Graeme Wheeler: Our two big Trump risks

It's too early to say how worried New Zealand should be about a Donald Trump presidency, says Reserve Bank Governor Graeme Wheeler. Not that that's his worry. At least not officially.

The Governor assesses risk and weighs the upside and downsides of issues affecting New Zealand economy.

On those, Wheeler is more comfortable sharing his opinion.

"For us the two biggest issues are what will happen to the US growth rate - because the US is 22 per cent of the global economy.

And what will happen to trade policy - the US relationship with China and relationship with Europe," he tells the Herald a few hours after delivering his latest monetary policy statement and cutting the official cash rate to a record low of 1.75 per cent.

It was a statement that he and his team reassessed after the US election result and decided to stick with. It remains upbeat on the New Zealand economy and points towards yesterday's cut being the last in the current easing cycle.

However, the Reserve Bank's projections for rates next year and through until the end of 2018 is 1.7 per cent.

That's a hypothetical level that prices in a 20 per cent chance of another cut during that period.

"The expectation at this point is that we don't need to cut again," Wheeler says. "What would put us in the situation of cutting? Those risks are mainly external."

The world's economy was already fraught with risk - Brexit, European politics, Chinese economic growth - but Trump's's election throws up a major wild card.

We've already seen markets crash and then bounce with in hours.

That isn't so surprising, says Wheeler, when you consider the initial shock.

Then, once it was clear Trump had won and the Republicans had the Senate and House of Representatives you saw the market start to assess his likely fiscal policies.

"Well he's on record saying he wants comprehensive tax reform. So corporate tax, he's talked about around 15 per cent. He's talked about a large infrastructure programme," he says.

"So then you saw and dramatic rise in 10-year bond rates - 33 basis points - that's just enormous. This was basically driven by the view that growth expectations will be higher, inflation expectations potentially higher and therefore interest rates higher as the Federal Reserve needs to deal with that."

The market has set aside its concerns about Trump's trade policy, he says. But it remains a big concern.

"What Trump has been saying is I'm going to renegotiate NAFTA, oppose TPP, I want to call China a currency manipulator and I want 45 per cent tariff on imports from China."

The issue is not that New Zealand or the dairy industry would be directly targeted, it is that world trade is so closely tied to global growth rates.

Protectionism has been on the rise since 2009 and global growth has been slow despite massive stimulus.

"I think the US administration is going to have to do a great deal of thinking about where it wants to go in the Asia Pacific region in respect of trade," he says.

"The TPP was a vehicle for them to exercise a lot of leadership in terms of trade and investment in the Asia Pacific region.

And the fact that China was not a member of it meant that if [China] joined in the future it would have been on the basis of what's already negotiated. So it put the US in a strong position."

There is another trade agreement - the Regional Comprehensive Economic Partnership - with the 10 ASEAN countries and India, China, Korea, Japan, Australia and New Zealand. It doesn't include Canada and the US.

"That was formed in the end of 2012 and I think quite a lot of focus will go on that agreement - particularly from the Chinese," Wheeler says.

Trump has also been critical of Janet Yellen and the monetary policy of the US Federal Reserve.

"I think that's very unfortunate because I think she is highly professional," Wheeler says.
Yellen's term comes up for review in 2018. Trump will have the power to recommend her replacement.

"The way that the US constitutional architecture is set up is there are checks are balances," says Wheeler, who spent 15 years living there, during which time he worked for The World Bank.

"But he has Senate and the House ... It puts him in a very powerful position not only in terms of being able to implement policy but also in terms of appointments to the Supreme court and US Federal reserve. And those appointments matter a great deal."