By Bernard Hickey
The Reserve Bank of New Zealand held the Official Cash Rate (OCR) as expected in its latest monetary policy decision, but has opened up the possibility of interest rate cuts if inflation continues to be weaker than expected and well below the Reserve Bank's 1-3% target band.
The bank said it expected to keep the OCR on hold for "some time", appearing to drop its December Monetary Policy Statement outlook for a tightening of policy late in 2015 and early 2016.
Instead, it opened up the potential for a rate cut if inflation was unexpectedly weak and said a period of deflation was possible in 2015 before inflation moved back towards 2%.
"In the current circumstances, we expect to keep the OCR on hold for some time," Governor Graeme Wheeler said in his statement, which is the regular short statement 'in between' full quarterly Monetary Policy Statements that include fresh forecasts.
"Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data," Wheeler said.
This is the first time the bank has openly talked about the possibility of a rate cut. The New Zealand dollar immediately dropped to a fresh three year low of 73.75 USc from over 74.3 USc before the OCR announcement.
Economists said the bank had dropped its tightening bias and was now formally back to 'neutral', with the talk of a possible rate cut reinforcing financial market bets that a rate cut was possible in 2015.
Fixed mortgage rates have dropped sharply in recent weeks as weakening inflation expectations globally and news of money printing in Europe has driven European bond yields to their lowest levels since the 1400s. That has flowed through into lower wholesale interest rates in New Zealand, which has allowed banks to cut fixed mortgage rates to closer to 5%.
Wholesale interest rates fell around 9 basis points after the announcement and financial markets have fully priced in the chance of a 25 basis point cut later this year.
Oil price slump
The Reserve Bank noted a weaker than expected outlook for trading partner growth and the 60% fall in oil prices since June last year. It said the sharp fall in fuel prices would increase household purchasing power and lower the cost of doing business.
However, annual GDP growth in New Zealand was above 3% and supported by rising construction activity and household incomes.
"The housing market is showing signs of picking up, particularly in Auckland," Wheeler noted without comment on what he might do about it.
He warned again that the high currency remained unsustainable, unjustified and the bank expected a further significant depreciation. Wheeler then went on to comment in more detail than usual about the low outlook for inflation.
"The high exchange rate, low global inflation, and falling oil prices are causing traded goods inflation to be very weak," Wheeler said.
"Non-tradables inflation remains moderate, despite buoyant domestic demand and an improving labour market," he said.
"Headline annual inflation is expected to be below the target band through 2015, and could become negative for a period before moving back towards 2 percent, albeit more gradually than previously anticipated."
Economist reaction
ASB Chief Economist Nick Tuffley said the Reserve Bank had moved to an explicitly neutral bias, although he still saw the risks towards a hike rather than a cut.
Any catalyst for a cut would most likely be an adverse global development. Nevertheless, markets will continue to price in the prospect of OCR cuts and the shift to the neutral bias will fuel the move further," Tuffley said, adding the New Zealand had joined a growing list of central banks that had softened their stances in a short space of time.
"The probability of a rate cut implied by the local OIS (wholesale interest rate) prices has clearly increased. A rate cut is now almost fully priced in over the next year (22 basis points vs. 12 basis points prior to the meeting)," he said.
ANZ Chief Economist Cameron Bagrie said the inclusion of the “up or down” phrase "signals a clear dovish undertone."
"The market will gun for cuts even more aggressively after today’s statement," Bagrie said, adding he saw the risks tilted towards a cut, but they weren't concrete enough yet to formally predict a rate cut.
Westpac Chief Economist Dominick Stephens said the Reserve Bank's new neutral stance was a "watershed moment", given the bank had held a tightening bias in one for or another since July 2013.
"While we anticipated the shift to a neutral bias, we still judge this press release to be more dovish than anticipated because the RBNZ failed to argue against the possibility of OCR cuts," Stephens said.
"We reiterate our call that the RBNZ will have to tighten macroprudential policy this year, amid low interest rates and a resurgent housing market," he said, adding he now saw a 20% chance of rate cuts.
Here is the Reserve Bank's full statement:
The Reserve Bank today left the Official Cash Rate unchanged at 3.5 percent.
Trading partner growth in 2015 is expected to be similar to 2014, though the outlook is weaker than anticipated last year.
Divergences continue among regions, with growth in China, Japan and the euro area easing in recent quarters, while growth in the US has remained robust.
