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Reserve Bank Governor, Adrian Orr
Reserve Bank Governor, Adrian Orr

The BulletinMarch 20, 2023

Is this the end of interest rate rises?

Reserve Bank Governor, Adrian Orr
Reserve Bank Governor, Adrian Orr

The US banking crisis may help force a rethink by the Reserve Bank here, writes Catherine McGregor in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.

Did last week’s turmoil stop interest rate hikes in their tracks?

What a difference a month makes. Just a few weeks ago, economic forecasters agreed: stubborn inflation meant the Reserve Bank (RBNZ) had no choice but to raise the OCR by another 75 basis points over its next three meetings. That’s all changed thanks to the financial firestorm kicked off by the collapse of Silicon Valley Bank (SVB) in the US, the massive wobbly thrown by Swiss bank Credit Suisse, and New Zealand’s unexpectedly poor GDP numbers for the last quarter of 2022. Westpac is among those that now expect the RBNZ to raise rates by 25 points to 5%, and then that’s it: the end of the current cycle. “Financial meltdowns are definitely disinflationary,” explained Liam Dann in the NZ Herald (paywalled). “They suck confidence and demand out of the economy… put simply, the events of the last week have done some of Reserve Bank Governor Adrian Orr’s work for him.”

Inflation fears fade – but for how long?

Not everyone is convinced Orr will be so easily swayed. A number of bank economists spoken to by interest.co.nz said SVB’s collapse would have little effect. They believed that, “at the margin, the reminder that the global environment was volatile and risky might push the RBNZ towards a smaller rate hike – but was unlikely to put [it] off altogether,” wrote Interest’s Dan Brunskill. One thing’s for certain: uncertainty is going to be with us for some time yet. “Sentiment might all change again next week. A new piece of data could put inflation back in the top spot as public enemy number one,” wrote Dann. “The Reserve Bank makes its next interest rate call on April 5, which, the way things are going, could still be several plot twists away.”

Investment funds take a hit

The meltdown among regional US banks isn’t just a macroeconomic problem for New Zealand. As Newsroom reported last week, Fisher Funds lost $80 million in its SVB investment, and has another $74m in San Francisco-based First Republic, which CNN is calling a “hot mess” of a bank. ANZ and Milford also had shares in the now-worthless SVB. In fact most Kiwisaver funds will have some exposure due to their indexing to the S&P 500, though Simplicity’s Sam Stubbs told Newsroom it equated to a loss of less than $20 per $100,000 invested. When individual banks are under threat, “yes, shareholders lose some money, but the banking system itself is kept intact,” Stubbs said. “And overall, it recovers. So I’m not overly worried about what we’ve seen so far.”

Could it happen here?

The US turmoil is prompting questions about the security of our own bank deposits. In a useful column for Businessdesk (paywalled), Frances Cook explained that this is precisely what the Deposit Takers Bill currently before parliament is designed to address. The state-run insurance scheme will guarantee up to $100,000 per person, per bank, which would cover 93% of NZ’s bank deposits. The government already has the ability to step in to guarantee deposits during times of crisis, Cook wrote. “I’m glad we’re bringing in a more formal system, but at least there’s that until then.” Further reassurance came from the Reserve Bank itself, which tweeted on Friday that “our banks operate different business models that mean that they are not as exposed to the risks that have led to recent events. Our rigorous stress testing has shown that they are well-placed to deal with far more adverse situations than what we are currently experiencing.”

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