The Reserve Bank of New Zealand must have come close to cutting rates when it delivered last month's monetary policy statement, according to UK-based economist Andrew Hunt.

The central bank knows New Zealand is exposed to the global slowdown, particularly to a slowdown in China, and New Zealand's banks are dependent on offshore wholesale funding, Hunt told an investment conference in Wellington organised by Nikko Asset Management.

Concerns about liquidity in wholesale interest rate markets globally is one of the reasons the Reserve Bank is proposing to nearly double banks' minimum tier 1 capital, to ready the banks to withstand a one-in-200 year catastrophe, Hunt says.

Since the GFC, the amount New Zealand banks need to borrow from offshore has fallen from about 40 per cent of their assets to about 25 per cent and has shifted from short-term borrowing to significantly longer terms.


Hunt says that since regulators in the United States and Japan have acted to stop banks from lending in emerging markets, the world has gone from a glut of credit to a shortage.

The world is already in a trade and industrial production recession as a result of that credit squeeze, he argues.

And Asian nations have returned to exporting deflation. Given about a third of US goods are manufactured in Asia, that's likely to decrease inflation in the US by about 100 basis points and will offset the inflationary impact of rising wages in the US, Hunt says.

After the passage of President Donald Trump's US$1.5 trillion tax package in late 2017, which included incentives for US companies to repatriate capital, only about a dozen US companies bothered to bring money back from offshore, he says.

The outcome of the mid-term US elections last November, which resulted in control of the House of Representatives shifting from the Republican Party to the Democratic Party, was a wake-up call for companies which hadn't gotten around to repatriating capital. They realised the incentives might not always be available.

Within 10 days of those elections, US corporates repatriated US$220 billion, flooding US markets with cash during the government shutdown and until very recently, Hunt says.

With about US$750-800 billion of Treasuries set to be issued in April and May, there are questions about who will buy them, given three-month yields are now higher than on 10-year Treasuries, he says.

The three-month Treasury bills were quoted recently at 2.4527 per cent while 10-year Treasury bonds were at 2.439 per cent.


While the industrial sector in China was beset by a credit crunch through 2018, China's households were saving less and spending more.

But now the wider economy in China is feeling a credit crunch and its economic growth is slowing. Hunt says growth is likely to drop to about 3 per cent this year.

That would be down from 6.6 per cent in 2018, which was already the slowest pace in 28 years.

Growth is also slowing in Japan and Europe and all this means the IMF forecast of 3 per cent world growth in 2019 "is a joke," Hunt says.

All these events have fed into the Reserve Bank of New Zealand's calculations and Hunt says the central bank will sacrifice the New Zealand dollar – by cutting interest rates – to ensure nominal GDP growth.

"If you're a small, open economy, the easiest way to maintain GDP growth is through your currency – if your terms of trade remain quite consistent, it works very well," he says.