The Reserve Bank cut its official cashrate (OCR) from 1.5% to 1% at 2pm yesterday. At that moment, the NZ gold spot price peaked with a mid-price of $NZ2340.79 for an ounce. The $NZ dropped about US1.5c against the $US but recovered about half a cent over the next few hours.
Every S&P/NZX index bar one rose yesterday. The NZX50 rose 1.88%, the NZX 20 2.01%, the NZX 50 Portfolio 1.95%, the NZX 10 1.90%. The one fall was by the All IT, down 0.39%.
9 months ago, when the NZ official cashrate was 1.75%, Reserve Bank governor Adrian Orr said: “We expect to keep the rate at this level through 2019 & into 2020.”
Since then, turmoil has escalated internationally, both financially & politically.
Sharp action, but it’s about long-term objectives
Mr Orr produced a media release plus a summary record of the bank monetary policy committee’s meeting yesterday. The longer committee record points to the debate within the committee on various issues, particularly whether a cut of 25 or 50 points made more sense.
Oddly, in this debate, it was – as usual – about the longer-term objectives of reaching & sustaining levels of inflation & employment deemed appropriate. To me, that debate, both here & overseas, has been about how to manufacture shifts to a permanent equilibrium rather than allowing markets to find their own to-&-fro way to an equilibrium.
The search for this manufactured equilibrium based on low interest rates theoretically suits borrowers in that the interest component of an acquisition is low, but the asset price will rise. That was a central reason, though not the only one, for the escalation of house prices. The eventual house price downturn, now running for 3 years, has demonstrated plenty of resistance to price cuts.
During the hours immediately before Mr Orr’s announcement, I was watching auction bidders taking great care to hold back from pushing yields lower – yields on commercial property below 5% have become common in the last 2 years, whereas that level had long been reserved for very special properties.
The Reserve Bank’s action would mean that yields do fall further, unless events overseas – such as extension of the US trade war against China – intervene.
Mr Orr said in his release yesterday:
“The monetary policy committee agreed that a lower OCR is necessary to continue to meet its employment & inflation objectives.
“Employment is around its maximum sustainable level, while inflation remains within our target range but below the 2% midpoint. Recent data recording improved employment & wage growth is welcome.
“GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment & inflation would likely ease relative to our targets.
“Global economic activity continues to weaken, easing demand for New Zealand’s goods & services. Heightened uncertainty & declining international trade have contributed to lower trading-partner growth. Central banks are easing monetary policy to support their economies. Global long-term interest rates have declined to historically low levels, consistent with low expected inflation & growth rates into the future.
“In New Zealand, low interest rates & increased government spending will support a pickup in demand over the coming year. Business investment is expected to rise, given low interest rates & some ongoing capacity constraints. Increased construction activity also contributes to the pickup in demand.
“Our actions today demonstrate our ongoing commitment to ensure inflation increases to the midpoint of the target range, and employment remains around its maximum sustainable level.”
Mr Orr also issued a summary record of the monetary policy committee’s meeting:
“The monetary policy committee agreed there was a need for further monetary stimulus to meet its inflation & employment objectives.
“The committee noted recent economic developments were broadly as expected and employment was around the targeted maximum sustainable level. The committee was pleased to see that the labour market data held up relative to expectations in the June 2019 quarter.
“However, the committee noted that inflation remains below 2% and the outlook for employment & inflation was softer. GDP growth had slowed and global conditions had weakened.
“The committee agreed that the balance of risks to achieving its consumer price inflation & maximum sustainable employment objectives was tilted to the downside, although members placed different emphasis on the sensitivities to these risks.
“The committee noted the decline in long-term government bond yields to historically low levels. Financial market participants expect both inflation & policy interest rates to remain low globally for a prolonged period. Some members noted that survey measures of short-term inflation expectations in New Zealand had declined recently. Others were encouraged that longer-term expectations remained anchored at close to 2%.
“The committee agreed that weak global economic conditions could see imported inflation remain low if global growth slows further or if commodity prices decline. The members discussed the range of appropriate policy responses should imported inflation persist at low levels.
