By David Hargreaves
The previously unimaginable could be the reality by the second half of next year if things continue on their current path.
Yes, New Zealand might well be heading for negative interest rates, via an Official Cash Rate that has a minus sign in front of it. And it might not take long for that to happen.
At the moment the OCR is 1%, which is where it has been since the Reserve Bank did the 'Shock and Orr' double (50 basis point) cut on August 7.
After this week's double whammy of awful business confidence results it's odds-on the RBNZ will cut again on November 13 when its next review is due.
To just stop on that point for a moment; it might sound a bit reactionary to talk about business confidence surveys as a sure-fire indicator of, and demonstrating the need for, further rate cuts.
After all, it can be argued that such surveys can be used as a bit of a protest vote against the Government. And the business confidence surveys have been, to varying degrees, toxic towards this Government since it took office in late 2017.
I would point to a couple of key things we saw in the business confidence surveys this week. Both surveys showed falling inflation expectations. That's important. And the very, very key thing was contained in the NZIER's Quarterly Survey of Business Opinion, which showed a sharp drop in ACTUAL activity for businesses in the past quarter.
Now, that's obviously quite different to a business leader saying they don't like the colour of the Finance Minister's shirt. That's an actual marker, an early heads-up, of what the economy's being doing in the third quarter of this year - bearing in mind that we won't get the official GDP September quarter figures released by Statistics New Zealand till December 19, long after the RBNZ's had its final review of interest rates for the year.
Falling inflation expectations bother the RBNZ a lot - since they influence price setting and therefore produce low inflation. The RBNZ will have the advantage that its own survey of expectations is next released on November 12 before the next OCR review. If that reconfirms falling inflation expectations - and I suspect it will - then the only way is down for interest rates.
So, when it comes to the next OCR decision on November 13, I think the only real issue to speculate and debate on, and it's very debate-worthy, is whether the cut will be a single (25 bp) or another 'maxi' version (50 bp).
On the one hand you can say (as the RBNZ indicated through its August move) that if you are going somewhere anyway you might as well do so in a hurry.
But the counter argument is that such big and unusual moves could potentially 'spook' the markets, as the impression might be formed that the RBNZ knows something bad that the rest of us don't.
The results of the two business confidence surveys out this week would suggest businesses were indeed spooked by the double OCR cut.
So, would that put the RBNZ off another double cut?
Shoot first, ask questions later
Well, under Governor Adrian Orr and now with the new Monetary Policy Committee in place there seems very much to be an attitude that the RBNZ would rather regret something it has done rather than something it didn't do. This is a central bank now that will seemingly act first and worry about the consequences later.
That being the case, the RBNZ's not likely to be put off by the fact that some folk were spooked by the previous double cut.
Another big consideration, I think, might be a timing issue.
After the November rates review, the RBNZ doesn't have another one scheduled till February 12.
That's a long time.
Until 2016 the RBNZ always used to have an OCR review in early/mid December followed by another in late January.
But then it was changed. I've got to say I argued against the change at the time just based on the rationale that three months might be too long to wait for an OCR review if the global economy was at any stage in a state of upheaval.
A long, unsettled, summer
Well, the global economy is in upheaval now, and the three months over this summer will be a long time to wait. Too long.
Of course, the RBNZ absolutely has it within its power to change the OCR at any time it wants should it see the need.
But if business leaders were indeed spooked by the August double cut then I imagine they would fall off their sun loungers if the RBNZ suddenly emerged in the heat of January with a rate cut.
In the now more than 20 years since the OCR was introduced, the RBNZ has changed the rate only once outside of a scheduled review - and that (a 50 basis point cut) was in response to the terror attacks on September 11, 2001.
So, I think even with this, shall we say, very decisive, current RBNZ regime, such a course of action would be unlikely.
What might be more likely then would be a take-no-chances double cut in November.
