MNI INTERVIEW: Weak NZD To Drive RBNZ December Hike

The Reserve Bank of New Zealand risks falling behind the curve after leaving the Official Cash Rate at 2.75% in late October, as interest rate differentials with peer economies widen, the currency weakens and imported inflation remains elevated, a former senior advisor told MNI, adding that a December hike is highly likely. 

Leo Krippner, now a research fellow at Singapore Management University, questioned the wisdom of the Monetary Policy Committee’s four-three decision to hold the OCR, noting its impact on the New Zealand dollar. (See MNI RBNZ WATCH: More Hikes Still Needed Despite Hold - Breman) "When that interest rate differential gets too wide, if you've got an on-hold RBNZ versus other economies hiking, that does affect the currency, and that will come through in inflation,” he argued. 

The New Zealand dollar fell around 2.3% against the U.S. dollar following the RBNZ's surprise decision, briefly dropping below USD0.56. On a trade-weighted basis, the currency dropped about 1.4% on the day and remained about 0.9% below pre-decision levels as of Nov 10, according to RBNZ data. (See chart)

“[The NZD] does actually seem quite vulnerable at this level,” Krippner said, adding that the MPC is likely to raise the OCR to 3% in December, with market pricing implying an 85% probability of such a move. 

While rising unemployment, falling oil prices and spare economic capacity could give the MPC grounds to hold again, Krippner argued these factors were insufficient to outweigh persistent inflation pressures. "My pick is that they do hike in December, and I also think they should hike in December," he said.

CATCH-UP RISK

The fact that the RBNZ’s September OCR track essentially incorporated two to three additional hikes raises further questions over the October decision, Krippner said. The surprise hold pushed market interest rates lower and effectively loosened financial conditions when the Bank was seeking to contain inflation, he added.

Krippner reiterated his view that the neutral interest rate was closer to 4% than the RBNZ’s estimated 3.5-3.75%, potentially leaving the Bank with more ground to make up next year if inflation pressures persist. (See MNI INTERVIEW: RBNZ Will Need 4% OCR By Mid 2027 - Ex Advisor)

He acknowledged that estimates of the neutral rate were highly uncertain, with confidence intervals typically spanning at least one percentage point. However, persistent upside inflation surprises across economies, even after excluding energy prices, suggested neutral rates might be higher than central banks currently estimate.

“Regardless of whether you say 3.75 or 4%, or whatever number you put on it … that does suggest that central banks in general have got a bit of catch up to do, and the Reserve Bank in particular has got more catch up to do because they started from a lower point and haven't really been hiking as much as some of the other central banks.”

Markets see the OCR peaking at around 3.5% by September.

DOVISH OCTOBER

Krippner said October decision’s suggested that the MPC's approach under Governor Anna Breman is more cautious than warranted by the inflation outlook.

He questioned the Bank's emphasis on inflation coming in slightly below its September forecast, noting annual inflation of 3.7% was only 0.2 percentage point below the RBNZ's 3.9% projection, while underlying inflation measures remained around 3%. He was also unimpressed by the MPC's reference to the risk of a global economic downturn, prompted by a potential correction in artificial intelligence-related investment and equity markets, which could undermine confidence and global growth.

"But in both of those aspects, the lower than expected inflation and the risk of a downturn, those are peripheral. What's in front of you is inflation at around 3%. It doesn't look like it's going down unless you get interest rates closer to neutral and maybe above neutral."

MNI POLICY: 'Gradualism' Leaves BOE's Hike Options Open

Comments by Bank of England Deputy Governor Lombardelli in favour of gradualism appear to mean that it will wait for clear trends in in its forward-looking data on earnings and durable price signals on the direction of energy prices before deciding on whether to hike again in December or to wait until February.

Lombardelli said at the Bank Watchers conference that uncertainty around the outlook was a reason to proceed "gradually", but she also said a December hike is plausible and did not rule out back-to-back hikes. One way to square the two is to view gradualism as signalling that the Monetary Policy Committee will not respond sharply to individual data points or to the latest developments in the Persian Gulf, absent an end to the war there, instead keeping its focus on forward-looking survey trends.

The top two factors for policy setting near term are clearly the New Year pay settlements, and the outlook for energy futures and price.

