Rates – Steady breeze in the city of sails


The Reserve Bank of New Zealand had a few things to say as it held the rate at what seems to be a low point relative to our historical trend.

The reason for a steady hand on the rudder?

  • That pesky inflation looks lethargic; “Core inflation and long-term bond yields remain low.  Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.”
  • Exchange rate parades proudly high; “A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.”
  • The Auckland housing constrained and bucking at the gates; “This moderation is projected to continue, although there is a risk of resurgence given the on-going imbalance between supply and demand.”

Could these low rates be the new normal?

The RBNZ Bulletin “Characterising the current economic expansion: 2009 to present day” was released this month. The author Rebecca Williams describes one of the more interesting estimates made by the RBNZ; the nominal neutral interest rate.

To try and gauge the affect of the central bank rate, the RBNZ has to guess what is the neutral position of the rate. They use a suite of models to assist. ” This suite implies that the nominal neutral interest rate has continued to fall since the GFC…”

“international research suggests that large declines in the neutral interest rate are a common feature of advanced economies since the crisis (with some US commentators suggesting that the real neutral rate in that country has fallen to zero)”

What does this mean for the future of rates?

The world has changed since the last crisis. Some of the worlds most advanced economies are settling on a very low cost of borrowing as the new normal. One of the key affects of this is being felt through a higher NZ dollar. Common sense dictates that if country A prints more money than country B, currency A will get weaker in respect to currency B.

In conclusion with a stronger NZ dollar, we can import easier and in turn this is feeding through to less competition for local goods. Less competition locally means prices don’t get higher as fast. And in turn the central bank only needs a lower rate to keep inflation in check.

If this starts to be a more permanent fixture of the landscape, the new normal could be lower rates. This will mean more borrowing and spending overseas right? Well yes. In that sense it is a good idea that the RBNZ carry more ammunition than just interest rates.

Like the 40% investor rule and restrictions on low deposit borrowing.