Next stop zero
All of which means that 2020 may well dawn with the OCR already sitting just 50 basis points above zero.
What is therefore to stop the OCR going reasonably quickly from there and into the minuses?
Well, the Government may yet step into the fray and announce a meaningful loosening of the purse strings. Perhaps some plans to borrow more money and go on an infrastructure spend-up. That could certainly gee-up the economy.
Without that, and without a significant pick up in the global outlook, then its difficult to see sentiment and therefore activity picking up significantly from here.
I reckon there's a real chance then that by the August OCR review next year we could be in minus territory.
What happens then?
Well, I guess we would find out!
We won't have to pay
I suppose the important thing to note is that a negative OCR would not mean term deposit rates going negative. No, we wouldn't have to pay the banks to take our money. (Well not any more than we already do in bank fees.) Yes, be thankful for small mercies!
If you look at the current average interest rate on six month term deposits of 2.75%, versus the current 1% OCR well then there's a 1.75% gap. If the banks were able to maintain a similar gap as the OCR was further cut, then even a -1% OCR would still see a putative six-month TD rate of 0.75%. So, positive but definitely not flash.
If we talked about a retired person say, on a 17.5% tax rate, that 0.75% would carry an effective yield of just under 0.62%. On a $10,000 deposit that would get you $62 a year after tax. Whoa, hold me back!
And let's bear in mind that the current inflation rate is 1.7%. Already the real rates of return on TDs are not much above that.
For those who have hoped to help support themselves on interest from investments this is all hugely problematic.
Really it all raises the question of whether further OCR cuts at all will help.
Too soon
In all fairness, it would be way too soon to be able to gauge with any degree of accuracy, whether the August 50 basis point cut has been stimulatory.
However, I think the really crucial thing is that nothing seems capable of lifting the mood at the moment. And if people are down in the dumps they will not spend. And if they don't spend...well, vicious circle and all that.
It would be a brave central bank in the midst of all this that would admit that cutting rates further may do no good. And clearly that's not where the RBNZ is with its thinking. So, down we shall probably go with our rates.
But I've got to say, monetary policy as we've known it seems a dead duck.
Only the Government can help out here. And I'm not sure it has the answers either.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
85 Comments
I agree with this sentiment. We're heading into Japan territory. No crashes, no massive spikes in unemployment, but no growth either. Alternate quarters of negative and positive growth.
Every time we get close to a recession the ECB, BOJ and FED ensure that we stay out of it.
Fritz you have been trying all these years to game the system and be a contrarian visionary but where has that got you? Yes the system is not perfect, and partly flawed but it can work for people. The saying "If You Cant Beat Em Join Em" worked for us and it might work for you too. There are quite a few sensible options out there, do not fall for any quick success pitches.
"From October 21, ANZ will introduce a debt to income (DTI) policy that will identify customers who are highly leveraged" - Sounds reasonable.
"Under the planned ANZ policy, applicants with a DTI ratio of more than nine times will be rejected." - Nine times! I hope that's part of your Probability calculation...That there are borrowers out there ( how many?!) with that kind of leverage is why rates are going to "0%"....and that ...is not good.
(NB: That's from the parent bank, and it's unlikely they won't enforce that at the subsidiaries)
"Yes, New Zealand might well be is heading for negative interest rates..."
Change is hard, especially when it requires sacrifice. But, as we will see, the sacrifice is going to happen anyway...Our present course will make the end (in the not-too-distant future) far uglier than it has to be.
https://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/TFTF_Oct_04_201…
Joe Wilkes made a pretty good case that the decline in real estate turn over for the year ending March 2019 equates to about 5 billion dollars see here. However, the year ending 2018 may have seen a similar or greater decline, as I seem to recall a figure from interest.co.nz of 300 million reduction in real estate sales commissions attributed to foreign buyers for that year. According to the observatory of economic complexity, New Zealand's biggest export is milk at around 5 billion dollars per year (for YE 2018 see here). Well that might not be true, as our greatest export could well be real estate! In that context our fake rock star economy under John Key and the current weak GDP & emergency monetary policy action could be seen in a different light.
