'Case builds for January rate hike'

Property

ANZ economists see possibility of Reserve Bank lifting official interest rates early

25th Nov 13, 4:15pm by David Hargreaves

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

ANZ economists are going against the recent mood of some economists from other banks and suggesting that interest rate hikes could come sooner rather than later next year.

In their weekly "Market Focus" the ANZ economists said a January rise in the Official Cash Rate "might seem like blasphemy to some but we think the case is building".

"The dataflow is one way, and while the risk profile – not least around the [New Zealand dollar] and global scene – will ensure a cautious hiking cycle, the Reserve Bank will not want to get behind the curve and the Governor [Graeme Wheeler] needs to get his inflation fighting credentials cemented."

After the RBNZ left official interest rates unchanged at the end of last month it held out the prospect that the persistently high NZ dollar gave the central bank the flexibility to delay or reduce any rate hikes it said were likely in 2014. This led some economists - such as those at the BNZ for example - to move out the timing of expected interest rate hikes, in the BNZ's case to June from March.

But the ANZ economists have cited various reasons for why they are "getting close to calling a January move".

They said that "fixation" with the housing market and the currency were usurping attention from the remainder of the economy, which was "going pretty well".

Economic indicators remained consistent with a broadening in momentum across both sectors and regions.

"Lacking a productivity miracle (we’re seeing improvements but far from a miracle) the OCR can’t remain at what is an exceptionally low level [2.5%] for too long in such an environment," they said.

Inflation looks like it will be close to the midpoint of 1%-3% policy band by mid 2014 – and very likely trending up.

"The OCR will be nowhere close to a neutral level by that point, and the Reserve Bank certainly can’t afford to be even close to 200 basis points below it. (Note, however, that we don’t think the OCR needs to be at neutral when inflation is at the mid-point: both the level of the OCR and the change in it matter)," the economists said.

"Between the September MPS [Monetary Policy Statement] and October OCR Review the RBNZ added this little beauty: 'The Bank is aiming to keep inflation and inflation expectations close to 2 percent over the medium term'. That’s common sense central bank speak, but in our minds it means the RBNZ doesn’t need to up the ante in the December MPS much further for January to be in play."

The ANZ economists said their monthly inflation gauge had started to detect a slight drift up. "This tilts the risk profile for Q4 inflation to the upside, a data-point the RBNZ gets a week before the January OCR decision."

The economists said that Wheeler appeared to be a Governor "who plays with a very straight bat".

"...And he hasn’t even blinked in response to the political maelstrom around the LVR speed limits.

"Forget the hawk-dove plumage. The feathers will change as circumstances do. Back in April the RBNZ moved to a neutral stance, such were the concerns over the global scene and drought conditions balanced against housing momentum. The signals are now firmly that the next move is up.

"The previous Governor made it clear early on that he’d rather take a risk on inflation than on growth, and failed to get his inflation fighting credentials established early. We doubt this Governor will repeat that strategy."

The economists said, however, that putting a January OCR move on the table did not mean they were "turning into rampant hawks or expecting the OCR to move rapidly higher".

"New Zealand might be having what is, on the whole, a regular business cycle, but the rest of the world is not."

They said that "downside risks" are abundant offshore, while domestically, although the demand side of the economy is looking assured, monetary policy should have some real bite when it moves, with 73% of borrowers floating or fixed for less than a year.

"Caution is the order of the day. We’re simply acknowledging what seems to us (and we suspect to RBNZ forecasters) an inevitability that the OCR is going to have to move sooner as opposed to later if the inflation outcomes are to remain well-behaved.

"And an early move is probably preferable, despite the likely exchange rate reaction. History suggests that getting a couple under the belt early will likely mitigate the extent to which the OCR would otherwise need to rise."

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30 Comments

by xingmowang | 25th Nov 13, 4:41pm 1385350879

ANZ is the only bank that has not lower its mortgage rate, comapred with its competitors.

ANZ just gave some justifications on why it did not.

No one believes, sorry.

by MortgageBelt | 25th Nov 13, 5:11pm 1385352701

The world is facing deflation.

