vested interests", well to that I say propping up a system that has nowhere to go hoping for a miracle that won't come seems stupid when the entire global financial system is put at stake just to keep property prices from deflating and corrupt banks from folding. They ask for CONFIDENCE but give those paying for it the finger!
No such thing as 'risk' Steven anymore. Have you noticed? The carry trade has already done huge amounts of damage and continues now whether you raise or lower the OCR.
How about: "want more income?" then invest in real businesses that innovate, produce quality niche products for export!
Hoarding property on the illusion of ever increasing capital gain is why we are at this point now in global financial history. The OCR should reflect real commodity and i dare say it 'compulsory asset' (namely a place to live) inflation or what's the point of even having one?
Until Alan Bollard introduces changes to the Core Funding Ratio, the effectiveness of the OCR is compromised by the banks' access to liquidity flows from international credit markets. As it stands, cheap international capital can comprise up to 70% of a banks deposit portfolio, which means that the spread between interest paid to domestic depositors and the cost of debt will remain high. And Kiwi's are wondering why banks are so profitable.
The banks run the place Anark....let's be honest about it....Bollard does what he is told by the banks. The economy is feeding the banks...it's that simple....and it will not change.
The way forward for Joe Bloggs is to abandon all thought that govt exists for the people...get rid of that mad idea and wake up to taking control of your own financial planning.
If you want to waste your life feeding a bank, having been dumb enough to take out a mortgage...hard cheese...The smart save up and learn to make do and to seek out what they need and to avoid the consumer shite.
Wolly,
Yep, the banks do indeed run the world, because they are perceived as being indespensible, when they're not. We're completely free to create our own currencies. A professor of law at Washigon State University wrote a book revealing that it was entirely legal for communities to introduce their own monetary systems as an alternative to the centralized banking system.
"These [alternative-currency systems] enable businesses and individuals that otherwise could not participate in the regular U.S. dollar economy to gain a medium of exchange - a local currency that they can use," said Lewis D. Solomon, professor of law at the George Washington University Law School and author of the 1996 book Rethinking Our Centralized Monetary System.
http://www.rcreader.com/index.php?option=com_content&task=view&id=13473…
Renting is no solution Wolly, because property investors and landlords essentially pledge the ability of their tenants to pay for their mortgage, when they borrow from the bank to buy rental properties.
Anark..what Iceland did we cannot because we are dependent on credit...we cannot earn enough to pay the bills by just selling Lamb and Dairy et al..the best you can do is look after yourself and stay well away from the parasitic banks...
Were this a nation without the benefit scams built by the lying pollies over the years, we might be more like Iceland...and be able to earn enough from exports to cover all costs and them some...but we suffer from decades of shabby govt and useless RB policies...
The promises keep coming...that we will save more.....that 170000 new jobs will be created....that budgets will be balanced....that surplus will happen and debts be repaid....I think we are more likely to catch out Dolphins playing football mid ocean with the Killer Whales.
Actually Wolly,
The Icelandic government, were fine after their National Default, but the public there like the Latvians, got screwed as hedge funds and private equity firms took over Icelandic banks and bought their loan portfolios. Icelandic debtors are still required to pay their debt obligations owed to the failed banks, but now owned by international financiers.
"The IMF entered the picture in November 2008, advising the government to reconstruct the banking system in a way that “includes measures to ensure fair valuation of assets [and] maximize asset recovery.” The government created three “good” new banks from the ruins of its failed banks, transferring loans from the old to the new banks at a discount of up to 70 percent to reflect their fair value, based on independent third party valuation. What do you reckon is in store for us, when our own property market collapses?
The vultures became owners of two out of three new Icelandic banks. On IMF advice the government negotiated an agreement so loose as to give them a hunting license on Icelandic households and businesses. The new banks acted much as U.S. collection agencies do when they buy bad credit-card debts, bank loans or unpaid bills from retailers at 30% of face value and then hound the debtors to squeeze out as much as they can, by hook or by crook."
http://michael-hudson.com/2011/11/icelands-fair-value-vultures/
"About 90% of Latvian mortgage debts are in euros, and most are owed to Swedish banks or their local branches. A few years ago, bank regulators urged banks to shift away from collateral-based lending (where the property backed the loan) to “income-based” lending. Banks were encouraged to insist that as many family members as possible co-sign the loans – children and parents, even uncles and aunts. This enables banks to attach the salaries of all co-signing parties."
http://michael-hudson.com/2010/07/latvia%E2%80%99s-third-option/
Anarkist, regardless of the credibility of S&P why did they downgrade NZ and Aussie banks this week? Do you not think S&P talk to Bollard and the RBNZ on a regular basis? The CFR is a joke because the RB made it so years ago. Like i said they were warned as early as 2003 as to where all this was heading and in 2005-6 many of us warned them about the US banking crisis. Fell on deaf ears my friend. Blind optimism ruled the day, and for some it still does, like Chancellor Merkel
Justice,
I'd argue that the ratings agencies now have an agenda to undermine confidance in public institutions. They've been fanning the flames of public panic since 2007, when the financial conflagion became too obvious to hide. Now they're exploiting it to rationalize radical economic reforms that have been on the agenda for some time. They did that in Mexico during the Peso Crisis and again in South East Asia during the Asian Crisis. They abett the reckless lending during the boom years and during the bust they amplify the economic turmoil. And those responsible, the private bankers get bailed out. it happened in Chile too, during Pinochet's regime, but haven't been able to ascertain whether ratings agencies were involved.
Then after the market close on Friday August 5th, we received word that S&P CEO Deven Sharma had taken control of the ratings agency and personally led the push for a U.S. downgrade. There is a lot of evidence that he has deliberately tried to trash the U.S. economy. Even after discovering that the S&P debt calculations were off by $2 trillion, Sharma made the decision to go ahead with the unethical downgrade.
http://seekingalpha.com/article/285737-the-rise-of-financial-terrorism-…
Lawrence Kudlow, economics editor of the conservative National Review magazine, testified January 26 before the Senate Foreign Relations Committee, "This is not a bailout of the Mexican peso or the Mexican economy. It is a bailout of U.S. banks, brokerage firms, pension funds and insurance companies who own short-term Mexican debt, including roughly $16 billion of dollar-denominated tesobonos and about $2.5 billion of peso-denominated Treasury bills (cetes). It is also a bailout of the Mexican government which incurred these liabilities. Finally, it could be a bailout of another $20 billion of Mexican private-sector bank certificates of deposit, commercial loans and trade credits."
http://multinationalmonitor.org/hyper/issues/1995/04/mm0495_06.html
There is nothing here that was not obvious well before the election. Why did these Wellington Wallies not have the honesty and spine to provide true and realistic forcasts for the parties and population to base their election considerations on. They are totally unprincipled and boardering on corrupt.
The banks will be telling Alan what he will do....nothing has changed regarding the economy being a property bubble dependent on cheap credit and LVRs near 100%. We have had three years of tinkering twaddle from the govt...
If there is any life left in the building sector...expect English and Key to kill it off with another gst hike...how else will wild Bill balance the books when revenue is crashing...014 looks set to be a Labour walkover, if that lot can ever erradicate from their beliefs... that giving friends money stolen from others leads to a better economy.
It looks more and more likely now that the cash raised from flogging 49% of the silver, will be frittered away on schemes on top of schemes..pure idiocy....
Almost too late now for the govt to declare war on Clark's scams...way to late to cut back Sir Humphrey's bloated salary and bonus...everyone in wgtn's on $500,000 a year...are they not!
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