“The committee welcomed the recent employment & wage data but noted that private sector wage growth was subdued despite businesses having difficulty finding labour. The members discussed that the recent slowdown in growth could dampen wage inflation by more than assumed. Some noted that if cost pressures remain elevated, firms may pass on costs to consumer prices by more than assumed, while others viewed the wage pass-through as a natural consequence of a tight labour market & policy stimulus.
“The members discussed the recent slower domestic GDP growth and the impact of slowing global demand on New Zealand through the trade, financial & confidence channels. The members noted that heightened global uncertainty was reducing investment and suppressing trading-partner growth. This highlighted the risk of a larger or more prolonged slowdown in global economic growth.
“The committee noted that additional stimulus from central banks had underpinned growth and reduced the likelihood of a more pronounced slowdown. However, some thought that even with support from monetary stimulus, considerable economic & policy uncertainty could see global growth continue to decline. Other members noted that the easing in global financial conditions since the beginning of the year, or a shift in political environment, could lead to a pickup in global growth over the next year.
“The committee acknowledged the importance of additional spending from households, businesses & the Government to meet their inflation & employment targets. They also agreed that additional monetary stimulus was needed. The members discussed several important uncertainties.
“The committee noted that low business confidence had dampened business investment in 2018 and had remained weak in mid-2019. The members discussed that if sentiment remained low, perhaps due to global economic conditions or if profitability remains squeezed, growth might not increase as anticipated over the medium term. The members also noted that the shift in domestic production from manufacturing towards services was also dampening business investment.
“The outlook for household spending was discussed with regard to the assumed dampening impact of soft house price inflation. Some members noted lower mortgage rates could contribute to a stronger pickup in house price inflation, which could support consumption. Other members noted that house price inflation could remain weak, for example if net immigration continued to decline relative to the number of new houses being constructed.
“The committee noted that fiscal assumptions embedded in the projections were consistent with Budget 2019, which included adjustments to reflect that government spending takes time to increase. The members discussed that fiscal policy could be more supportive if future announcements incorporate more spending or if the impact on domestic demand is larger than assumed. This view was balanced by the impact of any increase in government spending being delayed, for example due to timing of the implementation of new initiatives & difficulty finding labour.
“The committee also discussed the contribution of monetary policy to the projected pickup in growth & inflation. The members noted that estimates of the neutral level of interest rates have continued to decline and this was consistent with generally lower interest rates over time. Members also noted the bank’s current assessment of analysis on the transmission from monetary policy to growth & inflation. This suggested that the overall strength of these relationships was little changed in the environment of low interest rates.
“The committee agreed to continue to monitor & assess the impacts of monetary policy, including the transmission through to retail interest rates.
25 versus 50-point reduction
“The committee reached a consensus that, relative to the May statement, a lower path for the OCR over the projection period was appropriate. The lower OCR path reflected the economic projections & the balance of risks discussed.
“The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The committee noted both options were consistent with the forward path in the projections. The committee reached a consensus to cut the OCR by 50 basis points to 1.0%. They agreed that the larger initial monetary stimulus would best ensure the committee continues to meet its inflation & employment objectives.”
Now back to the gold price, in $NZ.
The spot price for an ounce of gold was $2261 at midnight Tuesday, fell $6 in the next hour and then took off, hitting $2328 at 3.20am. It peaked at $2340.79 right on 2pm, fell to $2318, then recovered some.
7 August 2019: Australian central bank holds at 1%
1 August 2019: Fed cuts funds rate, rolls over treasuries
2 July 2019: Australia’s Reserve Bank cuts rate again
4 June 2019: Australian Reserve Bank takes cashrate below NZ’s again
8 May 2019: Reserve Bank makes first cashrate cut since 2016
1 December 2018: US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations
9 November 2018: Reserve Bank expects to hold cashrate long-term, though numerous factors could change that
3 August 2018: Fed to pull $US40 billion/month out of market
10 November 2016: Wheeler cuts cashrate to 1.75%
2 August 2016: Australian cashrate cut to 1.5%
14 September 2012: US Federal Reserve orders up QE3
11 August 2011: Fed sticks with zero to mid-2013
11 August 2007: Fed holds rate, then says it’ll distort market to prevent collapse
Attribution: Bank release & policy statement, GoldBroker, NZX indices, X-Rates.