By Alex Tarrant
Current turmoil in global financial markets has led BNZ economist Stephen Toplis, Westpac's Dominick Stephens and ASB's Nick Tuffley to push back their forecasts for the Reserve Bank's next OCR hike to December from September.
Meanwhile, ANZ chief economist Cameron Bagrie said while ANZ was technically still picking a September hike, the OCR would be staying put unless the global environment improved substantially.
Westpac chief economist Dominick Stephens has said he now expects a 25 basis point hike in the OCR in December, versus Toplis' pick for a 50 bps hike. Westpac were previously picking a 25 bps hike in September, followed by the same again in October.
ASB chief economist Nick Tuffley took a more bearish view than the others on where the OCR was headed, saying he now expected a peak of 4% after the Reserve Bank removed the 'insurance cut in December, and then raised the rate by consecutive 25 bps moves from April 2012.
Fears about a fresh global recession were fuelled by Standard & Poor's downgrade of the US government's credit rating from AAA to AA+ late last week, while sovereign debt problems in Europe continue to rattle investors.
Reserve Bank Governor Alan Bollard signalled on July 28 he would look to remove the March OCR 'insurance cut' from 3% to 2.5% in the near-term if conditions in the New Zealand economy continued to improve, and if global financial risks receded. Markets read this as indicating a 50 basis point hike in the OCR on September 15, although that pricing has now fallen away again.
See Alex Tarrant's piece on Bollard's two big 'ifs' in the July statement.
Back to December
BNZ head of research Stephen Toplis said the bank's economists had been "beaten into submission" that the RBNZ would delay its removal of March's 'insurance cut' until December, unless the current turmoil was merely a 'storm in a teacup' and global markets rebounded. If that were the case over coming weeks, BNZ would return to a September call, Toplis said.
BNZ ruled out moving its expectation back to October as December had a Monetary Policy Statement with a media conference, rather than just an OCR review; and because October was immediately before the General Election on November 26.
See Toplis' comments below:
We have been beaten into submission. More importantly, we think that Alan Bollard will be feeling the blows even more than are we. Consequently, we believe the current turmoil in global financial markets will act as an insurmountable stumbling block to the rate hike we had expected for September.
In its July OCR review, the RBNZ said that “Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 ‘insurance cut’ to remain in place much longer.” Clearly the former has not occurred.
In effect, we think the RBNZ is now likely to replace one emergency cut with another. In part our view is shaped directly by the current slump in equity prices and accompanying correction in commodities but there are also other associated reasons to adopt this stance.
In particular, we note that financial markets have fully priced out a September move and don’t have any increase in rates until next June. We actually disagree with this view but it will be very hard for the RBNZ to push through a 50 point hike with this pricing intact.
As if this isn’t enough, Jackson Hole (the annual meeting of global central bankers) is looming. Someone senior from the Reserve Bank will be going to this and, in this environment, the odds are it should be the Governor. Given that this forum is dominated by European and US central bankers, whoever goes is hardly likely to be buoyed by the outcome.
And last but not least, there is some early evidence, anecdotal and otherwise, that confidence is being adversely affected by the current global shenanigans.
Indicative of this, our own BNZ business confidence survey showed a drop in confidence from +45 in July to +22 in August. And this was taken before the United States was downgraded and equities fell so aggressively thereafter.
While we have changed our view, this is highly conditional on things staying much as they are between now and September. There remains the chance that the chaos of the last few days turns out to be a storm in a teacup. If so we will return to our former view of a September rate hike.
Indeed, even as things stand, we would not be overly critical of the RBNZ if it still pushed ahead with such a move. Perhaps more important than the short term adjustment to our forecasts is our view that the market still continues to underestimate the likelihood of the RBNZ tightening over the next year. In our forecast track we have simply postponed the removal of the emergency easing until December.
