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RB snaps awake, jolts markets

Written By: - Date published: 3:06 pm, March 10th, 2016 - 49 comments
Categories: economy, Financial markets - Tags: , ,

Guest Post: By Simon Louison

Seemingly asleep-at-the-wheel, Reserve Bank Governor, Graeme Wheeler, apparently snapped awake today when he announced a surprise quarter point cut to the Official Cash Rate to 2.25 percent.

Wheeler finally realised things were that bad, realising more stimulatory medicine was needed to boost an economy being sucked down by the dire position of the dairy industry and shaky global markets.

Financial markets, which had believed Wheeler’s spaced out commentary about the economy being hunky dory, were jolted awake and send the Kiwi dollar down a cent and half.

Wheeler, in his quarterly Monetary Policy Statement, cited “many risks” including “difficult challenges” in the dairy sector and the fragile international situation where the risks were “on the downside”.

Of the dairy industry, he said “it’s certainly a challenging sector there’s no question.”

The RB has “stress tested” banks on the basis that the dairy price slump holds for three more years.
The full results will be released next week, but under that “pretty tough” scenario he expects dairy land prices to fall around 40 percent.

Given the sector owes banks around $40 billion, and that that debt is mostly secured on the land, that is going to cause banks pain.

“Under that stress scenario, what the results show is that about 40 percent of the debt would be impaired and actual defaults would likely be something like about 10-15 percent of dairy lending,” Wheeler told a news conference.

But he assured us that agricultural lending made up only 10 percent of bank lending and only part of total agricultural lending was in dairy.

Of course we know that a lot of the rest of the massive bank debt is totally safe in the housing market – the bulk of it in Auckland.

Wheeler believed the banks could accommodate such a downturn in dairy.

He said the RB was also comforted that Auckland house inflation has come down from 27 percent in the year to September to just 14 percent in the year to January!

Asked if he was worried if today’s cut in the cash rate, quickly followed by mortgage rate cuts by private sector banks, would put further upward pressure on house prices, Wheeler said the house price-to-income ratio in the rest of the country was only 5.1 times against Auckland’s 8.5 times and there was more scope for the rest of the country to ‘adjust”.

Assistant Governor John McDermott said one of the main reasons for cutting today was because of low inflation expectations. Inflation has been below the bank’s 1-3 percent target for five consecutive quarters.

Wheeler denied the bank was “asymmetric” in countering inflation falling below the bottom of the target rather than rising above it.

Commenting on the risks of deflation (where prices are on downward spiral), Wheeler said there were global forces at work including globisation itself, technology such as low cost communications, oil and commodity price falls and migration cutting labour costs.

But he refused to admit that monetary policy was now impotent or that inflation targeting was a waste of time.

“No central bank has abandoned flexible inflation targeting,” he said.

Dr McDermott, with a rather smug smile of his face, noted that the RB could still cut rates another 225 basis points before it got into negative interest rates already prevalent in Japan and Europe, “which is more than most central banks have.”

(Simon Louisson formerly worked for The Wall Street Journal, NZPA, Reuters and was most recently a political and media adviser to the Green Party)

49 comments on “RB snaps awake, jolts markets”

  1. Lanthanide 1

    The banks might be able to weather the storm of dairy land prices falling 40%.

    But can they weather that, and also weather a collapse in Auckland house prices at the same time?

  2. weka 2

    Has NZ ever been in a negative interest rate? What’s the lowest we’ve gone?

  3. Nic the NZer 3

    Why is this called a surprise? It was two weeks ago English was blaming the RBNZ for having too high an OCR and not hitting its inflation targets.

  4. Keith 4

    We’re stairing down the barrel of deflation and it’s harder to get rid of than a cockroach infestation and almost as hard as finding a honest straight talking Nat MP.

    Hence the rise in the minimum wage, posing as a generous caring John Key moment, because real wage inflation is non existent under Keys ineptitude. Deflation is bad but the fact it’s knocking on the door is just the cream on a cake made of bullshit for the incompetent National government!