Yes agreed 9 long years of a false economy "fake rock star economy under John Key", has left NZ in a huge debt trap. The good news is we can turn this situation around for the betterment of NZ citizens/residents. Tax the by product of Mr Key's legacy! We know er have almost 40,000 empty homes are now situated in the central and main commuter districts of Auckland. If we were to adopt the very successful Vancouver Empty Homes Tax model this could generate $460,000,000 in tax revenue each year and probably at lot more!
This is based on the average unoccupied home value being $1,170,000 due to most of these homes being in the more expensive parts of Auckland according the the latest census figures, - 1% tax on home value = average yearly tax of $11,700 per vacant property x that by 39,393 unoccupied homes = $460,898,100 in tax revenue. Main advantages: -
1) Huge tax revenue generated that can be used to build homes and improve services for NZ.
2) You are mostly taxing Speculative Overseas Investors vacant property who can't vote in this country.
3) Reduces the overall cost of living in Auckland by freeing up more rental property.
4) Helps business to thrive since they can attract and retain staff more easily with reduce cost of living in AKL.
5) Deters money laundering.
6) Helps to lower property prices at the top end of the scale.
More info on the Vancouver's empty homes tax : Opinion: What Vancouver’s impressive Empty Homes Tax revenue tells us https://www.vancourier.com/real-estate/opinion-what-vancouver-s-impress…
I like it! Potential side effects are that some of those properties will suddenly become rentable increasing the rental stock. Some will be sold by people who don't have the tax money increasing available housing - even if they are at the upper level of value, some people will move up and free up a cheaper house.
It would also claw back some of the tax that should have been in place due to a Capital Gains tax which never happened (but should have IMO)
I like it. Nobody will complain about taxing OPM. Vancouver had 10,800 properties estimated vacant based on water readings (cleaver metric, probably accurate), but only 2538 properties officially vacant based on the honesty of the home owner. Hmmm I wonder what's going on there...? The owner has to tick a box, and one box means they pay a truck load of tax, but the other means the pay nothing. Hopefully we could come up with something a little better.
Europe’s biggest insurer lambasts ECB over rates
Allianz CEO launched blistering attack on #ECB's Draghi: Reason why we’re not doing reforms is b/c you’re making it easy for people to spend money they don’t have. We created independent CenBanks in order to have this not happen. Draghi isn't independent.
Nor is Adrian Orr - he is ideologically tethered to chasing down an invisible neutral rate with lower OCR actions that are self defeating in as much as they fail to "stimulate" the majority with higher wages to purchase price relevant consumer goods, but certainly raise the present value of assets and liabilities beyond citizens' capacity to afford, while GDP languishes as long as bank loans to qualifying endeavours are shunned.
Good article David.
While you clearly indicate that there is plenty of uncertainty, considering the possibility and implications of a potential negative OCR is important.
Among the many implications, as you point out, the TD returns on $10,000 - or even $500,000 - at 0.62 net is a nothing. A decade ago, those approaching retirement with a nest egg of $500,000 would have felt very, very confident that they could have a reasonable and secure long retirement from return from bank term deposits which were then returning around the 6 to 8% and inflation around the 3%.
There certainly was a time when hard work and saving hard was rewarded. I can tell you as I approach retirement with my small nest egg I'm feeling less and less confident. Apart from bugger all in interest, as a depositor I also run the risk of losing the lot in a bank bail-in if the banks get into trouble. Added to that is the inflation which steals my savings at 2% per year, compounded, meaning my money will be worth pretty much nothing in 20 years. It's forcing me (and many others) to look at much riskier alternatives.
at least you get to retire i just feel that gen x is going to get whacked with the cost of bailins negative interest rates soaring cost of living means testing cuts to super to pay for this mess we left school right into Rogernomics and we will never get to retire either stripped of everything the boomers have had
We may just find that the assets generated by Boomers are passed onto Gen X, Z and millennials. For the generation of people who couldn't or wouldn't save for their retirement, or who lived in social housing without building assets, that won't happen though. My parents/inlaws are of that generation and I expect will have some remaining assets to pass on.
