Ready, Orr not?
Jitters in Oz after NZ rate cut. Christopher Niesche,
From where Australians sit, the New Zealand economy doesn’t look too bad. The terms of trade — how much money the country gets for its exports — are bouncing along at a record high, unemployment is at a decade low and inflation is nicely contained, but not worryingly low.
And yet Adrian Orr surprised everyone with a full half percentage point rate cut and warned of the strong possibility of negative interest rates.
The shock decision prompted one question for Australians; If that’s what the Kiwis are doing, what does it mean for us and our economy, which isn’t performing as well as New Zealand’s?
Iron ore prices have fallen further after starting to show some sign of life; unemployment remains stuck above 5 per cent; and on Friday the Reserve Bank of Australia cut its near-term forecasts for economic growth and household consumption.
The Australian newspaper more or less answered the question about what the Kiwi cuts mean on this side of the Tasman with the headline Kiwi cut raises the prospect of negative interest rates.
Orr’s promise to do “whatever it takes” to meet its employment and inflation targets certainly put the heat on Australia’s own Reserve Bank governor Philip Lowe.
Lowe had the misfortune of making one of his regular appearances before Parliament’s economic committee to be grilled about his own approach to monetary policy on Friday, just two days after the RBNZ rate cut.
“We did not get a heads-up on that decision,” he told his inquisitors, adding that he wouldn’t expect to be given advance warning of this “incredibly tightly held” information.
“Does it have any immediate implications for us? No. Our exchange rate came down in response to the cut in New Zealand, but they are responding to the same forces that we’re responding to,” he said.
“At the global level, the elevated desire to save rather than to invest is seeing interest rates low, and everyone is having to respond to that. [RBNZ board members] meet less frequently than us, so they chose to do it in one step.”
The RBA meets monthly, whereas the RBNZ meets only once every two months.
Lowe conceded that the central
bank could cut rates or more if required.
“It’s possible that we will end up at the zero lower bound,” he told the MPs. “We are prepared to do unconventional things if the circumstances warranted it.”
The zero lower bound refers to the problem that if interest rates at or near zero, the central bank is left with only limited capacity to stimulate economic growth.
This is unfamiliar territory for the RBA and for Australians. We watched from the sideline during the global financial crisis as economies around the world slashed rates to zero or lower and undertook quantitative easing, which for the majority of Australians remains a phrase they occasionally heard on the radio finance reports, but didn’t understand.
However, we might all come to learn that “QE” is a way for a central bank to inject money into the economy by buying back government bonds.
When the GFC struck a decade or so ago, we were in the midst of the mining boom with surging terms of trade, the Government was in surplus with lots of spare cash to pump prime the economy and the official cash rate was sitting at 7.25 per cent, leaving the central bank with lots of capacity to slash rates.
But the Australian economy is now very vulnerable to external shocks. The budget is in deficit, interest rates are at 1 per cent and the mining boom is a memory.
Orr’s plain talk dragged the Aussie dollar to a decade low as investors and economists started pondering the possibility of zero interest rates.
In that respect, we could say he has done us a bit of a favour. The lower dollar will make Australia’s exports a little bit more attractive in global markets, giving the economy a little bit of impetus.
But not everyone is grateful.
In an editorial headlined “RBNZ should go easy on the shock and Orr” published on Friday, the Australian
Financial Review said Orr had a history of surprising the Australian business community, with its plans to almost double bank capital requirements for the Australian-owned big four Kiwi banks, and by blocking Australian wealth manager AMP’s plans for the sale of its life insurance business.
The paper goes on to say that the RBNZ is right to prioritise the national interest but questions whether the New Zealand economy would be better off.
“It is hard to see how either the Australian or New Zealand economies, businesses or citizens are better off with less transtasman integration, regulatory co-operation and more dirt cheap money. The smaller partner is likely to lose most, for example, through a higher cost of finance.”
Most of all, however, Orr’s move reminded Australians of how vulnerable our own economy is.
Orr’s plain talk dragged the Aussie dollar to a decade low as investors and economists started pondering the possibility of zero interest rates.