    • McFlock 4.1

      they’d need to suddenly and significantly increase the minimum wage, 25c or 50c won’t do it. At least a few bucks. And even then any effect might not be tangible.

      • Draco T Bastard 4.1.1

        That’d go against National’s basic principle of screwing over workers as much as possible.

        • Stuart Munro 4.1.1.1

          The most direct reversal would probably be achieved by reversing their stupid and vindictive welfare cuts. That was always the dark secret of social welfare – it all gets spent at the bottom so it’s economic benefit is relatively strong – unlike Nic’s corruption.

          • Keith 4.1.1.1.1

            I heard this afternoon Graham Wheeler saying that the rate cut was to encourage growth. I believe Wheeler.

            Then I heard Key going on about how good this is, even cheaper interest rates than the already ridiculously cheap rates, touching on a lower exchange rate that is good for exporters then moving quickly on not to make mention of higher consumer prices that will result, real hollow opportunist bit of turd polishing. Key sounded as trustworthy as a stereotypical used car salesman.

            Funny thing is in contrast to Wheelers comments we muppets in NZ have been told for quite some time we have a Rockstar economy, an economy with more growth than nearly any other western nation, averaging 2 to 3 plus percent in growth, ra, ra, ra!. Trouble is that growth never seemed real as in you can feel it and that every one seems to be doing better. High (real) unemployment, people living in cars, insufficient income to pay the bills or hours to work, government borrowing soaring. There’s been this nagging doubt about how real this “growth” is and it appears to be tied to things like speculative housing inflation and rebuilds and tremendously localised area’s selected to enhance this statistic. No matter how tanking is the dairy industry, real things like that don’t seem affect predicted growth.

            So bullshit away National, the truth is the economy is flat lining and slipping under and you don’t have and never have had a clue!

            • Lanthanide 4.1.1.1.1.1

              Key’s always had it both ways: low interest rates are good because people have more money in their back pocket, and high interest rates are good because it makes the dollar higher, which makes it cheaper to buy things in the shops and it shows the economy is strong.

              He has literally used both of these explanations about 1 year apart, back during 2011-2012 time frame.

            • Nic the NZer 4.1.1.1.1.2

              You must have passed over the bit of the RBNZ anouncement where they mentioned the RBNZ targeting a 1-3% inflation band. Are you suggesting a lower inflation band should be set as the tatget?

      • Richard McGrath 4.1.2

        Or the government could consider abolishing tax on incomes below $50k p.a.

        • Sans Cle 4.1.2.1

          ….and taxing anything over $200,000 at 95%, if we could properly account for all income sources – not just on paid employment.

          • Colonial Viper 4.1.2.1.1

            I think a historically fair but high rate of income tax is 89%.

            • Richard McGrath 4.1.2.1.1.1

              Do you honestly believe anyone would bother working in the situation where there was an 89% tax rate? Or a business remaining there rather than shifting to Hong Kong, Singapore or somewhere else with lower degrees of wealth confiscation?

              • lprent

                A tax credit system for kids is far simpler for everyone from employers to the IRD.

                Raising low income wages is even better. It helps eliminate exploitive ratshit employers and nonviable businesses as a economic benefit – allowing resources to flow to more constructive ventures.

                • Jones

                  Why not go for a UBI?

                • The Chairman

                  “Raising low income wages is even better. It helps eliminate exploitive ratshit employers and nonviable businesses as a economic benefit – allowing resources to flow to more constructive ventures.”

                  Indeed.

                • Richard McGrath

                  Should wages be related to productivity or dictated from on high?

                  • One Anonymous Bloke

                    Right now, they aren’t related to productivity: they’re dictated by employers. Hence the massive fall in the value of wages over the last three decades, despite the increased productivity; aka market failure.

                    It’s the fault of deregulatory fuckwits with a hard-on for Libertard/Objectigimp delusions.

                    That’s why no-one cares what they think anymore.

              • Draco T Bastard

                Do you honestly believe anyone would bother working in the situation where there was an 89% tax rate?

