A November cut in the New Zealand official cash rate is believed to be a done deal by most economists as Australia faces low interest rates for years, perhaps even decades.
United States futures trader and exchange operator CME Group’s executive director and senior economist Erik Norland, who visited Australia last week, says any rate rise forcing Australia’s debt-laden companies and households to pay more interest could be crippling and unbalance the economy.
Australia’s total private sector debt, including companies and households but excluding financial institutions, rose from 203% of GDP to 243% between 2011 and 2015, to $A2.89 trillion ($NZ3.05 trillion), according to the Bank of International Settlements.
Because of that burden and associated risk, Mr Norland expected the Reserve Bank of Australia to avoid starting a cycle of raising rates in the long term, and he doubted Australian interest rates would ever return to 3% or 4%.
"I think it’s going to put Australia on a path to becoming eventually like the United States, Japan and Western Europe, where rates will ultimately be very, very low," Mr Norland said.
Australia’s official interest rate is 1.5% and in New Zealand, the official cash rate is 2%.ASB chief economist Nick Tuffley said the New Zealand Reserve Bank had delivered a clear message that it anticipated cutting at least once more — helping correct market pricing for rate cuts.
"From our perspective, a November OCR cut is largely a done deal. The Reserve Bank maintained a strong easing basis. Furthermore, inflation risks remain skewed to the down side, so it seems fairly unlikely for data to outperform to such an extent the central bank refrains from cutting further."
Also, the Reserve Bank had learned the hard way that by opting to delay a cut, as it did in June, it risked losing credibility with the market, he said.
How future economic data evolved would influence the probability of further cuts early next year.
The Reserve Bank was 50:50 on the risk at the August Monetary Policy Statement (MPS) and the tone of the September statement suggested the balance of probabilities had not altered significantly, Mr Tuffley said.
The key events before the November MPS included consumer price inflation on October 18, inflation expectations on November 2 and third-quarter labour market data on November 2.
In addition to those releases, the path of the trade-weighted index would also be a key driver of policy, along with any further stretch in funding costs.
Lending demand had increased with lower interest rates but at the same time, banks’ domestic funding growth had slowed.
Offshore long-term funding remained relatively expensive as investors demanded higher risk premiums globally for investing in the banking sector.
The good news for New Zealand savers was the higher funding costs were resulting in higher term deposit rates than would otherwise be the case for the current level of the OCR.
In turn, the increased funding cost was starting to be passed on to borrowers, Mr Tuffley said.
The moves were small by historical experience, particularly when compared with the global financial crisis.
However, the Reserve Bank used the OCR to influence broader interest rates in the economy.
Should funding costs continue to increase and interest rates move further away from the OCR, that could be enough to convince the Reserve Bank another OCR cut was needed next year.