Boomers are in their 70's so possibly have another 10-15 years before their wealth passes down. Many paid 20%+ interest rates, facing the same imposition as modern generations, just with higher servicing costs on lower debts. Compare a $500k mortgage at 4% (20k) , to a 50k mortgage at 20% (10k).....Average weekly earnings have lifted 2.5x since 1989.
The Interest Rates were higher back in the day argument doesn't hold weight. What term are you talking btw?
E.g
50k at 20% over 10yrs: Principal repaid : 50,000 Interest + fees paid : 65,920 Total amount paid: 115,920
500k as 4% over 10yrs Interest + fees paid : 107,440 Principal repaid : 500,000 Total amount paid : 607,440
So a Boomer paid a lot less overall in total repayments. Also, I ask because I don't know but how long were interest rates that high for really? Did anyone actually pay 20% over the life of their mortgage?
So I checked. According to the RBNZ FlotaMortgage the B1. Floating first mortgage new customer housing rate which they have data on going all the way back to 1964 got over 20% 8 times. Those months were Feb 1986, Apr 1987, May 1987, Jun 1987, Jul 1987, Aug 1987, Sep 1987 and Oct 1987.
So yea, if you took out a mortgage during those months sucks for you. However, no one would have paid 20% for the life of their mortgage and they would have refixed every time the rate went down.
So again, bogus argument.
at least you get to retire i just feel that gen x is going to get whacked with the cost of bailins negative interest rates soaring cost of living means testing cuts to super to pay for this mess we left school right into Rogernomics and we will never get to retire either stripped of everything the boomers have had
Hi Anaconda
Clearly it is not going to be as simple as previously and those who are retired or approaching retirement need to consider the options.
Unfortunately higher risk options are a concern as they are usually associated with considerable volatility and often without time frame necessary with such investments.
Where as previously one could sit with a straight forward "reasonably secure" strategy of putting all in laddered term deposits rolling over. A laddered is one's cash being split into a number of roughly equally sums with these invested for a lengthy period to get a good return return but rolling over at different times e.g. 4 equal TD each invested for a year but timed to roll every three months. Unfortunately now even the longer term deposits are not attracting a premium rate.
What one will need to do is split one's money into shorter term low risk investments (e.g. term deposits) and some with higher risk longer term such as exposure to shares. In the later case one can use one's higher risk/growth KiwiSaver as a vehicle with the least management fees.
As previously posted my wife (retired) has reluctantly become a landlord again as a means to ensure a better return and protect her capital.
The bottom line is that retirees are going to need to be far more active in their investments. However, unfortunately older retirees such as my Mother (93 years old) finds this too challenging to contemplate.
Is the economy (and rates) getting worse because the rich are hoarding economic growth i.e. cash? Too much money and not enough hours in the day or places to invest it. Global GDP averages 2 - 6%, since 2010, but the combined wealth of Billionaires has grown 12.4% CAGR over that same period.
Good news though is the average Billionaire's worth has reduced from $3.56b to $3.34b, but this could be partly due to the increase in the number of individual Billionaires from 1011 to 2754 during the same period.
So many on Interest.co property bears think you are experts when it comes to predicting what the property market is going to do.
Reality is that while over the past years you have been stating that the market is overpriced and was going to drop, property investors have been investing and doing very nicely Thankyou.
There are always opportunities in every market and what most investors would be saying to you is if the numbers add up, then buy if there is good upside.