One survey "we'll be paying close attention to, perhaps as early as December" is "pay settlements next year and the factors that will be driving those," the BOE’s Director Monetary Analysis Fergal Shortall said at an agents’ briefing the day after the BOE’s 25-basis-point hike to 4.0% on Nov 5. (See MNI BOE WATCH: Hikes To 4% As Policy Not On A 'Pre-Set Path')

The BOE's firm survey, its Decision Maker Panel, which includes pay expectations, is due to be published on Dec 4 and its agents’ business survey on Dec 11, both in time for the MPC meeting ending Dec 17.

On Wednesday, the OIS market rate path priced in 18 basis points of tightening in December, after U.S. core inflation data and a hawkish message from the Federal Reserve's Christopher Waller at the Bank Watchers’ conference.

PILL COMMENTS

But BOE Chief Economist Huw Pill, also speaking at the agents’ briefing, was careful to leave the precise timing of the next move open while also stressing that the Bank is not set on a tightening path from spring 2027.

Despite the focus on whether a hike comes "as soon as December or in February ... crucially, I think there's no pre-set path for interest rates upwards in the course of next spring and beyond," he said.

The MPC has not, so far, given market participants any clear steer on which of the two months a hike is most likely to see a hike, leaving the short-end of the rate curve unanchored and moving around on news headlines. 

While the position of some MPC members is clear, with Catherine Mann voting for a 50bp hike in November and therefore highly likely to back a December increase, the core of the committee has so far left its views unclear.

One thing which could prevent another hike would be a resolution of the Iran war. Governor Andrew Bailey restated at the press conference that in "the absence of a resolution of the conflict, I think that the case for a further 25 [basis points] without any commitment on when it would come would be quite strong."

MNI INTERVIEW: German GDP Underestimated - Ifo's Peichl

Germany is likely growing faster than official figures suggest, a leading government advisor told MNI, adding that AI tools alone could already have raised GDP by between five and seven percentage points over what is currently captured.

Andreas Peichl said GDP could have been underestimated especially over the past few years - with the defence sector likely expanding more strongly and with AI and higher public spending both potentially adding to near term output. (See MNI BRIEF: German Economic Council Raises 2026 Growth Forecast)

“If we take the case of industrial production – how many units of a particular product have been produced, at what average price, etc. – at a limited sample of firms, it is clear there are errors,” said Peichl, Director of the Centre for Public Economics and the Centre for Macroeconomics and Surveys at ifo.

“In defence, for example, certain numbers are not allowed to be reported, which is especially significant given the current shift towards more military spending. And the same is true with some types of value-added generated through the use of data, in particular.”

Growth from extra public spending will become more visible this year and next, Peichl said, while defence-related investment should trickle down into other industries, adding another percentage point or two to GDP.

Recent ifo survey results point to a recovery in sentiment among businesses and exporters, though how much this can be attributed to cyclical factors remains to be seen, said Peichl, named as an Advisor to the Finance Ministry’s independent Stability Council on Tuesday.

“I don't know if we are through the valley with those indicators that hit rock-bottom, but right now expectations look okay. Germany has experienced so many shocks in recent years and survived," he said. 

“Companies are adapting, and some – such as those that are very important in the value chain, producing computer chips or GPUs, like Zeiss – are benefitting. Nvidia is doing a lot of R&D in Germany, and there are a lot of new startups and companies emerging in different industries, though of course it will be some time before they have reached a certain size, at which point they will show up in the numbers.” 

AUTO INDUSTRY CHANGING

Germany’s hugely important auto industry was slow to respond to changes in global markets, but began ramping up R&D from 2019 onwards, Peichl said.

“This led, or is still leading to, a big structural change. And if you also look at the value production index you can see that while the number of cars produced is going down, the gross value added of the car industry is not.”. (See MNI INTERVIEW: German Industry To Shrink, Re-Focus On Europe)

Yet with some 400,000 people retiring every year, demographic changes are a major concern which can only be partially compensated for by increasing labour market participation and better technology use, he said.

The rise of Alternative for Germany and anti-foreigner sentiment may make attracting a broad base of skilled workers harder, Peichl said, but "doing more to activate the domestic workforce and potentially using productivity gains from AI means there may be more politically feasible options than having a lot of migration into Germany.”

PENSION REFORM

Recent proposals by independent commissions on pension reform were good, but insufficient, Peichl said, while the compromise package likely to be agreed by Germany’s coalition government is “not good enough.”

