The full pdf version of the Weekly Overview is contained here.
Weekly Overview March 31 2016
Thursday March 31st 2016
This week’s Overview is a relatively short and simple one. I take a look at how some people may be overestimating the impact on Auckland house prices of media reports that some people are shifting elsewhere. I also note the way in which increasing investment in some residential property markets appears to be leading to more unoccupied houses.
In this week’s Overview I start by taking a look at reasons why not all banks have passed on all the 0.25% cut in the Reserve Bank’s official cash rate. It comes down to changes in the OCR not being the best measure of changes in overall bank funding costs since the global financial crisis – something well known by the Reserve Bank and a message delivered by all of us since 2008. If the Reserve Bank wants all floating rates to drop at least 0.25% given that the credit spread for us borrowing funds offshore has increased sharply recently, all they have to do is cut the cash rate again. Simple.
The Reserve Bank cut it’s official cash rate another 0.25% this morning so it now sits at a record low of 2.25%, even lower than right after the depths of the global financial crisis. So why cut when the economy is growing near a 3% pace? They are worried about inflation settling uncomfortably low having missed their inflation target range of 1% – 3% for a year and a bit now. Current inflation is only 0.1%. The cash rate cut will lead to some retail lending rates going down, but with bank funding costs offshore rising because of investor concerns about European banks the feed-through in many instances probably won’t amount to the full 0.25%.
This week I discuss the recent reduction in business confidence but how the spread between winners and losers across sectors in NZ at the moment is amazingly wide. If tourists could be encouraged to spend a day frolicking with cows that would be great. Exchange rates have moved little while some retail interest rates have been lifted in response to bank funding costs rising offshore as the world gets concerned about offshore bank exposure to the likes of the energy sector and we Australasian banks get caught in the backwash.
The Overview isn’t a must read this time around in my opinion.
Last week I wrote about the weakness in world sharemarkets in terms of specific factors. These included losses for energy sector businesses because of the structural decline in oil prices, slowing growth in China and worries about debt and capital outflows, weakness in the Japanese economy, and worries about the impact of tightening US monetary policy. But there are wider issues in play which also lie behind the growing disquiet.
Sharemarkets have fallen again this past week as investors find themselves with plenty of reasons for backing away from riskier assets. For some it is the fall in oil prices and resulting poor profit outlooks for businesses involved in the energy sector, expectations that sovereign funds of oil exporting countries will sell assets to offset revenue losses, and losses to be taken by banks which have lent to energy companies.
Two weeks ago I listed reasons why despite the dairying downturn growth in the NZ economy would remain good especially compared with other countries and this would limit scope for lower interest rates, support jobs growth, and keep the NZD from falling much.
The Reserve Bank left the cash rate at 2.5% this morning which surprised no-one. But they did open the door a bit more to cutting further, so although our view remains that they won’t move again, one cannot rule out a 0.25% reduction in March. A lot depends on what happens overseas as domestically our economy has a lot of strength.