When New Zealand slashed its interest rates by half a percentage point this week, it sucked the Australian dollar into a vortex, dragging it to its lowest point in 10 years.
It was, one economist said, “shock and awe” by the Kiwi central bank, a move taken only three times – after the Christchurch earthquake, the global financial crisis and September 11.
In the background, foreign central banks have been slashing their interest rates, bond rates have been tumbling around the world, and China and the US have been slugging it out in the second round of their trade bout.
Bloomberg declared that the fall in bond rates had sounded the “shrillest alarm yet over the economy”, while other media prophesied the world was teetering on the brink of economic disaster.
Then on Thursday, NZ’s Reserve Bank governor Adrian Orr dropped the knife in the toaster in a “whatever-it-takes moment” by saying the RBNZ may have to resort to negative interest rates if it felt it needed to resuscitate the economy further.
“Easily within the downward errors of our forecasts … if you’re trying to stimulate … that means you have negative interest rates,” Mr Orr said on Thursday, potentially leading to mortgage rates of 2 to 3 per cent.
For many commentators, this was confirmation the sky was about to fall in.
But BetaShares chief economist David Bassanese prescribed a cup of tea, a Bex and a good lie down.
Mr Bassanese said a recession was “a low probability” based on the strength of the US economy, that central banks were cutting rates as a precaution, and that zero interest rates would choke the viability of banks.
“The Reserve Bank will only cut to 0.5 per cent by early next year. I am not changing my view or bringing it forward,” Mr Bassanese said.
“They would be reluctant to go too far too fast and I certainly don’t think they will go to zero [per cent].
“If you’re a glass-half-empty person, you look at the bond market and say it’s pointing to a recession,” Mr Bassanese said.
“If you’re a glass-half-full person, you’d say the bond market is simply saying that central banks will come to the party and do what’s needed and put enough stimulus in the market that’s necessary [to prevent a recession].”
In the US, consumer spending was still strong, the labour market was still firm and the US is also a large enough domestic market to not be too buffeted by the trade war, he said.
“They [central banks] are simply taking out insurance. They’re trying to stave off a recession … they’re firing their bullets now and the bond market is just pricing in those future cuts.
“And the sharemarket is holding up because they believe that central banks will do enough to ward off a global recession.”
AMP Capital chief economist Shane Oliver said zero interest rates had been the least-effective means of breathing life into an economy.
Dr Oliver said the US Federal Reserve had never done it, and zero rates in Japan and Europe had neither boosted inflation nor increased credit growth in their economies.
“The RBA has been asked how low rates could go and he [governor Philip Lowe] has been reticent to talk about lower rates because of the problems it would cause the banks [in further cutting rates and still attracting depositors],” Dr Oliver said.
“The RBA recognises that it’s unlikely we would see zero rates either here or in New Zealand. Yes, India cut rates by more than expected, and Thailand cut when they weren’t expected to, but I’d be surprised if the RBA would support that approach.”
Dr Oliver said the current nervousness was less about economic weakness and more about the US-China trade war.
“The fundamentals have not changed that much. It’s more about the return of an escalation of the trade war, and the bond market has merely reflected that,” Dr Oliver said.
“The risk has gone up, certainly, but I don’t think we are at the point of recession yet.”
Investment manager with VFS Group Global Macro Fund James Whelan sees a “plus-50 per cent chance of recession in the US”, but much of that is based on the China-Trump battle that would affect global markets and, in turn, the US.
“If the US goes, we all do,” Mr Whelan said. “Trump’s re-election is the key motivator for making the economy work, and he’s in a jam where he polls well on fighting China, but fighting China is hurting his base.
“It’s volatile. Whatever the state of play is now will not be the state of play next week.”