Let's imagine the rate hike to 2.75% in January.

The effect? The NZ$ ?

by spottie | 25th Nov 13, 5:37pm 1385354274

Hopefully the RBNZ will continue to raise our banks' Core Funding Ratio; thereby forcing them to fund more from domestic sources.

by steven | 25th Nov 13, 5:39pm 1385354350

So you want a depression and loss of jobs and a housing price collapse?

Because thats what raising the OCR means.

regards

by spottie | 25th Nov 13, 5:43pm 1385354618

If you believe a 25 basis point OCR rise will cause a housing price collapse and a depression, then that must be one heck of a housing bubble we have.

by steven | 25th Nov 13, 5:54pm 1385355281

Im assuming its the start of a trend, and yes its a bubble, x2 and thats just in BAU scenario.

Depression, well it looks a lot like the 1930s from the data...debt levels etc.

regards

by Stephen Hulme | 25th Nov 13, 6:07pm 1385356074

The chance would be a fine thing. As I noted on another thread outstanding bank claims are presented by the RBNZ as NZD 350.543 billion, whilst funding sourced from the household sector is recorded at NZD 119.237 billion - as you will note there are other domestic sources that can be added once ultimate ownership is discerned.

by steven | 25th Nov 13, 5:47pm 1385354829

The problem is the variables, sequence and humans. So the trend will be all the loose money will be withdrawn to the US, out of NZ anyway due to fear. So our NZD could collapse....<0.60.

Then where does the bank funding rate go? Do a Greece? even spain at 7ish% is bad news.

OCR wont matter I think it will be under 1% when the event occurs...but the ppl on 95% LVRs? bad news.

regards

by spottie | 25th Nov 13, 6:01pm 1385355664

So, a 25 basis point rise in the OCR is now going to cause a collapse in the NZD to 60c ?

I didn't realise things were so serious.

BTW: If someone has a 95% LVR and they are not fixed long term then they know the risks they are taking. That's their decision and if they get caught out....tough.

by Stephen Hulme | 25th Nov 13, 6:06pm 1385356006

That's their decision and if they get caught out....tough.

The government certainly believes so:

NZ First leader Winston Peters says the Government is as "unprincipled as the Wolf of Wall Street" for threatening to walk away from a $1.2 million lease on a building in Wellington that housed the defunct business Learning Media. Read more

by steven | 25th Nov 13, 6:31pm 1385357509

Interesting, as the losses mount so do the wails of "bail me out too".

and I dont think its even started yet.

Whinee is out there vote gathering....interesting all the comments from BH etc on pensions and heathcare expectations yet not really this side...ie bailouts on losses, all lumped on the younger generation or the attempt to.

regards

by steven | 25th Nov 13, 6:21pm 1385356872

Its a trend which I assume is what you mean....and its a global event anyway...

Even if they have 5 years, they have to come off at some point. If there is a huge drop in value, well taht would be interesting for them.

regards

by SK | 26th Nov 13, 9:49am 1385412583

'with 73% of borrowers floating or fixed for less than a year.'

Oops.

by steven | 26th Nov 13, 10:16am 1385414214

And the banks continue to try and talk up the OCR after 5? years its gone no where effectively. When it does fianlly I expect some will panic and run to fixed....Im sure the banks will be happy.

regards

by spottie | 26th Nov 13, 10:43am 1385415787

It's almost as if we had a huge natural disaster or something.

Fixing for many is not done in a panic, it is merely one of the insurance policies they purchase

by Machiavelli | 26th Nov 13, 11:03am 1385416983

It's hard to see rates doing anything but going up next year. I spent a good few years floating and never flinched at bank talk of rates rising. I did fix recently because I consider the writing to be on the wall (i.e. NZ is going to be humming along next year). I wasn't in a panic. I wasn't running. Anyone not considering fixing at the moment is taking the bigger risk in my opinion.

