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Reserve bank cuts OCR to record low

Written By: - Date published: 9:21 am, August 11th, 2016 - 28 comments
Categories: economy, john key, monetary policy - Tags: , , , ,

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 )

28 comments on “Reserve bank cuts OCR to record low”

  1. ianmac 1

    Didn’t Key say in a QT response yesterday that what Rutherford says doesn’t count because he is just a journalist? If so it is a typical Key dismissive of those he disagrees with.

  2. Lara 2

    Bagrie is right on that. The return for those who are prudent and trying to save (for a home? for anything!) rather than getting into debt is absolutely pathetic.

    I see the monthly interest payments on savings and wonder why on earth I’m risking it leaving it in the bank. The pathetic return barely compensates the risk.

  3. s y d 3

    interest rates cut, but NZ dollar gains…figure that one out?

    • grumpy 3.1

      Just about to say the same thing! Sort of goes against everything the Great God Samuelson taught us, eh?

      • RedLogix 3.1.1

        That’s because we are in Debt to GDP territory Samuelson never contemplated. Different place, different rules now apply.

    • dukeofurl 3.2

      Easy, its a dead cat bounce.

      remember they dont buy and sell real dollars, just bits of paper that say you will buy x amount at y price on z date.

      Looking at the rates over the last month, they are mostly down, except NZ-US

    • Lanthanide 3.3

      The market had priced in something like a 0.40% cut.

      Because it was only cut by 0.25%, the dollar went up. If it had been cut by 0.50%, the dollar would have gone down. If it had been cut by 0.40%, the dollar would presumably have been unchanged.

      • Huginn 3.3.1

        It’s more complicated than that.

        ‘Reductions in policy rates to extremely low or negative levels appear to be dysfunctional – perhaps even a tightening of monetary policy. I will not rehearse the straightforward arguments as to why, and the early evidence. Suffice it to say that the most significant event in financial markets this year was the response of asset prices to the surprise cut in Japanese policy rates in January – the currency strengthened, risk assets fell. That looks like a tightening.’

        Eric Lonergan

        http://www.philosophyofmoney.net/there-are-two-types-of-negative-interest-rates/

  4. ropata 4

    Another attack on the working poor and the productive sector by financial villains. Why the hell are we propping up the parasites at the expense of real workers?

    • Anno1701 4.1

      ” at the expense of real workers?”

      beacause they (we) arent properly organized

      we need mobilization ASAP !

  5. Draco T Bastard 5

    “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.

    I’d say that’s weird but it stands to reason.

    When someone takes out a loan from the bank the bank creates the money and gives to them in their bank account. Both loans and deposits increase. This should be true no matter which bank it was deposited in. If it’s no longer true then either the money is being withdrawn as cash and not being put back into the banking system at all (yeah, right) or it’s leaving the country and being placed in offshore banks.

    Now, which group of companies are really great at exporting money? Oh, that’s right – the foreign owned banks.

    Basically, what we seem to be seeing here is another detrimental aspect of foreign ownership.

    And we shouldn’t forget all those rich people dodging paying taxes by use of tax havens.

  6. G C 6

    The Reserve Bank thinks they can control the NZ dollar through interest rates. I have news for the dead wood at the RBNZ, that horse detached from the cart agers ago.

  7. G C 7

    The Reserve Bank thinks they can control the NZ dollar through interest rates. I have news for the dead wood at the RBNZ, that horse detached from the cart agers ago.

  8. Keith 8

    Its also very ironic that the RB are worried about property inflation but then have to lower rates because the Rockstar economy is deflating.

    More temporary foreign workers will be the answer from National to complete the insanity.

  9. b waghorn 9

    but but henry told me this morning now is the time to borrow more , and even floated the idea of borrowing to by shares due to shares getting 6% returns at the moment.

    (just chucked that in so people can see where these low rates could lead to, i have no intention of ever doing a thing that douche henry says)

    • Anno1701 9.1

      “but but henry told me this morning now is the time to borrow more , ”

      VERY irresponsible broadcasting

      i even heard him state that his listeners were “cowards” if they didnt borrow…

      • mosa 9.1.1

        Don’t watch him !!!
        It only adds to his ratings, he is the last person who should give advice.
        I wish he would go and boil his head.