Foundations - Have you seen this shite that came out of Christchurch yesterday?
https://www.stuff.co.nz/business/industries/115950286/nine-years-on-and…
You really have to feel for them. It looks like another $billion might start to fix up the issue.
Apart from the earthquake big issues came from "the foundations were built without wire mesh reinforcement – a shockingly penny-pinching practice Christchurch building codes allowed right up until the earthquakes." and "cheapskate building practices didn't help Christchurch, he says. Where Auckland uses crushed quarry rock that is strong and triangular – more likely to stay locked in place – the South Island fills its foundations with local greywacke river stone, cheap and abundant, but also soft and round. A material that shatters and slides."
I believe the knighthood mooted for Gerty Brawnlie for his efforts during the rebuild has been put on ice....
Nothing a bit of ingenuity cannot fix. I dont know how serious this is but it depends on if the floor is out of level. Its pretty normal if someone has a cracked concrete driveway, they dont freak out I mean. Plus that was old carpet from before the Christchurch earthquake so they mustn't have felt the need to check underneath until now when the carpet was to be replaced.
I'm not an engineer (are you?), a concrete driveway is a bit of a different story to a cracked foundation in a house. Sure, Sika do a pretty neat Epoxy Injection System that'll fill up those cracks nicely but it won't prevent further crack propagation elsewhere in the slab.
To be honest, they were probably better off just keeping quiet about it, epoxy repairing the cracks and moving on from the place.
Nothing to worry about folks. Here's what an economist from a big NZ bank had to say on Friday regarding our currency:
"The kiwí's strength today was reinforced by record short positions in the currency, according to US Commodity Futures Trading Commission figures, Kelleher says."
In other words, while we're the world's most popular and rewarding currency pokie machine, instead of a high per capita wealth generator, we'll be OK.
looks like we have to adapt and relearn ways of paying our way.I took the credit cards out of the wallet last month and keep a cash float.take a couple of hundred to go shopping,amazing how much stuff you return to the shelf.paid my rates in one hit for the 2% discount, that would have been a joke 18 months ago.got my free prescription at countdown pharmacy.so maybe some other real competition will arrive.
Wow the economy is obviously worse than I thought. I sold a reasonable retail business on 1 April 2019 and I know for a fact that retail is now a harder business to be in since 1 April. The reps I still talk to say it has never been so bad as it is now and it’s all over the country and particularly bad in Auckland and Christchurch. People are not so confident to buy stuff when their housing values are going south. As they say cash is king. There will be some bargains at some stage in the future.
I suspect Gordon's comment was not meant to be a reply to mine however I can see why you would sell a retail business but you may want to keep a rental property that was yielding more than term deposits. It's like the Holy Grail for landlords and diminishing mortgage interest rates has brought about its arrival without the help of significant inflation.
You are correct Zach. I was not replying to you. I have to say I am in shock about the state of the economy. The Reserve Bank have so much information at their finger tips. They are not reducing interest rates to just be benevolent. They are doing it to support a faltering economy. We don’t need another Great Recession. There will be people kicking themselves they didn’t take some assets off the table and put the cash into bank deposits or gold. I did warn people such as The Boy. But he is an uneducated agent who knows better than everyone including the RB.
Compared internationally, debt levels of business, government, and private persons are moderate, so no need for yields to keep falling.
But most likely to sure, the OCR will go negative just to keep competitive internationally as currencies, as a consequence of falling yields, race to the bottom.
International debt levels are at a stage where debts can not be repaid and interest loads choke off most of the income of business, government, and private persons.
In order to push down debt levels, central banks will keep yields negative for a very long time or yields go more negative rapidly in a short time.
Of course strategies of a debt write down theoretically exist, but within the current neoliberal economic/monetary curriculum, such an option sounds rather outlandish. In the meantime, as the savings meltdown continues, economies will continue to suffer.
When I went to university they said monetary policy had a 18 month lag.