Time will tell though steven. As you suggest impending doom could always arrive. I don't see it though.

by steven | 26th Nov 13, 12:53pm 1385423610

Example of the effects of raising interest rates on a Natioanl economy, Sweden

"The Riksbank raised rates sharply even though inflation was below target and falling, and has only partially reversed the move even though the country is now flirting with Japanese-style deflation. Why? Because it fears a housing bubble."

http://krugman.blogs.nytimes.com/2013/11/23/bubblephobia-and-monetary-p…

Rinse and repeat here?

I hope we are brighter on that.

regards

by Machiavelli | 26th Nov 13, 1:24pm 1385425457

Is inflation in NZ below target and falling?

by steven | 26th Nov 13, 3:04pm 1385431499

That is a big Q.

below target, yes,

http://www.rbnz.govt.nz/statistics/key_graphs/inflation/

Falling, well it did for a while, maybe in the last number we have is some up noise in a downward trend or a real reversal and inflation now increasing hard to know. The next number or 2 will tell us if its really rising or falling.

If we accept that the Fed's cheap money is pumping up asset and commodity prices which feeds into manufacturers prices and is therefore holding them up, yes maybe.

If we accept that peak everything especially oil is doing the same, yes maybe these are masking deflation.

Wages are supposed to be "sticky" so they dont drop easily so higher un-employment, is that dropping? not really.

How are other countries doing for inflation? EU low or negative, USA, low, Japan low or more likely deflation so why should NZ be different?

I guess the real events or impacts to us are going to come from abroad. So as long as the world staggers along so will we...up a little or down a little. If the world was to pick up then yes I'd say inflation was probable.

regards

PS I thought it was 2 to 3%, seems ZZ shows its 1 to 3%, so no, not below target.

by Machiavelli | 26th Nov 13, 3:26pm 1385432763

Good information thanks steven but we disagree on a few points. I consider inflation to be within the target range, I consider unemployment to be dropping and I am under the impression the outlook is for inflation to increase.

Why should NZ be different? Good question. I'm just a simple man but I observed that we got through the GFC relatively unscathed and now there is a minor bit of construction to do around the place. Didn't I read a while back that our economic situation was the envy of the world? From where I'm sitting there is more demand in the market than I know what to do with and most of the business owners I talk to are experiencing the same. I consider I'm at the beginning of 5-10 good years of money making. There's a few good reasons. The glass is half full good man!

by steven | 26th Nov 13, 1:21pm 1385425292

"panic" no I'd credit you with far more nounce. I more concerned with those at 95% LVR and no view of whats going on.

I think you should always consider fixing, so not simply drift along not watching things and then jump.

I posted on Sweden's blip, so fixing through that, say 2 years might well make sense. The time period is really how you see the next 5 ~ 10 years to determine how long you fix for.

regards

by Mike B | 26th Nov 13, 1:37pm 1385426276

"the OCR can’t remain at what is an exceptionally low level [2.5%] for too long in such an environment," they said."

Back in the 50's and 60's you could get a 3% mortgate which lasted for years.

Now we are in the era of greed rules 6% mortgages are too low

by Chairman Moa | 26th Nov 13, 2:19pm 1385428777

Reading this article, it reminded me not so long ago we were looking to buy a new small car. Went to local Holden dealer and this sales person insisted that we should look at the new Commodore VF, its fuel consumption isn't much more than a 2L car and petrol won't go any higher than it is now. True lies....

by fat pat | 27th Nov 13, 12:14am 1385464490

Will rising interest rates dampen inflation if the inflation is caused by foreign capital flowing into NZ. I wonder if somebody can explain this to me? I went to the reserve bank statistics page

http://www.rbnz.govt.nz/statistics/key_graphs/inflation/

and got the data for the total value of NZ housing stock as a function of time. I plotted value vs time on an excel graph and it shows that from 1978 when I was born till about 2002 a more-or-less straight line with a gradient of 0.029 ie 2.9% inflation. For some reason in 2002 the gradient abruptly changes to 0.18 until the GFC in late 2007. It wobbles a bit and then resumes it's relentless inflation rate of ~ 18% pa.

The current total value of housing stock as of (Q2 2013) is 689 billion dollars and rising. If the 1978-2002 3% inflation trend had of continued, then our housing stock would only be worth around $370 billion dollars. Does this mean that collectively our NZ houses might be 86% overvalued? or does it mean our dollar has lost almost half its buying power since 2002?

