An increasingly sombre view of the global economy lies behind the Reserve Bank's decision to cut the official cash rate yesterday.
The world keeps delivering weaker growth and lower inflation than the bank expected.
That affects us not just through weaker commodity prices, notably for dairy products, but also through channels which put upward pressure on the exchange rate and potentially New Zealand banks' funding costs and the retail interest rates borrowers face.
And as nearly half the consumers price index is made up of items affected by world prices and the exchange rate, persistently low inflation threatens a self-fulfilling further decline in inflation expectations - another trend the central bank needs to lean against.
The risk is that the Reserve Bank has to keep cutting the official cash rate just to offset those international upward pressures on the kiwi dollar and retail interest rates. That leaves it less firepower in reserve to actually ease monetary conditions.
The monetary policy statement pencils in another cut in the OCR, to 2 per cent, as its central scenario (depending, as ever, on the data).
But two of the three alternative scenarios it sketches imply another two cuts as well as that, if global inflation gets even weaker, or if "reduced risk appetite in financial markets" - the polite terms for fear - gathers pace.
In recent months, global financial markets have seen investors piling into the safe haven of sovereign debt (favoured countries' at least) to the point where trillions of dollars of government bonds are trading at negative yields. When investors are willing to forgo any interest, as long as they get most of their money back in several years' time, that is not a sign of confidence in the alternatives.
The flipside is a widening of credit spreads - the gap between yields on government bonds and those issued by riskier borrowers. This has implications for local banks' funding costs, as New Zealanders always want to borrow a lot more than other New Zealanders are prepared to save.
About 28 per cent of the money the banks lend is imported.
Yesterday, the Reserve Bank was portraying the international threat to the banks' funding costs more as a risk to watch for, than something it was already responding to.
But clearly, neither it nor we can be indifferent to prevailing sentiment in international credit markets.
The world keeps delivering weaker growth and lower inflation than ... expected.
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It is retail interest rates that count for the economy. The expected track for the official cash rate provides the base for those rates, but the risk margin on top of that matters too.
The Bank for International Settlements (the central banks' central bank) reminded us last week that flattening yield curves and rising credit spreads can be the canary in the coalmine: "Recent experience, supported by academic research, suggests that sharp increases in credit spreads are a leading indicator of recessions." Underlying some of the turbulence of the past few months, it said, was a growing perception in financial markets that central banks might be running out of effective policy options.
In a low inflation environment, several central banks including the European Central Bank and the Bank of Japan, have had to resort to negative policy interest rates to keep real interest stimulatory.
Meanwhile, there has to be some information content in the increasingly torrential outflow of capital from China in recent months.
But what is it telling us? Is it a vote of no confidence in the Chinese authorities' ability to engineer the great rebalancing from investment to consumption, from exports to domestic demand and from goods to services in a way that does not undermine the country's fundamental social compact: a populace docile and quiescent in exchange for rising living standards?
Or is it people speculating on a major devaluation of the renminbi?
That would export deflation to a world economy where a deflationary tide is already running.
It would be a seismic shock to foreign exchange markets already having to contend with the divergence between the US Federal Reserve, which has embarked, albeit tentatively, on a tightening and the ECB and Bank of Japan, which continue to ease.
Hopefully, the People's Bank of China is sufficiently conscious of the body blow that would strike to the global economy, therefore China's own markets, to eschew devaluation.
And there is a new risk. If badly timed, a renminbi devaluation could play into the hands of a fatuous demagogue, Donald Trump, whom a startling number of Americans appear to regard as a potential President of the United States.
The New Zealand dollar has been trading nearly 5 per cent higher than the Reserve Bank's December forecasts assumed for the current quarter.
Westpac chief economist Dominick Stephens, newly returned from talking to people in financial markets in Europe, is persuaded that the carry trade - upward pressure on the dollar from arbitrage on interest rate differentials - is back. "Money managers are very attracted to New Zealand's high real yields, given the ultra-low yields on offer in Europe. And despite the dairy sector's travails, there is still enough positivity in the New Zealand story to make it seem like a safe investment," he said.
But others doubt there is much the Reserve Bank can do about that. Deutsche Bank chief economist Darren Gibbs says the Reserve Bank would probably need to cut the OCR by 1.5 percentage points or more to achieve the material change in the exchange rate that would deliver materially stronger near-term inflation.
Debate on this article is now closed.