By David Hargreaves
I don’t know if you noticed, but there was a paragraph missing from the end of the latest Reserve Bank Official Cash Rate decision announcement.
The missing bit read: “Over to you, Janet.”
Yes, they didn’t say it, but our central bank is waiting for Janet Yellen and the US Federal Reserve to raise interest rates. If the Fed (finally) jumps in December and puts up US interest rates this would be expected to push the New Zealand dollar down, increasing the cost of our imports and causing NZ inflation to spike to the levels the RBNZ is expecting. Such a spike is crucial if the RBNZ is to finally get in line with its official monetary policy target of 1-3% inflation and an explicitly targeted 2% rate.
Now, obviously whatever happens in the US is very important. But should our central bank be pinning its policy decisions on what happens in the US – as it appears to be?
No, surely not.
I will say up front that I think the RBNZ should have trimmed another quarter of a percentage point off the OCR now and followed it with another cut before Christmas.
While it may seem odd to say so, the ‘do nothing’ option in this case was more risky than actually cutting rates.
The Fed will make its final decision on interest rates in mid-December, after our Reserve Bank (December 10) makes its final official announcement on interest rates for this year*.
I can only suppose that the RBNZ is planning a quarter of a percentage point cut to the OCR (to 2.5%) on that day and has fingers crossed that the Fed subsequently moves rates up. The REALLY risky course of action would be for the RBNZ to sit tight on our rates and wait and hope that the Fed moves. I sincerely hope that the RBNZ is not even remotely considering that latter course of (non) action.
If the RBNZ did leave the OCR sitting at the current 2.75% level and the Fed didn’t raise rates then I think you could confidently expect the NZ dollar to surge, and by the time everybody’s re-emerged from the beach it may well be riding over US70c again.
If that happened the RBNZ’s projections of higher inflation really would be blown out of the water and I think serious questions would start to be asked by Finance Minister Bill English of just when the RBNZ is thinking of getting in line with the Policy Targets Agreement English has with RBNZ Governor Graeme Wheeler.
Even if the RBNZ does (and surely it will?) reduce the OCR to 2.5% on December 10, there’s still a risk that things will go awry if the Fed doesn’t push US rates up.
The RBNZ had the chance to take the initiative by dropping our rates now. It would have kept downward pressure on the dollar between now and December and a follow-up rate cut in December would have ensured continued downward pressure on the dollar afterward – even if the Fed didn’t come to the party.
It seems to me that the RBNZ has spent far too much of the past two years waiting (and being continually disappointed) for the Fed to ‘normalise’ conditions in the US. The fact is the Fed has now on an ongoing basis failed to live up to its pre-decision displays of bravado. There has to be a pretty good chance that despite its latest chest beating the Fed will yet again come out with a non-decision in December.
I suppose we can perhaps take some comfort that the RBNZ at least acknowledged in its latest statement that there was a risk the Fed would not move, by cautioning that our rates may have to move lower if the NZ dollar stays strong. But I would also point out that this statement rather cuts across what Wheeler said only two weeks ago when he appeared to be trying to put a ‘floor’ on our OCR at 2.5%.
I don’t think the RBNZ has a dog’s show of getting inflation to the levels it’s saying it will – unless it gets very lucky with the Fed. But as I said earlier, the RBNZ is taking a big gamble on the Fed. One it should not have taken. Surely we have to make our own decisions and not wait for others?
If the Fed doesn’t move in December then the OCR will have to be cut below 2.5% next year. No doubt.
And no doubt also that this would be another bucket of petrol on the house market fire. Therefore for sure you could expect that the relaxation of the LVR ‘speed limits’ outside of Auckland (from 10% to 15%) would be reversed in short order followed by the RBNZ dipping back into the ‘macro-prudential tool kit’.
In this regard the release of papers showing Treasury expressing enthusiasm for debt-to-income ratios is interesting to say the least. Watch this space.
*An earlier version of this article had an incorrect date shown. This has been amended.