I also looked at the historic gold price in US dollars which shows a similar trend. Almost no inflation from 1978-2002 (~$400 usd/oz) then gold rockets to its present value ~1200 usd/oz. It seems as if all asset classes are vastly overvalued. Or does all this mean that the NZ and US dollars are in freefall?

The US federal reserve is buying a whopping $1020 billion dollars of US bonds per year, presumably because nobody else wants or trusts them. Every year they are creating more than enough money to buy all the houses in NZ, every year! But where does that money actually end up? Apologies didn't mean to rant or hijack the topic.. just interested in what people think.

by steven | 27th Nov 13, 7:34am 1385490845

Spot on, yes roughly a x2 housing bubble today. Yes the cheap Fed money is blowing up bubbles in assets and indeed everything as the bwankers gamble with it.

Now go back and plot in the oil price as well. Though the oil price you really want is the marginal cost, ie the cost to produce new fields.

Gold, the gold bugs I think expected huge inflation when the printing started so bought gold like mad. Inflation didnt happen but it probably stopped deflation and a 1930s Great Depression mkII , interesting comparison with keynes economic model (zero bound trap) v the austrian one (printing = inflation).

All that money, well money is an IOU. It is an IOU proxy for work or energy. Since there isnt the fossil energy to underwrite the 1s and 0s its going to disappear as easily (but way more painfully) as it was created.

It will do that when ppl realise all the assets they have bought cant pay the interest/profit expected off them, by a factor of x2 (BAU - business as usual) at least if not x4 (post peak oil world). So if you bought at asset at 4million and expected a 10% return but only get 2.5% that makes the asset instantly worth 1million.

regards

by fat pat | 28th Nov 13, 1:57am 1385557070

Thanks Steven. That's a really interesting analysis which I must say rings true. I was wondering why gold was counter intuitively dropping in value. I always thought the biggest worry was US debt default (fiat currency collapse) but as you point out, oil underpins everything and that's much more worrying. I'd love to see that validated by something more accurate than my excel spreadsheet. I read recently that an Australian fellow called Steven Keen created a free and open source economic dynamics software modeling program called minsky. I guess the real question people what to know is how do you preserve wealth in a world where everything is overvalued including currency itself? Even bank deposits don't seem safe anymore. The open banking resolution means that New Zealanders will face some sort of Cyprus style hair cut in the event of a banking crisis.

by steven | 28th Nov 13, 7:34am 1385577285

gold dropping, a game of relatives.

upside,

It went as high as it did because enough ppl believing that printing == inflation thought gold would rocket in price and thinking that fiat currencies collapsing would go to $5000 or more. So like the tulip mania we had mad speculation by greedy il-informed ppl, thats a bubble as well. End result it went to $1800 odd and has now dropped back to $1200 odd....some nasty burn marks on some ppl, serves them right. The next ones to burn will be those holding gold mine shares as the marginal cost to extract what gold is left is $1200 and more, bye bye gold mines.

Downside,

or sensible is that gold should be held short term to see you through a bad event. So the best way to think of gold IMHO is not worry what it costs when you buy it close to a bad event just get it, coming out the other side it should be worth more of less what you paid for it relative to all the other losses and you bail out. Hence if I didnt have mortgage debt and if there wasnt the loons buying (or still holding it) I'd buy some gold and silver today as a hedge. Though actually I am buying metals, just its brass, lead and copper, but you can always use them to eat with.

USD, I'd suggest reading Nicole Foss (youtube is great). So actually what's expected is the US is considered a safe currency (again a game of relatives) so money will run to it in the event of a bad event ie Depression. This is the short term outlook, so if I was going to go mad and speculate I'd buy USD right now with NZD as I personally think the NZD will tank medium term relative to USD. Once the event is reached bottom ( 2 or 3 years) Id sell USD and buy gold as countries can re-issue notes and de-value. Then sell gold and buy land. While holding USD of course it could default and I'd be left penniless, big impact but not a big risk short term....