World oil prices have fallen 60 percent since June last year, which will boost spending power in oil importing economies but reduce incomes for oil exporters. The oil price decline, together with uncertainties around the transition of US monetary policy, has led to an increase in financial market volatility.
The lower oil price will have a significant impact on prices and activity in New Zealand. The most direct and immediate effects are through fuel prices, with the price of regular petrol falling from a national average of $2.23 in mid-2014 to $1.73 currently. This will increase households’ purchasing power and lower the cost of doing business.
Annual economic growth in New Zealand is above 3 percent, supported by rising construction activity and household incomes. The housing market is showing signs of picking up, particularly in Auckland. However, fiscal consolidation, the reduced dairy payout, the risk of drought, and the high exchange rate will weigh on growth.
While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.
The high exchange rate, low global inflation, and falling oil prices are causing traded goods inflation to be very weak. Non-tradables inflation remains moderate, despite buoyant domestic demand and an improving labour market. Headline annual inflation is expected to be below the target band through 2015, and could become negative for a period before moving back towards 2 percent, albeit more gradually than previously anticipated.
In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data.
Official cash rates
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(Updated with currency move, chart, economist reaction)
41 Comments
Deflation in 2015?
The system of measurement is clearly out of whack if car running costs are a bigger driver of interest rates than that of housing costs...
In 50 years time we will look back at this period with bemusement in much the same way as we currently look back at the gold standard...
I love deflation.
How many people are crying because technology has been falling in price for years. Tell all those people will smart phones that they should be paying 10 grand for their smart phone or their ipad, or laptop and so on. Tell them its awful that we can buy them for a fraction of the cost because the price is falling and quality improving.
Tell them that the big 50 inch tv that cost $20,000 last year should now cost $23,000 or more. Tell them its bad that they drop the price.
Technology is in constant deflation and booming yet all other goods and services that are going up in price, or trying to go up in price, are struggling.
Maybe we should put the government, Council, Insurance companies, banks, Lawyers, Accountants, Fund managers, Power companies and so on into deflation. Then they may be forced to get better, not worse.
Look at all the problems in the West with inflation (no matter how small) high unemployment, street marches, toppling established governments, poverty and so on.
Now look at Japan. People keep saying "The Japanise disease" yet i have not read a single report of high unemployment, street marches, toppling governments, poverty and so on.
Who gains from inflation? - The asset holders do - Equities go up, interest rates go up, house prices go up - all benefitting those with wealth and the more wealth the more they benefit.
Surely Wheeler must know that as an open economy , we are "importing " deflation from our trading partners like Japan and other economies where the currency has fallen or is being managed downards or there is over -production of consumer goods so prices are falling ?
Just like when oil goes up and it feeds into the economy , we are said to be " Importing inflation", so the reverse must apply ?
The only price increases we see domestically are increases in ADMINISTERED COSTS by the State and Local Authorities , and these are usually unavoidable fees , levies and charges because there is no competition .
Interesting he used the crucial word DOWN when referring to future moves in Interest rates .
As is now evident in the case of oil, iron ore, copper, consumer electronics and much more, massive excess capacity ultimately results in the collapse of boom time prices. Soon there is in motion a withering cycle of deflationary adjustment, profit collapse and a plunge in new capital spending.
http://davidstockmanscontracorner.com/the-wreck-of-the-monetary-hesperu…BTW a neutral OCR is definitely not 4.5%!
Could we now have an interview with the over excited bank economists who have been heralding floating mortgage rates of 8 - 9%? So we can seek to understand why they have been ignoring the true global conditions for the last 5 years.
Is that a definite maybe, or more flim-flam. Hedging ones bets is getting more ridiculous by the day, never mind the current thinking.
Why work, be happy. It does not pay, except, when on an inside straight.
I will Reserve judgement on what Reserve Banks say.
Overpaid and not worth the effort.
But then, nothing new there.
Finance is becoming a joke. But then Swiss knives and oil are doing swaps.
Greeks de fault.
I have never seen such machinations and gobbledy gook and political chicanery in all my born days.