Peichl was concerned that while additional public debt taken on to fund investments in climate, infrastructure and defence is manageable and necessary, it should not be spent on everyday consumption. Policymakers should consider new tax streams, he said, while considering whether all of the country’s nearly 500 social programmes and subsidies are necessary.

“If you look at social spending  - not only of the federal government, but at all levels of government and social insurance – it’s two percentage points of GDP higher than it was before the pandemic. That’s 90 to 100 billion euros. Demographic change can only account for 0.3-0.4 percentage points of that.”

Exemptions for carbon prices, electricity taxes and supposedly temporary caps on energy prices for energy-intensive companies are an obstacle to structural change, he said.

“Clearly there are political and strategic reasons why Germany still needs to produce its own chemicals, its own steel, and so on. Only when you take today’s geo-economic constraints into account does it make sense.”

MNI POLICY: Fed To Reassess Policy After 1 Or 2 More Hikes

The Federal Reserve looks on course to raise interest rates again next month and debate a third move in early 2027 before taking a fresh look at the policy trajectory next year amid a political shift that could dampen the pace of AI investment and a likely pullback in oil prices if the Middle East conflict winds down.

The case for tightening rests on an economy that has stayed resilient since the September rates increase. Growth is running at around 2.5%, above most estimates of trend, and the labor market is solid and in balance, neither adding to inflation nor showing meaningful weakness. 

Most FOMC members have stressed the need to be gradual and considered in raising rates, which suggests a predilection for hiking at every other meeting. Tuesday's firmer-than-expected CPI report, a third straight upside surprise on core inflation, not only strengthened the case for a third hike early next year after an increase in December but also potentially bolsters the view of FOMC hawks who would rather tighten more rapidly to avoid having to do more later on. (See MNI POLICY: Fed In No Hurry But Committed To Taming Inflation)

At the same time, even the most vocal hawks are not calling for a higher peak rate, which means a couple more hikes should be enough to make them comfortable that policy is restrictive.

AI-DEPENDENT

Two sources of inflation pressure -- tariffs and energy -- are shocks monetary policy cannot directly offset. They're also seen as temporary in nature, with tariff effects largely in the rearview and oil prices already taking a step back after the midterm elections. 

At the same time, wage pressures are sufficiently moderate to dampen worries about the labor market as a major inflation driver. (See MNI INTERVIEW: US Labor Market In 'Quiet Steady State' - Sahin)

De-escalation in Iran and a pullback in crude would reduce the direct and indirect energy contribution to inflation and could even turn it into a drag, easing the case for further tightening and shifting the debate toward how long policy needs to stay restrictive.

Most salient for the Fed is the AI investment boom that's driving growth and lifting prices for software, semiconductors and utilities. That demand-supply imbalance is the kind monetary policy is best suited to address, and policymakers see two-sided risk to the 2027 outlook. 

Faster AI investment could further strengthen demand, while an abrupt market correction as in the dot-com boom could hit investment and consumption and expose opaque financing structures. Currently accommodative financial conditions providing a tailwind to the economy may reverse.

BLUE WAVE 

A Democratic Congress also raises questions about the pace of the data center and AI infrastructure buildout, particularly as state-level moratoria and permitting restrictions draw bipartisan attention. The near-term effect is likely limited, since much of the construction is already permitted and under way. But expectations for tempered spending could restrain a major source of growth next year. 

"Business investment could strengthen or falter as companies learn more about the uses of artificial intelligence and governments consider policies toward this potentially transformative technology," Dallas Fed President Lorie Logan said Tuesday.

Once inflation is clearly on track back to 2%, Fed officials see a return to the policy juncture of a year earlier: returning real rates to neutral. But there will be disagreement within the committee as to what that actually means. Importantly, policymakers will also need to reassess by how much have neutral rates have risen and how much of the productivity gains from AI have materialized.

 MNI INTERVIEW2: PBOC Needs To Improve Communication-Economist

The People’s Bank of China needs to improve its communications to prevent market misunderstandings as it transitions its policy framework to one in which rate benchmarks play an increasingly central role, while also retaining liquidity management tools and bond transactions, a prominent economist told MNI.

For the moment, reverse repo operations and government bond transactions provide the PBOC with additional operational flexibility to manage liquidity in the event of economic weakness, financial stress or external shocks, Yu Changhua, professor at Peking University’s National School of Development, said in an interview, noting that the PBOC has continued to rely on these instruments, together with quantity-based and structural tools such as targeted relending facilities, even as it shifts towards a price-based framework.