                Yep, I do – because it’s happened before. All around the OECD in fact.

                • Richard McGrath

                  Which countries had an 89% tax bracket apart from the U.S. under Eisenhower more than fifty years ago?

                  • McFlock

                    UK seems to have been in the ballpark, for one.

                    Figure 2: knock yourself out. First page of the first google attempt, by the way.

                    Draco might have over-egged it by saying “all around the OECD”, but that had probably only about half the egg of your “Do you honestly believe anyone would bother working in the situation where there was an 89% tax rate?” nonsense.

                    89% is a high marginal tax rate, sure, but it’s not exactly unheralded and it has actually existed without resulting in capital flight and economic collapse. If that’s outside your conceptual capabilities, then you need to reassess your relationship with reality.

                    • One Anonymous Bloke

                      I say force them to go Galt: build an island out of sand and industrial waste, and set them loose.

              • Anno1701

                “Or a business remaining there rather than shifting to Hong Kong, Singapore or somewhere else with lower degrees of wealth confiscation?”

                “we are not in the least afraid of ruins” ….. Buenaventura Durruti

        • lprent 4.1.2.2

          Why go for a complex and massively expensive solution like that?

          Firstly just defining what a “FAMILY” is. Whatever way you do it you get distortions. For instance when I was living with my recently separated sister and her preschool kids. Or if Lyn and I took responsibility for godchildren after fatalities with their parents without doing the adoption or guardian procedures with the approval of their remaining family.

          Just think how scam artists would love claiming they are a family and withholding PAYE, Bad enough the way that they have to pursue deadbeat business people through th courts now. Imagine that kicked up twenty-fold for small amounts.

  5. esoteric pineapples 5

    Great posts Simon. As much as I enjoy all the other blogs on The Standard, it’s good to have some journalistic reporting, something that tends to be absent on even the best blogs. Even sites like Scoop tend to just print press releases. What a journalist does is use their intelligence, skill, and experience to gather information and present it in a way that different points of view make sense against each other. They are providing a value added service that the general layperson can’t do themselves (or simply doesn’t have the time).

    • Sacha 5.1

      “Even sites like Scoop tend to just print press releases. ”

      That’s their business model. Our big media duopoly have have no excuse.

      • Colonial Viper 5.1.1

        The main point with Scoop is that they will publish legit press releases that the MSM completely ignore.

  6. Stephen Doyle 6

    Won’t this cut just continue fuelling the Auckland housing market?

    • Kiwiri 6.1

      Yup, that will buy more time to keep things bubbling along, as well as the feel good factor in the home equity
      Buys a bit more time for some dairy farmers too

  7. Expat 7

    Wheeler should not have increased the OCR two years ago, against global trends, it saw Kiwi’s pay more for their mortgages (taking money out of the economy) and held the dollar up (getting less for exports) and now he’s paying the toll

    The dollar just dropped 3c against the Aussie.

    • Lanthanide 7.1

      Or, he at least shouldn’t have gone higher than 0.5%

    • Paul 7.2

      Raising the interest rate also encouraged speculation in the dollar.

      The fact we nave so many neo-liberal ideologues in this country is killing jobs and the economy.
      Hoggard of Federated Farmers bemoans the common sense approach of those countries who protect their agriculture. Protecting your people’s food base seems a lot more prudent than a religious belief in markets. Farmers who bought this belief are now going to have to sell their land to overseas owners. Soon we shall be like medieval serfs, working the land for foreign overlords.

      Our economic problems are then compounded by dolts like Key, who on one hand blather on about ‘free trade’ while at the same time tying us to a slavish support of the US, meaning farmers can’t sell their milk to Russia and undermining our sovereignty by signing the TPPA.

      When the Auckland house prices collapse, the million or so people who have voted for National on the basis that ‘I’m alright Jack’, will learn like others already have that Key and his gang are only concerned for the 1% and the transnational corporations

      By then, though, it will be too late..