        • save nz 9.1.1.1

          +1 Mosa – the good thing though is that TV ratings are bogus anyway as they only measure 600 people or something ridiculous. Just don’t click on any Henry Internet link – the Internet is brutal for showing real figures…

    • Craig H 9.2

      Borrowing to invest is always risky territory, but it’s a legit point that if you are willing to risk it, there’s good profit in it if you focus on dividends, not capital gain. Obviously, you could end up with nothing if the company folds, but that’s why they pay more – higher risk = higher reward.

  10. Paul Campbell 10

    So I was listening to some talk radio today and someone made the point that the Reserve Bank was running outside it’s inflation goals (inflation is too low, the economy is stagnating). There was a whole lot of gnashing of teeth about what they could do to get inflation back to 2%.

    Not one person suggested raising wages

  11. G C 11

    Let me spell-it-out for you ALL:

    When the RBNZ cuts rates, it’s a sign that the speculative housing market will continue, as speculators will have access to even cheaper money. Therefore fake GDP will continue, as such the NZD will continue to rise (be in demand).

    • Nic the NZer 11.1

      Hmm, thanks for the ‘insight’.

      However observing the actual outcomes in NZ I note that interest rates were significantly higher between 2003 and 2008 and this didn’t appear to discourage a fair amount of speculative housing market activity occuring over that time period either. In fact it is broadly agreed by many that a housing bubble formed over this period and collapsed following the financial crisis.

      Maybe in fact interest rates work in the other direction and the reserve bank is somewhat obliged to set low rates in response to NZ’s significant level of private sector debt. This could occur because the significant existing debt is encouraging sluggish borrowing and may encourage more sluggish borrowing (or net debt repayment) at higher rates.

  12. save nz 12

    Has anyone worked out that if nobody gets paid enough to live on, and the ‘essentials’ that people are forced to spend their money on, are overseas owned or legally avoiding taxes, then the economy will stagnate….

    It is staggering how much ordinary issues like parking and is so overpriced in NZ, they keep dreaming up ways to charge more. Or power daily rates which often cost more than the power… Ticketing is a popular way to get extra revenue..even if you don’t owe it you still are expected to pay for it and have to waste your time on disputing stupid officials…http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11691804

    School donations that are not donations but fees, etc

    Stuff that we are told is free or discretionary, but you are expected to pay for it.

    Even if you had a mortgage free home, when you pay for all the necessities then on minimum wages you would have nothing left.

    The other day we were talking about how in a so called well paid job at a telecoms company after paying childcare and parking in Auckland, a worker probably only earned $60 a day. What about everything else like accommodation, food, bills etc

    Low wages and price gouging is why the economy is stagnating.

  13. Atiawa 13

    The Reserve Bank Governor is a great name for the role he plays. Sitting on the bench for the last seven years waiting for the coach to put him into action on the court.

  14. Thinkerr 14

    I’m part-way through a 1932 book by an economist, Irving Fisher, called ‘Booms and Depressions’.

    Too much to summarise, but pdfs of the book are free to download if you search for them.

    Three points the book makes are very interesting for our current times (I might not have them quite right, it is a difficult read):

    1. We think of money as an asset, but it’s really not, because most money in circulation started out as a loan to someone (see point 2).

    2. The banks have a multiplier, so every dollar deposited allows them to lend, say, $10. So, when deposits stop coming in, it actually shrinks the amount of money in circulation, because most of the ‘money’ in circulation started out by being loaned to someone. Having less deposits means the banks can’t re-lend loans as they are repaid.

    3. When the amount of money in circulation shrinks, the ‘real’ value of the remaining dollars gets bigger. The loan balance stays the same, but businesses, particularly, have to work harder to find the money to meet their liabilities.

    I don’t fully understand the book (probably need to read it over again), but some of the comments and news headlines are eerily reminiscent of what I’ve just been reading.

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