By David Hargreaves
Well, the Reserve Bank got the decision it wanted, but not the outcome.
There’s a strange harmony in the RBNZ’s ‘hawkish cut’ to interest rates last week being followed by the US Federal Reserve hiking American interest rates in a ‘dovish way’, but at the moment it isn’t producing sweet music to the RBNZ’s ears.
The huge discordant note as at time of writing is the Kiwi dollar, which actually rose against its American counterpart in the immediate wake of the Fed decision.
The explanation for this apparently contradictory turn of events would lie in a combination of the very conditional nature of the Fed hike, the fact the move had been hugely telegraphed, and the fact that our central bank last week attempted to draw a line under any further rate falls here.
I’ve already said I think our central bank is going to need to drop rates again, and I think the immediate aftermath of the Fed’s decision only firms up that prospect.
The more I reflect on last week’s Reserve Bank Official Cash Rate announcement the more I think it was a seriously botched job.
If you read the December Monetary Policy Statement closely, I think it looks like a central bank that’s decided not to drop interest rates. Indeed if you took your cues from RBNZ Governor Graeme Wheeler’s October speech you might again come to the conclusion that there was no intention to further cut rates this year. I really do wonder if that whole MPS document was put together with a kind of assumption that there would be no rate cut – but then late in the piece the decision was made to do a cut.
The disastrous consequence of combining a cut with an essentially hawkish ‘no more cuts from us’ message was to drive the Kiwi dollar higher.
And now the the US rate hike has occurred with ‘dovish’ supporting language then so our dollar has risen again.
That’s important because the RBNZ’s expecting a lower dollar and that this lower dollar will cause a spike in inflation. The RBNZ’s picking March quarter CPI inflation of 0.6%. It’s also picking that the Kiwi dollar will in the March quarter be valued at 69.4 on the trade weighted index – the basket of currencies of our major trading partners. Right now the Kiwi dollar is over 5% above where the RBNZ’s predicting it for March.
A spike in the currency right now is pretty significant because of the opportunity it will provide for importers to stock up on forward cover. To use retailer The Warehouse as an example, its annual report for the year ended July showed that it had about $200 million worth of cashflow hedging at the very attractive rate of US76c set to run out next month. It has a further $75 million worth of hedging over the following six months at US68.5c.
Businesses are smart these days. They are going to be able to stock up again in the near future at forward currency rates – certainly not as good as they were – but nevertheless much better than the RBNZ would have imagined or be hoping for. Predicting the direction of a currency is a bit like playing roulette (just as predictable), but I don’t see it as impossible now that the Kiwi could climb above US70c early in the New Year. With a US Fed equivocal about further rate rises and our central bank seemingly close to unequivocal about no further rate cuts here, why wouldn’t the Kiwi dollar rise further?
I believe that the RBNZ has too slavishly looked to the Fed for a lead. It has spent the last couple of years or more waiting for things to ‘normalise’ globally and take its cues from that. Well, the US rate hike has finally come, but you wouldn’t say the situation has improved for the RBNZ. There is no way it is going to meet its inflation targets next year. Either it chucks the targets away and decides that the economy is doing well enough anyway, or it cuts rates again.
I do think the the RBNZ is, sooner rather than later going to need to clarify its position and open the door rather more widely than it has as the moment for further rate cuts. Watch this space.