The economy isn’t growing terribly much but we still have capacity constraints. I’m all for the government borrowing money to build state houses or borrowing money to build more rail to ease congestion, I’m in favour of some more hydro dams, and even a few more roads. But why talk about borrowing to stimulate the economy when we have no workforce to do the work? And if we have no workforce why do we need the stimulus?
We used to talk about monetary policy in terms of being at capacity but we never talk about that anymore. Yes inflation is a bit low but we used to have a band of 1-2% and 1.7% is pretty high on that scale.
I don’t think we’ve thought through what we want to achieve. So the ideal would be rising wages and rising costs? And we will get there by making the existing capacity constraints worse?
Should be interesting. Will we see $3 a litre petrol by Christmas? Have we been in a long oil glut like the 1960s? Will supply disruption happen suddenly like in the 1970s? Will we wake to $4 a litre before too long.....followed by a spike to $6 a litre a few weeks later?
Prices have been so stable for so long we could be in for a shock. Stability leads to complacency. Low volatility is followed by high volatility.
I think interest rates fiddling and monetary policy as they are now used have become outdated. Banks will continue to make money in all regimes and the customers/consumers will be paying for that, while also bearing all the risks.
At least Orr has the gumption to take the fight to the Aussie Banks. In a way he is like Trump, unpredictable, goes with his gut feeling and not afraid to think differently and is in a position to influence.
The Battle is well joined...Fireworks getting ready for Guy Fawkes and Diwali.
Quote:
'The governor Adrian Orr has a plain language guide to help. "I love the idea of walking into a bank and asking for a loan. If I say, 'Look, I've got 7 cents in the dollar. I've got only 7 percent equity, can I have a loan?' A bank would laugh you out the door. Yet that's what they have themselves … they don't have much equity, and they have a lot of leverage."
Unquote:
Simplistic ? Or Reality ?
Banks may be TBTF, but not Too Big to be confronted. And who better than the Chief Regulator ?
Or is Orr just waving the Big Stick, with no intention/chance of using it ?
Time will tell.
Michael Reddell has a rather different, and frankly, more authoritative, view....
...when Adrian Orr is proposing banning people from serving on the boards of bank parents and subs or – much more radically – proposes that he should more or less double how much capital locally-incorporated banks would need, he isn’t following some clear and specific mandate set by Parliament or the Minister, against which he can readily be held to account. He is pursuing a personal whim.
The article notes one piece of evidence that cannot be disregarded:
the very, very key thing was contained in the NZIER's Quarterly Survey of Business Opinion, which showed a sharp drop in ACTUAL activity for businesses in the past quarter.
Businesses generally know their own sales, COGS, GP and EBITDA: the first two often daily, and all monthly. These are not figures that can be fudged, distorted, or hand-waved away. Always, of course, absent accounting fraud...
If they say that their own activity is slowing or reversing, better listen up......
Not much commentary on the impact on the man in the street. People are already being charged for having money in a bank account in Holland. A consequence will be many taking money out and keeping it at home, or just spending it. Does negative interest rates mean people will be paid to borrow money? Or will the banks be charging at both ends? Every way I look at this, without additional regulation I can just see the banks ripping everyone off - watch the profits they make skyrocket! If you think it was bad before, it will get worse!
I am not sure whether the prospect of negative interest rates in NZ is insane,or simply bizarre,but we are about to enter Alice's Looking Glass world.
The RB has attempted to achieve monetary stability through a low and steady inflation rate. As inflation has persistently undershot its target,so interest rates have fallen. Now, inflation as it is officially measured is indeed low,but emerged elsewhere,just as Hyman Minsky warned it would many years ago. Thus,squeezing the balloon in one place-elimination high inflation-simply reinflates it elsewhere-in the asset markets.
I am led to believe that the Australian housing market is showing signs of revival as interest rates fall there,so we can expect the property here to follow the same pattern. Our already inflated stockmarket-in which I am heavily invested-may also keep moving higher.
One day,the music must stop.
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