We’ve gone for December, not October, because we think it may take some time for the RBNZ to be certain that the economy has dodged the current bullet; because December is a MPS rather than an OCR review; and because October is immediately before the General Election.
The rationale for our view remains as has been the case for some time now: we fundamentally believe that the New Zealand economy is on a relatively firm footing; that growth will accelerate aggressively through calendar 2012; that we will come up against capacity constraints relatively quickly; and that, as a consequence, inflationary pressures will become problematic.
Indeed, one of the ironies of the recent move in asset prices is that the accompanying slump in the New Zealand dollar reduces one of the strongest disinflationary forces acting on the economy currently. Moreover, as long as our commodity prices remain relatively well supported, the currency’s fall will lessen the blow to domestic producers and, hence, enhance domestic demand. Taking all these things into consideration, not only do we think that the removal of the emergency cut is but a matter of time but we also believe that a series of rate increases is still likely through calendar 2012.
In the current environment one’s has to be ready to adapt ones views quickly while not reacting in a knee-jerk way to every market move. In changing our stance we hope that we have achieved a happy compromise. That said, we have to acknowledge that the risks are many and varied. Ongoing strength in the domestic economy and/or a bounce back in global equity prices could quickly prove our decision premature. Conversely, an acceleration in the decline of asset prices could equally as easily put a sufficiently big dent in New Zealand’s economic outlook to further postpone any rate hike. Whatever the case, we remain cautiously optimistic that New Zealand remains relatively well placed to handle whatever the world throws at it.
Read ANZ chief economist Cameron Bagrie's comments:
In this environment, the OCR will not be moving up, despite local developments, including last week’s labour market figures, clearly justifying the removal of March’s insurance cut in September. Receding global financial risk was a precondition to the RBNZ hiking, and at present we are a country mile away from that condition being met. We’re not going to be into the game of chopping and changing our interest rate view from week to week, and technically we still have a September hike pencilled in.
But now the onus is on the global scene improving – substantially.
See Westpac's comments below:
Global financial conditions have taken a nasty turn recently, as fears of sovereign debt default have spilled over into a broader range of markets. Even if authorities are able to contain the damage through swift action – and the bounce in equity markets this morning, following the US Federal Reserve’s prognosis of low interest rates for longer, is an encouraging sign – we suspect the experience has been sufficiently bruising to influence the RBNZ’s plans. We now expect the RBNZ to delay tightening until December, with the March ‘insurance’ rate cut removed in two 25 basis point steps in December and January.
In the 28 July OCR review, the RBNZ stated that: “Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 ‘insurance’ cut to remain in place much longer.” While many took this to mean that the 50bp insurance cut would be removed in one go at the next review in September, we weren’t so sure. The domestic economy is clearly on the road to recovery, but for global financial risks to recede in such a short timeframe would have been a tall order. Our pick for the removal to be spread across two 25bp hikes in September and October was a nod to the uncertainty around global conditions.
We’re now clearly past the point where financial risks could possibly be described as receding. The global economy is slowing – that in itself has not been a surprise to us, but it’s likely to be several months before we have some indication of where the slowdown will bottom out. And even if the plunge in risky assets were halted today, the underlying cause of the turmoil – the intractable problems with sovereign debt burdens in many parts of the Northern Hemisphere – will remain in the background.
Consequently, it’s clear that the RBNZ’s condition of ‘receding financial risks’ will not be met by the 15 September Monetary Policy Statement, and probably not by the 27 October OCR review either. So we peg December as the most probable start date for rate hikes – and even that is subject to how global markets pan out in coming months.
Our change in call effectively takes us back to the profile laid out in our recent Economic Overview (“Against the tide”, 26 July). We already felt that the uncertain global environment and the strong New Zealand dollar would see the RBNZ hold off tightening until December; we shifted our call to a September hike only because the RBNZ signalled this so strongly in the July OCR review.
