David Hargreaves says about the only thing we can be sure of is that American interest rates will not rise in the near future, so we need to focus on that

By David Hargreaves

At stormy, turbulent times like this it is helpful to deal with what we know.

What we do know at the moment is that 'uncertainty' has massively increased in the global environment. How long the uncertainty lasts is, well, uncertain.

And it's uncertain because what has happened with the Brexit vote could lead us in so many different directions, just for example:

• Britain ultimately u-turns on this decision;
• Britain goes ahead and pulls out;
• Scotland gets a new referendum, parts company from England and stays in Europe;
• the North and South of Ireland look to pull together to stay in Europe;
• more countries pull out of Europe;
• a certain shy and retiring Russian leader sees the instability in Europe as a chance to increase his expansionary ambitions - watch out Baltic states particularly;
• the knee-jerk populist politics from Britain inspire Americans to install a populist President not called Clinton;
• And so on.

Right now, for all we know, several of these things could happen, or maybe none of them. But we don't know. What can be noted is that none of those things have a direct impact on this country. Unfortunately though a combination of some or any of them is going to cause shock waves that will inevitably have an impact on us and an economy that is ever-fragile, even if it looks okay at the moment.

Pretty much the worst-case scenario would be that the uncertainty goes on for an extended period and it then becomes a case of global markets being fixated on the issue and following, slavishly, every ebb and flow - with a resulting jerking up and down of markets.

But back to what we know, or can reasonably deduce. Based on what has been seen so far, I would make only one definite conclusion:  I don't think there is any way the US Federal Reserve will now be able - as it would have dearly wanted - to put up American interest rates when it next makes a call on this late next month.

So, focusing on that as a likely 'known' fact, what will no immediate US rate rises mean.

Well, I have given up trying to second guess our increasingly contrary Reserve Bank on its interest rate decisions.

What you can say is that the RBNZ has been dearly hoping to keep the Official Cash Rate here at the current 2.25% and would have hoped by the time of its next OCR decision in August that the Fed would have done some of its job for it and raised rates.

Now it won't be able to hide behind that and will have to very much make its own call.

The biggest considerations for the RBNZ will be what happens in the near term to the value of the NZ currency and what happens to interest rates in the wholesale marketplace.

Strong Kiwi disappoints

While, as I suggested recently, Britain deciding to take the plunge out of Europe might definitely be the 'nuclear option' in terms of giving the RBNZ its desire for a lower Kiwi dollar, it has to be thought that so far the very robust response of the Kiwi might so far be a disappointment to our central bank.

It would be very presumptuous and risky to talk about our little old dollar starting to become a 'safe haven' currency because depending on how long the wave of uncertainty lasts, downward pressure may yet come at some point.

However, I think you do have to say that in bygone years (as was certainly the case in 2008) the money would already have started shooting out of New Zealand at a time like this. But to this stage the Kiwi is sitting pretty staunch.

And as I say, while the RBNZ would be concerned if the value of the Kiwi plummeted, the central bank might have reasonably expected some much needed depreciation. At the time of writing the Kiwi dollar is actually pretty much at the same level against the American dollar as it was at this time last week. Now that's not something you would have expected, nor is it how our currency has reacted in the past to global shocks.

But would continued strength of the Kiwi dollar force the RBNZ to cut in August? Not of itself no. Quite simply our central bank might decide that unless it took the hedging shears to rates, and say lopped a whole percentage point off - which it ain't going to do - then this might not make much difference to the currency.

Something must give

So, what that potentially means is that this country is looking at continuation of a currency at an elevated level (unless some delay 'flight' response kicks in), interest rates relatively high, and inflation probably remaining outside of the targeted range. Theoretically the RBNZ is going to have to address its non-compliance with the inflation targeting at some stage, but I've got to say the defiant, albeit defensive as well, attitude of senior staff at the bank during the last OCR press conference, would suggest the bank's not ready to yield on this yet.

The one thing that would definitely force the RBNZ's hand on interest rates is if bank funding costs rise appreciably and the banks start coming under pressure. Banks (as you would expect them to do) are already talking about this, but there's no great sign its actually happening yet. And the banks are globally supposed to be more robust than they were in 2008. But there's no doubt, if there are a series of continued bumps and shocks in the world markets then funding costs will have to rise and that might finally tip our RBNZ over.

But the other point to consider is; would our central bank be too perturbed by a slight rising of interest rate costs? It's a contentious point with dairy farmers struggling. But there's no doubt that the RBNZ would welcome anything that poured a bit of cold water on the housing market at a time when it is preparing further macro-prudential measures to dampen particularly the Auckland housing market.

As a slight aside, I do wonder if the RBNZ might slightly delay the timetable for announcing more macro measures, just while it sees where things settle from the current turbulence. I would have been expecting at least signalled introduction of measures within weeks if not days.

Might there be a delay? I suppose the question would be whether the global turbulence could in any way take heat out of our housing market and surely the short answer would have to be no, unless there's a big pull-back of foreign investors, which seems unlikely.

More attractive?

In fact, what about the reverse impact? Might these upheavals make New Zealand more attractive as a destination for investment funds?

And that's foreign funds. The other longer term ramification for the housing market out of all this is what may happen to inbound migration. It has shown signs recently of peaking (though remaining at a high level).

A fractured Europe and jumpy global environment means only one thing to me: These delightfully isolated couple of islands in the Pacific start to look like a good place to escape to. There's going to be thousands of very brassed off British people at least considering emigrating, have no doubt. And others in Europe and beyond might also see things the same way, depending on how long global turbulence and uncertainty is with us.

The flip side is that Kiwis, who are already in a rare 'stay at home' frame of mind at the moment might look at the rest of the world, say 'yuck', and stay where they are. The upshot potentially could be further net migration pressure. Unless the Government's prepared to get involved and bring in limits - but high migration has suited it so far - then the current 'peak' migration figures could be swiftly surpassed. 

In which case the RBNZ would be well advised not to wait in implementing those housing measures because Auckland's housing shortage will keep on keeping on, and so will its prices.