      And history will show that Douglas, Richardson, Shipley, Key and a long list of self centred followers sold our country for the proverbial thirty pieces of silver.
      They were aided and abetted by court jesters and popinjays such as Henry, Hosking and Christie, who sold the neoliberal lie to a populace sated on modern day circuses.

      This about sums it up.

      • Expat 7.2.1

        Paul

        All good points, as far as killing jobs goes, it started in Key’s first year of rein, 200k Kiwi’s left NZ since 2010, and the jobs market has only deteriorated since then.

        The most accurate indicator of a prosperous, thriving economy is LOW unemployment, preferably below 4.5%, but modern right wing govts don’t subscribe to this ideology, they still focus on high unemployment, to keep wages low, how counter productive is that, every time we see it, the economy starts going backwards.

  8. dave 8

    if interest drops in the bank iam pulling my money out why should we give them the us of our saving for next zero when bank fees are added in stuff that

  9. Murray Simmonds 9

    Dave:

    Your savings account is pretty much irrelevant to the bank, as is mine and everyone else’s savings.

    Banks make their money out of mortgages. So the bank really just agrees to hold our savings account because each customer with an account on their books represents a potential mortgage customer. (Bank fees reamed out of you by way of bank fees are peanuts compared to what they stand to make out of you in interest payments if you take out a mortgage).

    If I borrow $100,000, that money is created there, on the spot by the bank. I then repay it at whatever interest rate and the bank then gets to keep my interest payments – money that they have essentially made out of “digital vapour” (i.e out of an entry in a spreadsheet).

    That’s the way modern banking works.

  10. vto 10

    interest rates dropping to near zero is the logical outcome of the monetary system we operate under

    was always going to happen

    question is: what is going to happen next, when the current system finally breaks? how is the monetary system going to be changed? and make no mistake – it will be changed

  11. pat 11

    the question is whether it will be changed pre-emptively or not…

  12. Murray Simmonds 12

    “interest rates dropping to near zero is the logical outcome . . . .”

    The thing is, vto, that interest rates have dropped, for the first time in history, to BELOW zero in some of the more troubled world economies (Japan and some European countries for example.)

    IMO this shows just how “out of control” the world monetary system has become.

    “the question is whether it will be changed pre-emptively or not…”

    Well. pat, the only changes made after the 2008 GFC were effectively changes that maintained the status quo.

    I’m not holding out much hope for anything much changing this time. But whatever happens, one can pretty much guarantee that it will be exactcly what the 1% want.

    • pat 12.1

      it is a question of whether the change will be controlled or uncontrolled….the 1% would be expected to want to retain control….that dosnt mean events will accomodate them

  13. Murray Simmonds 13

    Zero-Hedge article on Japanese bonds:

    http://www.zerohedge.com/news/2016-02-29/japan-sells-first-ever-10y-bond-negative-yield

    the comments below that article are amusing – Americans trying to get their heads around the question of why on earth anyone would want to buy bonds with a negative yield.

    My guess is that it is something to do with this:
    if you believe that your bank is about to go bust then you draw out all your money and put it somewhere safe. Traditionally, that was gold bullion. But with everyone rushing into gold, that might be a bit of a problem, long term.

    So negative-yielding govt bonds might not be a bad hedge against losing your entire savings when the bank files for insolvency. You might lose a LITTLE in your purchase of negative-yield bonds, but you’d lose a helluva lot more if you kept your money in a failing bank. So its a kind of “insurance policy”.

    • Nic the NZer 13.1

      The simple explanation here is that the BOJ is rumning a negative cash rate. If the cash is in bonds it doesnt get confiscated.

  14. Murray Simmonds 14

    “the 1% would be expected to want to retain control….that dosnt mean events will accomodate them”

    Yes, pat, unless you take the view that the 1% ARE the agents in control.

    This is where the conspiracy theorists come in.

    I watched the long documentary posted by Paul (above) this morning.

    Dunno if it was a good idea or not . . . . but its a fascinating POSSIBLE scenario. It’ll probably give me bad dreams tonight . . . .

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