Market implications
Our call for a 25bp hike in December is in line with market pricing at the time of writing – though that matter is hardly settled, with pricing having swung wildly over the last few days between a 50bp hike this September and a 25bp hike next June. Were the RBNZ to release a statement today, signalling a December hike, we don’t’ think that it would have a lingering impact on markets.
However, the real point of contention lies not in the near term, but in the extent of the tightening cycle over the next few years. The RBNZ’s last projections suggested an OCR peak of around 4.5% by late 2013; our view has long been that the OCR is more likely to return to an about-average level of 6%. In contrast, the market is now pricing a peak of no more than 3.5%. Admittedly, though, the outlook for rates is unusually binary at the moment. If global conditions deteriorated into another full-blown financial crisis, then OCR cuts could be on the cards. But if the current turmoil is brought under control as hoped, then the RBNZ will revert to its plan to return the OCR towards a ‘neutral’ level.
ASB chief economist Nick Tuffley:
Note that the RBNZ is not releasing its decision for another 5 weeks. The current environment is fluid, and developments (for better or worse) over the next 5 weeks could bring about a quite different picture for the OCR outlook. It is entirely possible we have to alter our view closer to the date.
The RBNZ was eager to unwind ‘insurance cut’ soon.
However, unwinding was conditional on current global risks receding – yet they have increased considerably.
We expect the RBNZ to put off reversing March’s insurance cut until December.
The RBNZ’s removal of the post-earthquake insurance cut was contingent on “current global financial risks reced[ing] and the economy continu[ing] to recover”. Financial market risks have grown substantially over the past week. Not just have Italy and Spain come under pressure, but France – Europe’s second-biggest economy – is now getting the spotlight turned on it. European banks, large holders of European government debt, are now getting caught up in the crisis.
It is still possible that Europe’s politicians will come up with a speedy and comprehensive solution that allays fears about European solvency and that global markets return to a state of serenity. But for a September OCR hike to still occur, such an outcome would have to be quick to give the RBNZ confidence that global financial risks are lower than they were on July 28.
On top of the market crisis itself, growth prospects in the US and Europe were starting to look a bit shakier. The past week’s events risk sentiment spilling over and briefly affecting economic growth itself in countries caught up in uncertainty. Moreover, the implications for NZ of the Standard and Poors downgrade are the likelihood of the NZD/USD being even higher in the medium term, reducing the amount of work NZ interest rates need to do to contain future inflation.
We have pushed out our forecast of a 50bp hike (removal of insurance) to December. Subsequently, we expect the OCR to rise in consecutive 25bp moves from April 2012 to a peak of 4%. That peak is lower than our previous view, largely due to an expectation of a higher NZD/USD over 2012 – once risk aversion has receded.
(Updates with Westpac pick)
7 Comments
It all comes down to whether Bollard thinks those who save can be of more help to the debt ridden economy than those who are in debt.
Clearly he supports Bernanke's near zirp game in which savers are punnished and splurging with credit is encouraged.
Until this madness stops we can expect the debt ridden economy to remain stuck under the Elephant's arse.
The damage done by RBNZ over the past 3 years since October 2008 to older people with savings living on fixed incomes is irrepairable .
Dr Bollard cannot allow this untenable situation to continue.
Quite apart from inflationary pressures , etc , he must give increase rates to enalbe savers to get a fair return on their savings
To start with, this isnt Bollard's fault. This is a global event driven by voodoo economics piled on exhausting natural resources...If you want to blame anyone look at who allowed the housing market in such a state and then who voted for them not to do anything about it.
Second when savers put money in the bank what happens to it? It has to be lent out and that borrower has to make a living, a profit for their risk, the banks margin and the depositers margin.....so some poor sod is doing the work of two other ppl, that is almost parasitic to mind. beyond that "profits" have been generated by exploiting natural non-recurring resources, the result is depletion and higher and higher costs, so your day dream for higher rates doesnt looka happening thing, even if it was justified, which for no risk isnt IMHO.
regards
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