At 9am this morning:
Reserve Bank cuts rates – down to 2pc
The Reserve Bank has just the Official Cash Rate by 0.25 pc to a new record low of 2 per cent.
Traders and economists tipped an interest rate cut as a foregone conclusion and a minority were betting the stubbornly high kiwi dollar is a big enough threat to its policy targets to prompt governor Graeme Wheeler to reduce the official cash rate by 50 basis points in one move.
The OCR currently sits at 2 per cent – the lowest point since the rate was introduced in 1999. …
This is not good (economic) news. Take a read of: Ryan Greenaway-McGrevy warns that low interest rates are not manna from heaven – they are a consequence of the economic climate and tell us something about where the economy is headed. Consider in context with Advantage’s post this morning: The great slowdown.
Key has called for the rate cut to be passed on in full to borrowers, earning him a rebuke from the banking sector:
Reserve Bank’s interest cuts will not be fully passed on by banks: ANZ chief economist
ANZ’s chief economist Cameron Bagrie doubts banks will pass on the full impact of Thursday’s expected interest rate cut, and borrowers will see even smaller savings as the benchmark rate goes lower.
Prime Minister John Key, a former currency trader, said on Monday that the banks should pass on the savings “in full” to borrowers.
But Bagrie, who in March correctly predicted that banks would use at least part of a surprise interest rate cut to cover increased funding costs, said Thursday’s cut was also likely to at least in part be used to protect margins and prevent cuts to depositors.
“Funding costs are up. If you look at where we are raising money today versus where we were last year, credit growth is outstripping deposit growth, which is just unsustainable. You’ve got to have money coming in the door before you can put it out the door,” Bagrie said.
“We’ve got to see less credit and more deposits. Unfortunately pricing signals are incentivising the reverse.”
“In order to be putting money out the door you’ve got to be attracting a deposit base. At some point you get these rates down so low, people just think ‘i’ve got to do something else with my money’,” Bagrie said.
“So we are getting to that point of diminishing returns, where each incremental nudge lower in the official cash rate is actually going to create some perverse outcomes because it doesn’t follow naturally that you can keep on lowering those borrowing rates if you can’t continually take those deposit rates lower at the same rate.”
Asked if he expected pressure to go on banks for lower borrowing rates, similar to Key’s comments, Bagrie said the reaction was natural, but appeared to ignore the make up of bank balance sheets. …
We are in strange territory.
(Update: See Gordon Campbell on the Impotence of the Reserve Bank )
ANZ chief economist comes uncomfortably close to saying John Key doesn't understand bank balance sheets https://t.co/hcrfoqxxxs
— Hamish Rutherford (@oneforthedr) August 9, 2016