RBNZ fighting the last war - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that the RBNZ cut interest rates 25bp to 2.00% as very-much expected today.

Key Quotes

“In fact, as was too much expected judging from the market reaction: NZD spiked from 0.72 all the way to 0.7340 before consolidating around 0.73, or a solid 1.3% gain. In other words, while the Reserve Bank said “Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” the market response was “GET ON WITH IT!”

The RBA has of course made exactly the same error repeatedly, and despite rates now at 1.50% AUD was this morning trading over 0.77, when it’s widely acknowledged that something with a six handle would be vastly more comfortable for exporters of both goods and services.

In both cases we seem to have central banks ‘fighting the last war’. Inflation is too low in both cases; growth isn’t all that it should be; and yet housing prices are already at nose-bleed levels, driven by decades of asset-price driven growth and an open-door policy to foreign home buyers. In both cases, the horse has already bolted. Indeed, while there is a little learning taking place in the RBA and RBNZ about our ‘new normal’, it is too slow.

For example, in his last speech Glenn Stevens noted “…the most powerful domestic expansionary impetus that comes from low interest rates surely comes when someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend. The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt. So for policymakers looking to use low interest rates to boost growth, the question is: which entities, if any, in the economy can accept higher leverage safely.”

Crucially, that logically means the only options available are (i) sustained slump; (ii) government spending; or (iii) exporting one’s way out, i.e., passing the debt problem on to someone else. Yet Stevens then ruled out public spending on anything except infrastructure, which OECD governments no longer spend money on, when adding “Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending.” So, logically, that only leaves exporting ones way out – and that requires RBA and RBNZ rates to be far closer to the 0.50% in the US, and below zero in other major economies. The rest, as they say, is just detail.”