“Rather than an incomplete reform, this reflects a pragmatic choice tailored to the current realities of China’s financial system,” Yu said.

However, the use of multiple tools risks blurring market perceptions of the PBOC’s intentions, he said, pointing out that, for example, an increase in reverse repo operations or bond purchases for liquidity purposes could be misinterpreted as a broader signal of monetary easing or a shift in the policy stance. In order to counter this, the central bank needs to articulate the objectives, tenor structures, and policy intentions behind its liquidity injections, so preventing balance-sheet operations from being misconstrued as a directional policy shift, the economist suggested. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth)

STRUCTURAL TOOLS

The PBOC’s structural instruments remain a key supplement to broad monetary policy in an economy with imperfect transmission of interest rates and distorted credit allocation, Yu said, adding that rate cuts alone may not be sufficient to ease financing terms for tech firms, small enterprises, and businesses undergoing the green transition. The central bank can also reshape funding conditions and risk premiums for financial institutions by expanding the eligible collateral pool, he said.

But structural and targeted tools can be overused, which would not only dilute the signalling power of benchmark rates but could potentially lead to capital misallocation, fuel financial bubbles or exacerbate industrial overcapacity, Yu cautioned, adding that the tools should be time-limited and be transparently evaluated. The economist also called for clearer boundaries between monetary policy, fiscal policy, industrial policy and macroprudential regulation.

As China’s sovereign debt market deepens and liquidity improves, the PBOC’s purchases and sales of government bonds can become a more flexible channel for injecting or withdrawing base money, reinforcing the operational framework for price-based monetary policy, Yu said. However, he noted that if the central bank were to conduct persistent, large-scale purchases of medium- and long-term Chinese government bonds to suppress long-term yields and term premiums in a bid to stimulate growth, such operations would increasingly resemble quantitative easing. (See MNI INTERVIEW: Window Of Opportunity For China Stimulus)

“This distinction is not absolute,” he said.

At present, the PBOC’s government bond transactions mainly serve as a supplementary instrument for base-money provision and liquidity management, while daily overnight reverse repo operations play the central role in anchoring short-term money-market rates near the policy rate, Yu said. 

 MNI INTERVIEW: New PBOC Framework Works Best On Short Rates

The People's Bank of China’s latest interest rate framework will enhance its control over short-term money-market rates, but its ability to influence the cost of longer-term lending remains constrained by weaknesses in the banking system and by a persistent tendency to favour state-backed borrowers, a prominent economist told MNI. 

The PBOC’s move earlier this month to replace the seven-day reverse repo rate with the overnight reverse repo as its primary policy rate will mean that shorter-term rates will take their direction from the new benchmark, though their transmission to longer-term lending costs will remain indirect, operating through the Loan Prime Rate, banks’ funding costs and credit-risk spreads, said Yu Changhua, professor at Peking University’s National School of Development.

The re-anchoring is a crucial step in China’s transition towards a price-based monetary system, said Yu, who was invited to discuss monetary policy transmission with researchers and officials at the PBOC in September. (See MNI PBOC WATCH: LPR Held, As PBOC Switches Benchmarks)

However, while altering the policy-rate anchor can enhance short-end rate stability and clarify policy signals, improving loan pricing and monetary-policy transmission will also require strengthening commercial banks’ capacity for market-based credit-risk pricing.

“The stimulative impact of the re-anchoring should not be overstated, and it cannot substitute for reserve requirement ratio cuts or interest rate reductions,” he noted. 

China’s main economic challenges, including weak domestic demand, subdued corporate profit expectations, and cautious household spending, will require not just monetary policy to support private sector investment and consumption but also fiscal moves to stimulate aggregate demand, he said. (See MNI INTERVIEW: China Advisor Calls For More Public Investment）

OVERNIGHT RATE

Pivoting to an overnight rate allows the PBOC to manage short-term liquidity costs more directly and precisely, and formally establishing it as the main policy-rate benchmark will clarify policy signalling, enhancing the transparency and predictability of monetary policy, the professor said. 

But there is no frictionless transmission mechanism linking overnight funding rates to interbank certificates of deposit, bond yields and bank lending rates, he added. This problem is particularly acute within the banking system, whose uneven distribution of capital and liquidity means that even when overall liquidity is abundant, it can remain concentrated in certain institutions or circulate within the financial system without translating into additional credit to the real economy, while capital constraints may limit some banks’ capacity and willingness to lend, Yu said.

