The new growth approach of Central Banks

What is obvious from the masses of data under constant review is many central banks are no longer working in post 2008 crisis mode. A new phase of growth and repair is the new norm. The current changes are slow yet structural and will take a few quarters since most economies were hit exorbitantly hard. New Zealand is no different in this regard as OCR was 8.25 at crisis time and dropped to 2.50 lows.

For the past 7 years, central banks operated in defensive mode and adopted questionable policies to hold economies from collapse but no longer since growth and the future is the new priority. In markets, structural changes are seen in rotations from bond safety exodus to risk on equities and other risk financial instruments. Why focus on New Zealand and the RBNZ? Because both always either lead the way towards recovery or signal downturns long in advance. Despite OCR 2.50 lows as an example, the RBNZ hiked already three times and all occurred in 2014.

Overnight Vs 90 Day Rates

The Overnight rate trades between short to intermediate averages between 3.35 - 2.69 while the 90-day in the same time frame trades between 3.62 and 2.97. The overnight rate encompasses averages from 1 year to 30 beginning at 3.35, 2.69, 4.44, 5.51, 6.02 (25Y) and 7.89. Targets for the Overnight rate range from 1 year to 30 beginning at 3.49, 3.06, 2.09, 2.92, 3.22 and 2.70. The 90-day averages in the same time frames range from 3.62, 2.97, 4.75, 5.71, 6.26 and 13.65 for the 30 year. Targets begin at 3.53, 3.35, 2.34, 3.47, 3.66 and undetermined for the 30 year.

Reserve Bank, New Zealand, Rate Decision, Monetary Policies, RBNZ, economic factors, Overnight rate, 90 day rate

Targets are inflection points yet guides and vital to align the entire 30 year distributions in present views. The 5 year average for both the Overnight and 90 day Rate is misaligned and should be much higher. The 90 day rate is comfortable within the 3.62 - 2.97 range. If an adjustable OCR cut lower is needed from 3.50 then the range sustains. An OCR move lower, evidenced by positions of the Overnight and 90 day rate, would be corrective as longer term averages become oversold. Further, from the three rate hikes in 2014, any move lower is temporay and corrective as the trend in OCR is higher over time. Where the 90 day should be located based on Knut Wiksell’s Neutral Interest rate principles is above 3.62 so a higher range between 3.62 - 4.75 would serve the perfect economic range at least short term. Wiksell’s actual principles is the 90 day rate should be above the 20 year average at 5.71 to then range between 5.71 and the 25 year average at 6.26. An interest rate above the 20 year average is an economy in good equilibrium.

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