Like I said though debt is what I have and debt remains....so that has to go first....95% LVRs will be ugly, even 60%.....oh boy.

Steven Keen and minsky is really compeling and points to such an event as above. He also has a debt jubilee idea that is the only thing I see as saving our asses....wont happen of course...

Bank deposits were never safe IMHO...its just now its explicitly so. So the soft lullaby of the Govn will bail me out of losses is not, its Wasp, eat me raw at full volume, it should wake ppl up. I like the OBR, it keeps things going instead of a lockup and we get to still buy food....a small price is paid in losses to the gamblers, oh I mean investors...

;]

regards

by fat pat | 28th Nov 13, 11:49pm 1385635771

I just checked Nicole Foss out on YouTube giving a talk in Tauranga. She does seem to be very analytical and articulate, albeit pessimistic. Well I guess I won't be taking out a second mortgage to stock up on bitcoin. Joke of course, but I only mention it as something I consider to be staggering overvalued. I mean bitcoin is nothing more than a cryptographic construct which could easily be replaced with something similar. However, if you had borrowed money a year ago to invest in bitcoin you'd be filthy rich if you sold them right now. Bitcoin went from 3 or 4 dollars to $1000 in about a year. I guess that highlights the discrepancy between what should happen based on rational analytical thinking, and what actually does happen based on crazy greed and panic driven market behavior. Unfortunately I'm stuck in my analytical ways and am paying down debt. I'd like to think I could retire my debt before the next anticipated deleveraging/depression/default phase. I wonder how long this strange uneasy time of credit growth can persist. Like you said Steve Keen has a theory on debt instability which predicts a bleak outcome. Janet Yellen however seems committed to maintaining status quo after Bernanke triumphantly leaves his post so maybe the system has some legs, at least for a few years. Anyway great to have your perspective on gold and wealth preservation, thanks :)

Regards, Pat

by iconoclast | 29th Nov 13, 1:19am 1385641164

Fat Pat: Bitcoin went from 3 or 4 dollars to $1000 in about a year. I guess that highlights the discrepancy between what should happen based on rational analytical thinking, (common sense), and what actually happens based on crazy greed and panic driven market behavior

Look over your shoulder

Bitcoin went from $700 to $1000 yesterday, in one day. In the one day, with only 21 million units on issue, the total value of those went up by $6.3 billion. All on chinese trading

Guess who was pushing the price up

There is a simple parallel between this and the property market in Auckland

Something that has been discussed here for 4 years. Some have seen it. Others deny it. Those in authority won't acknowledge it. People like Gareth Morgan go to extraordinary lengths designing exotic distractions to take your attention away from what is happening.

The Chinese are looking for a means of exchange to get their money out of China. Cost no object. Here they are driving the cost up out of the reach of sane people

Frenzied buying ...

The virtual currency bitcoin has continued to fluctuate wildly on the back of frenzied trading by Chinese investors despite warnings of a potential bubble, reports the Beijing-based China Securities Journal. http://www.wantchinatimes

It has nothing to do with value, logic, rational analysis, and common sense ...

by fat pat | 1st Dec 13, 10:45am 1385847950

fascinating! Yes foreign investment in the Auckland property market does appear to be rampant, however I believe the National government has absolutely no intention of doing anything about it, for several reasons.

1. A sizable proportion of that property purchase money going to national party supporting baby boomers, and is pumping up the economy, indirectly feeding GDP.

2. At a time when out exports are hurting because of the high dollar, perhaps this foreign investment in assets is making out current account deficit look better?

3. Foreign investment may be increasing our money supply and devaluing our dollar in relative international terms. No data to back that up, just a thought. If true, that would be helping our export sector.

When the national government leaves office it will claim that it left the books in order, GDP was up and the economy was humming. On the flip side of the coin, asset prices will have become dangerously bloated. The younger generation will have become disenfranchised tenants in their own country, and people who had money in the bank will be wondering why the buying power of their NZ dollars has plummeted in half a decade. The future revenue earning potential of the country will have become seriously compromised with billions of dollars propping up the bloated property market and an aging population who won't be paying taxes.