A more significant problem is the banking system's persistent tendency to favour state-owned enterprises and borrowers benefiting from implicit government guarantees, which means that even if market interest rates decline, private firms' financing conditions may not see any corresponding relief, he said.

The priority for monetary policymakers should not merely be to diversify rate pricing benchmarks, but to find ways to improve market-rate transmission and reduce non-market influences on credit allocation, Yu said.

MNI INTERVIEW: Right-Wing Spanish Gov't To Cut Spending, Debt

A new conservative Spanish government would seek to restore budget balance through cuts to public spending and sales of state holdings in non-strategic companies, and also take measures to boost investment in energy and data centres, the People’s Party economic chief told MNI.

A return to budget balance would allow Spain to reduce its debt without relying heavily on flexibility available under EU fiscal rules and also attract more capital and investment, Juan Bravo, economic spokesman for the PP, which polls suggest is set to emerge leading a coalition government after elections on Nov 29, said in an interview

 “The country that is more credible is the one that attracts all the investment,” he said, adding that Spain has margin to continue to reduce its spread with German bunds, at a time when German government spending is rising. “Our objective is to return to budget balance.” (See MN POLICY: EU To Get Tough On Fiscal Rules After Bond Rout)

Bravo wants to save EUR1.5 billion per year by reducing the number of ministries from 22 to 14, and another EUR1.3 billion by improving the management of state-owned companies and political hires. More savings would come from trimming overlapping responsibilities between central, regional and local administrations, as well as from trimming subsidies.

New technologies and AI should also allow reductions in civil service staffing, with around 40% of public employees expected to retire over the next eight years, Bravo said.

He declined to provide targets for the deficit or debt, pointing to what he said was past experience of deception by the governing Socialists with regards to the state of the public finances.

CAIXABANK

A PP-led government would seek to sell state holdings in companies “where public ownership is not strategically necessary,” with an 18% stake in CaixaBank and 10% of Telefonica prime examples. 

“What we do want to convey is that we will not be in places where state participation does not make sense,” Bravo said, though he added that the stake sales would be timed to maximise returns and in consultation with the companies’ management teams.

DATA CENTRES

Legislation will also allow Spain’s autonomous regions to speed up construction of data centres, Bravo said, noting the country’s access to international data cables and potential for cheap energy. The government would also promote EUR300 billion of investment needed in infrastructure including energy over 15 years, almost twice the current annual rate, from both public and private capital, he said, claiming that more than EUR1 billion in renewable electricity generation is currently wasted per year because of insufficient demand and storage capacity.

A new right-leaning government would raise personal income tax brackets to reflect inflation and update family tax allowances frozen for 11 years, Bravo said. The PP wants a broader tax reform, including changes to personal income tax and the tax administration, as well as measures to encourage investment through corporation tax, he added.

DEFENCE

In contrast to the reluctance of current Socialist Prime Minister Pedro Sanchez to boost defence spending, the PP would push for an increase to 3.5% of GDP in the medium-term, in line with other European countries, Bravo said. Increased spending would boost pay for military personnel and include investment in dual military-civilian infrastructure such as ports. At least 60% of the money spent should remain in Spain, with procurement supporting national industry, he said.

Spain should also take a role in reviving the project to build a new generation fighter aircraft under Europe’s Future Combat Air System, working with Germany and seeking alternative partners including possibly Sweden, Denmark, the UK or Turkey if France does not cooperate, said Bravo.

Spain has currently taken EUR1 billion from the EU’s SAFE defence-funding facility, and Bravo said that any increase in that amount would depend on financing costs.

Under the PP, Spain will also align its position on China with that of the broader EU, in a significant departure from Sanchez’s policy of seeking warmer ties with Beijing.

“If we are partners of the EU, we take the decision together and are not going on our own,” Bravo said.

Bravo played down the prospect of major economic disagreements with Vox, the right-wing party whose support the PP is likely to need in order to form a government. Drawing on his experience negotiating budgets as Andalusia's regional economy minister, he said the two parties were “on a similar page” on economic policy and that the main difficulties in reaching agreements would lie in other areas. (See MNI SOURCES: Bond Selloff, France, Clouds ECB Dec Rate Call)