Interest rates going to remain low for a long time

We are hearing in the Press how interest rates are going up and I like a lot of others decided not to take the risk and fix for three years at the current rates. But having not put my money where my mouth is, I remain skeptical that they are rising significantly and believe the evidence suggests they are going to stay low for a number of years yet.  The increases we are seeing now are very small and caused by the cost of borrowing money rather than any actual rate increases.

From the horse’s mouth the NZ Reserve Bank Governor Graham Wheeler said  that the bank expects the OCR ( Official cash rate to stay unchanged until late 2019. That’s a year later than was being said last year.

Mr Wheeler said “

“In effect, there is an equal probability that the next OCR adjustment could be up or down.  We consider the balance of risks for the global outlook to be downside.  For the domestic economy, there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced.”

The key point being “we consider the balance of risks for the next global outlook to be downside “  The Bank are anticipating the world economy getting worse rather than better and while that risk remains there is no room for any substantial rate increases.

In an earlier article we discussed how the American economy was in worse shape than the press and spin doctors are letting on. This was based on the slowdown in trucking movements across the states. These are the people who move the products. This is the best marker for what’s really happening in the states when you take out the spin from the money printing. If this is slowing then so is the real economy. The figure was supported by Maersk Shipping Line which was reporting a similar slowdown in container movements. ( CEO Soren Skou “Currently we are challenged by market Headwinds. In the form of low growth and excess capacity”).  What this evidence is saying is the world’s largest economy, when broken down into what’s being moved into, out of, and around the country, is slowing down.

In an interesting article by George Friedman in his newsletter called ‘This Week In Geopolitics “, he describes “Something Rotten in the State of Russia “when analysing data about wage arrears (Wage arrears are workers not being paid )

In December 2016 (the last month for which Russia’s Federal State Statistics Service has data), total wage arrears amounted to 2.7 billion roubles (roughly $46.4 million in USD).

 The regions with the largest wage arrears can be divided into two categories. The first is port regions. Primorsky region, whose capital Vladivostok is Russia’s largest port on the Pacific, has by far the worst incidence of wage arrears. It accounts for 21.2% of the country’s total. The area where it is the second most prevalent is Siberia (in places like Irkutsk and Novosibirsk).

 In part this will reflect the lower oil prices and maybe some of the sanctions over the Ukraine, but interestingly it seems the port regions are the hardest hit. If Russia is being hit with a drop off of container movements as reported by Maersk in the USA then we are seeing signs of world trade slowdown in Russia and the USA.

Add to this the very real financial issues still facing the Europe

Mario Draghi, The President of the European Central Bank and the man who has his finger firmly on the European financial pulse said in a recent speech

“The main interest rate remained at 0%……. although the €80bn-a-month quantitative easing (QE) scheme will be trimmed to €60bn a month from April.”

 I’ve skipped lots of the speech but look at the meat of what he is saying. The European Central bank is about to cut its money printing from 80 Billion Euros. (That’s equivalent to 122.4 billion NZ dollars) to 60 Billion Euros (NZ equivalent 91.8 Billion)  A MONTH!!!! . This is money the ECB creates out of thin air to try to rescue the European economy.

“Asked at the news conference whether interest rates were likely to rise before the end of the QE programme, Mr Draghi replied that policy makers wanted to see “a sustained adjustment in the rate of inflation, and we don’t see it yet… we see progress in the recovery [but] it’s a gradual process”.

In a statement ahead of the news conference, the ECB had reiterated:

“The governing council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”

Together with Brexit,  there are no economic rainbows in the foreseeable Global financial  future. Remember our  Reserve Banks comment “ Global outlook to be downside “ . The 2019 projection for flat interest rates is  almost certain to be pushed out further. It would be export suicide for our reserve bank to push up the cash rate now while the rest of the world tip toes around  with its head just out of the financial water.

All this supports the earlier article arguing that we have not reached the end of the property price rise cycle.

 

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