Why does the RBNZ want to stop long rates going up

This is causing me a little bit of confusion. New Zealand’s yield curve has become normal – this is very rare. However, the Bank doesn’t like it – not one bit. They went as far as complaining about it. My first impression was to say – this means they will cut further and commit to a lower interest rate path. But now I want to figure out why the hell they actually want that.

Short rates give us information on current risk, current expected growth, and current time preference in society.

Beyond capturing movements in long-rates tell us about three things:

  1. Future expected inflation,
  2. Expected growth in the future,
  3. The level of risk/return associated with long run investment.

Now as far as I can tell, when the RBNZ said that they would stop cutting rates soon and a few “positive” indicators came out, borrowers decided that they would now base their decision on whether to fix rates on these fundamentals. Given their expectations of inflation and growth in the future fixed rates looked damn attractive.

As it is a standard market, when demand goes up price goes up – and this led to a big lift in long-term interest rates.

Now, outside of a belief that households weren’t setting their expectations “rationally” (something the statement can be construed as trying to solve) I can’t see any issue with this. Given the relative scarcity of long-term credit, the lift in demand lead to higher prices – which reduces the quantity of those loans demanded.

If the lift in 3,4, and 5 year rates is because of a robust medium term outlook for the economy then this is good new, isn’t it?

Update:  Bernard Hickey also discusses long-rates.

20 replies
  1. Bernard Hickey
    Bernard Hickey says:

    It is good news.

    But try telling that to a politician who has to listen to whingeing newspaper editors (who all have mortgages) and whingeing exporters (who all want low interest rates AND a low currency). It is a pity that savers don’t revolt more when rates are cut. A mass march (well shuffle) on Parliament would do the trick.
    And Bollard is at the end of day a politician.
    He made an interesting comment though at his press conference on March 12. He said he never gets so many complaint letters and emails as when he cuts interest rates. Fair enough too.

  2. Miguel Sanchez
    Miguel Sanchez says:

    The problem is not the higher rates but what people are doing with them. Think of it this way: a certain retail chain is running an ad urging people to “buy now before the price rise!”. Many people will rush in and buy at what they believe to be the lows. However, more cynical souls such as myself will hold back, knowing that consumer demand is weak and that this store just doesn’t have that kind of pricing power. We suspect that, at worst, the store will raise their sticker prices, then offer massive year-round ‘discounts’ on the sticker price that are at least as good as the previous prices. Dr Bollard is simply urging us to be a bit more cynical.

  3. Steve Withers
    Steve Withers says:

    Higher interstate rates may also indicate higher risk. I’ve been basing most of my own presumptions on the idea that too little risk is reflected in interest rates. I stRted seeing things that way back in 2003 and it has served me well. At the same time, the lack of risk in the price of money has served others poorly. Either we include more risk in charging higher rates for the same thing, or we have learned nothing from the crash. Events to date suggest wide variation in who has learned what.

    Maybe the RBNZ just wants to discount our money and our output to the world, effectively reducing our spending (and borrowing) power to improve trade prospects while damping inflation. Guess we’ll find out

    I won’t be buying a house any time soon.

  4. Matt Nolan
    Matt Nolan says:

    @Bernard Hickey

    Hi Bernard – I’ll put a link to your post on the post.

    Ultimately I don’t see why there is an issue with rising long-rates – people still have the option of cheap short rates, and have decided that they would rather have more expensive long rates. I believe its called supply and demand …

  5. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    I see what you are saying – and I agree that retail firms are doing that. However, I think the RBNZ would love it if people were running out and buying things that weren’t houses with the additional borrowing.

    I think there concern is that all is happening is people are switching mortgage terms and getting stuck in loans that are more expensive than they need to be – it would have been better for the RBNZ to come out and explain this to people, instead of giving an arbitrary statement complaining about long-rates not matching their forecast model.

  6. Matt Nolan
    Matt Nolan says:

    @Steve Withers

    Agreed that higher interest rates can denote higher risk. However, the higher interest rates didn’t appear for depositors – who are the ones taking on risk here, so thats a bit weird.

    Ultimately, the risk profile hasn’t changed in the last three months – demand for a type of loan changed, driving up its “price”. We really need to ask why this happened before we can start bemoaning it.

    If it is because of expectations the RBNZ could have handled this better, if it is because people can see us pulling out growth in the future (which is believable – economies grow as technology improves and populations rise) then that is really a good thing for the RBNZ.

  7. insider
    insider says:

    WHy doesn’t the RBNZ say it is going to hold rates down for a year or two to incentivise people away from fixed rates?

    Ok I admit in advance it is a dumb non economist question

  8. Matt Nolan
    Matt Nolan says:


    Your question is fine – the only thing I would ask is why? If people are making sensible decisions about when to fix, then the RBNZ shouldn’t be trying to talk them into moving to floating – I suspect that the impact of having more floating rates on the effectiveness of monetary policy is over-rated.

    Now, they are saying that they will keep rates very low for at least a year anyway – which is why they think current market rates aren’t making sense …

  9. Miguel Sanchez
    Miguel Sanchez says:

    Matt – you picked up the message, if not the metaphor. Long-term mortgage rates are the ‘sticker price’ and short-term rates are the ‘discounted price’. We know the discount won’t last forever, but we can expect it to be around for as long as demand is too weak to support higher prices.

  10. insider
    insider says:

    @Matt Nolan

    Well if he is unhappy with the prices banks are charging for loans and he thinks they should be charging less, he could increase pressure by giving confidence on medium term rates – to pick up Miguel’s metaphor “I will not be beaten on price!”

  11. Miguel Sanchez
    Miguel Sanchez says:

    “WHy doesn’t the RBNZ say it is going to hold rates down for a year or two to incentivise people away from fixed rates?”

    It’s a very good question. The RBNZ is kinda sorta doing this already – they are one of the few central banks who publish an explicit forward track for interest rates. But I think they could do more with it, i.e. use it more as a statement of intent and less as a mechanical (and extremely conditional) forecast.

  12. Matt Nolan
    Matt Nolan says:

    Oppps – I see about the metaphor 🙂

    I agree that this is the key justification for the Bank’s actions – but they could have actually focused the discussion on households instead. It just sounded like a complaint about the fact that the market doesn’t believe their 90 day bill track …

  13. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    In an extreme situation they should be willing to bend their interest rate rules – now of course we may not even be in that situation now, and even if we were the RBNZ REALLLY doesn’t want to do that 😛

  14. Miguel Sanchez
    Miguel Sanchez says:

    No prob – I forgot that the RBNZ is actually giving out shopping advice as well these days.

    I know the RBNZ doesn’t want to bend the rules, but the facts are that (1) they’ve done it before, in what was a very un-extreme situation (March 2003), and (2) they’ll end up effectively doing it anyway – if they don’t get the recovery they’re looking for, and they can’t take rates lower, the only alternative is to keep pushing the projected rate hikes further out into the future.

  15. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    You are exactly right.

    However, one thing I would like to point out is that the Bank has generally got very angry whenever anyone mentions doing it at the moment – there seems to be some sort of new found bias against it at the moment. As a result, I think the threshold is a bit higher than in 2003.

    Personally I am a big fan of keeping on an endogenous interest rate track – however, if the rates suggested by that seem to high maybe they should turn around and look at their forecasts again …

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