Alter Ego - the 50% fall in oil prices was not forecast by anyone on this site, and very very few offshore. That fall takes about 1.0 - 1.2% off the CPI in Q1 i.e. without that unexpected fall the CPI would be sitting very slightly above the RBNZ's lower band and little would not have changed the outlook for inflation and the OCR for the RBNZ i.e. a slow grind towards 2% by years end and a 2-3 more hikes starting mid-late year. Oil has changed that nearly overnight, and if one is convinced that it can sit this far below its production costs for a long time, it will be a more permanent change - I seriously doubt that, and as production and drilling gets cancelled, a shortage and nasty rebound late 2015, certainly 2016, could see an equally nasty reversal of the whole trend
We're are now seeing the downside to what years of money printing and negative real rates does when you have to bail out poor borrowers. Uncertainty and huge volatility.
That's not right GA. Ergophobia predicted the collapse in oil price right here four years ago and the likes of Powderdown Kiwi and steven treated me with contumely for it at the time. It was obvious that Shale and Fracking on that scale in the US and Canada was going to have this result. What's more I say it will be a very long, maybe permanent phenomenon, unless Goldman Sachs work out a way of rigging things.
There would I think be some effect on price from the shale oil boom over-production. Some of the US shlae oil is clearly was absorbed in countering drops in production from conventional crude elsewhere. The rest has suddenly caused this huge price drop though? I cant see it I'll admit, so what is left is indeed a decline in demand? ho hum.
Oh boy how to answer this one.
To start with can we see the link matched with reasoning? Otherwise its looking like nothing more than a lucky guess. PS plus I'd like to see you dated it, ie you specified it would be 2015. Of course luck always plays a part, sooner or later Im sure you will get lucky, maybe its today. On top of that of course it was expected that Saudi would as the swing producer cut back to keep the oil price up, lots of oil companies it seems though that, didnt happen. So with all tehse variables you claim you are right on the button? hard to believe.
Having listened to Matt Simmons btw who predicted these spikes and collapses repeating no I dont think I would have said a price fall was not possible. I'll go futher on that, MS said it would take 3 spikes and collapses before we generaly accepted the effect of peak oil. this looks like no2 if its primarily recession induced as opposed to primarily induced due to excess oil.
"contumely" interesting choice of word. Sadly I dont think your understanding of energy and economics is anywhere as good as where your english may well be. So just to be clear, yes I have not thought much of your scripture and now I think even less of you now in trying to claim the glory of you saw it coming and are spot on on the date to boot.
So tell you what lets see more of your predictions, matched with reasoning and with dates I'll note them down in my dairy for recall to see how you did.
.
With respect ergopholbia, alot of money has been lost by people predicting something the likes of 4 years too early. There's at least one on here thats been predicting imminent rates cuts from 2-3 years ago - yes sooner or later he will be right but we certainly havent had an OCR at 2.00% over the past 2 years - in markets theres a term for being right at the wrong time, wrong!
What would interesting is whether you think sub $45 oil prices will still be here at the end of 2015 based upon your statement that its a long term issue?
How long $45 oil? well ,
"The decline with 4 million barrels per day for conventional oilfields during 2015 indicate that 2015 will show a peak production. Will this be the final global Peak Oil? Read the EIA article: Lower 48 oil production outlook stable despite expected near-term rig reductions."
OCR go lower?
hmmm, I think one thing I didnt consider some years ago was those who simply cannot accept a low OCR are the central bankers plus the politically right of centre. So with that mind set its going to take a major event to get to 2% even if we have -1%+ in some sectors already. What we see right now is the QEing and printing managing to avoid a major recession just how long can QEing go on for? some years I suppose.
Yes I agree totally with that last statement Steven, in fact its the key one. QE buggers up all predictions, but it isnt a solution, in fact in compounds the problem into a bigger one that will be experienced by another set of central bankers and politicans. But unless we're very old, ill, or just plain unlucky, that means us! Those that think they can forecast the timing are dreamers and the ones claiming it here need to understand that
Actually I am fairly sure I for one commented on the see saw effect suggested by Matt Simmons. What I will agree on is no one had or predicted the timing as far as I am aware.
What I will also say just for the record is we should see this repeated in a few years. Matt Simmons also said that he didnt think "we" would accept this post peak oil effect until the 3rd event.
Production costs/ oil cost, well the interesting thing is once the shale oil well is sunk and apparantly the cost to do so (via junk bonds) is paid off in 2 years what comes out after that is "almost free" , hence oil will keep coming. However its likely that with a typical 30% per annum decline rates in a failry short time span the US new peak will fall away (this year maybe next). So yes its likely the price will go back up within 18months, assuming BAU.
"reversal of the whole trend" but will people invest in shlae oil junk bonds again? if tehy dont then I odnt see how we will see the US output surpass what we see now.
For the last sentance I'd say it was oils doing and cause of "Uncertainty and huge volatility." Printing etc is but the medicine used to try and cure expensive energy.
There were a few who poo poohed the inflated prices, primarily oil, but also other strategic assets as I recall.
Our own econo-misseds, nary a one.
Economists are a wee bit like the Weather Forecasters in the USA, behind the 8 ball, possibly snowed under with all the miss leading info.
They cannot agree on anything, until proved wrong, depending on which way the wind blows..
In world terms, not NZ?
Also look at the tradables sector, already in deflation in NZ. So the Q is what is real GDP and what is make believe la la land stuff. I suggest the finance sector isnt real GDP where manufacturing is. So lot sof cheap money masking the real problems?
I guess time will tell, but I really wonder if it is that (1 year) far away.
A NZ recession in one years time? I see zero chance of that barring a global crisis and I think that's more than a year away with The likes of ECB QE delaying that further. And although the dairy pay-out and the possibility of a drought are certainly a concern, a 0.7200 NZD, very low fuel prices, very low fixed rate mortgages, construction boom etc that view shouldn't be a surprise - we just don't get recessions when monetary conditions are as loose as this, it's what we get in response to a bad recession.
Yup there's going to be a big fall-out sometime in the future but it ain't this year in my book, and maybe even not next year.
So the OCR is put up to, decrease households’ purchasing power and higher the cost of doing business.
Ergo fuel decrease and therefore the opposite, fuel increase will deccrease households purchasing power and higher the cost of doing business.
Yet higher fuel costs are seen as inflationary by the RB? so it puts up the OCR anyway? even though teh extra cost of petrol is taking money out of ppls pockets, so a double whammy.
However it wont drop the OCR to reduce deflation, oh no. So it appears the answer is always, look for an excuse to put up the OCR no matter the problem, oh dear.
I am out of step with everyone here at interest reguarding the current oil price.
As i have allready mentioned. It was on the news some time back that the US wanted the price of oil to drop to $75 a barrel so it would deprive ISIS of a large part of their funding. It stated that it cost ISIS that price to produce..
This is how i see the oil situation.
The low price is good for America because
That low oil price is hurting ISIS - Russia - Iran - Venezuela - All enemies of the US
The low oil price is helping the sluggish world economy particularly Europe - Good for the US
The low oil prices are hurting many of the smaller oil companies making them a bargin for the bigger oil companies. I think i heard somwhere that two big oil companies in America merged recently.
Sudia Arabia - Americas friends - will not reduce output
It was also on the news recently that Fracking has a high initial output then drops off very quickly. Then a new well has to be put in. This is why there are tens of thousands of wells in America.
This American boom is predicted to last about ten years.
With this window of oportunity America is making the most of it to take down ISIS, Russia, Iran and Veneseula.. Once this fracking boom is over the chance has gone forever.
You didnt actually state your oil price expectation, so up? down? about $46? about $80?
I dont know whos predicting the american boom will last 10 years but even the EIA
"The decline in the existing wells might be so large that we in reality will have peak shale oil in 2015. As you can see in the figure the shale oil has been the driving force for the increase of the global oil production. The decline with 4 million barrels per day for conventional oilfields during 2015 indicate that 2015 will show a peak production."
says USA shale will peak this year (though maybe next depends on actual decline rates).
Add in the expectation of the rest of the world losing 4mbpd and that suggests the world decline is setting in.
In terms of conspiracy theory you are right up there on ISIS, I like occams razor simplest thing is usually it, in this case shale over-production combined with a faltering global economy requirinf less. Take down such countries? so leave them in what sort of state? anarchy? you have to be an right wing extremist to think that's a good idea. Not that there are not such people.
LOL ISIS has the lowest cost of crude production in the world because they don't have the exploration and drilling costs. A few AK's about sums up their upfront costs. The expensive oil is ultra deep water, fracking and tar sands. The fracking industry alreay shot itself in one foot with natural gas, now they went and did the same to oil. They are already cutting back on new drilling.
Did the US also ramp up milk production to 'take down' NZ? How about copper, iron, lumber? LOL.
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