If the Reserve Bank had hoped the three month summer break between Official Cash Rate reviews would help clarify the way forward in the inflation battle, well, it is likely to have been disappointed. Very disappointed.
The opposite has probably been the case, with conflicting signals emerging around the economy and making the RBNZ's inflation-busting task arguably even more complicated than it already was. And that's before we even talk about the weather...
I'm making the perhaps brave assumption here that I think for the moment - till more clarity emerges about all the economic impacts of the weather events - the RBNZ will carry on with its earlier signalled course. Inflation will remain number one priority. And let's face it our weather woes are likely to be inflationary, anyway. Just what the RBNZ didn't need.
So, in terms of the here and now, it appears that the debate within the RBNZ in the run-up to the release of the new Monetary Policy Statement (MPS) and OCR review on Wednesday, February 22, will be around whether our central bank should increase the key interest rate by 50 basis points or go for another 'jumbo' rise (matching the one in November 2022) of 75 points.
The only reason we can say that with any conviction is because the financial markets are anticipating either a 50 or 75-pointer, with current money at time of writing more on 50. Therefore, if the RBNZ delivered anything different it might get the wrong kind of reaction, which would then be unhelpful in its inflation battle.
The RBNZ doesn't have to abide by what the market thinks at all - but at the moment it's better if our central bank does stay on the same page. The last thing it would want is for the markets to, for example, start driving down wholesale interest rates, which could then begin pushing mortgage rates down. More on that theme further down the article.
In terms of what the economists are thinking, most of the major bank economists are now leaning toward a 50 point rise. However, Kiwibank economists, while not expecting the RBNZ to pause because of the weather impacts, have said that it should.
Whatever the RBNZ decides between a 50-point OCR hike and a 75-pointer, however, there's going to be a great deal of head scratching about where to go from here.
In very simplistic terms the RBNZ wants to see our ultra-tight jobs market loosen and develop some 'slack' (yes, including by implication rising unemployment) and a slowing of consumer spending. This will then lead to a general cooling of the economy and easing of inflationary pressures.
At the end of last year there appeared to have been some signs that the central bank was starting to get the desired results.
December quarter inflation came in at an annual rate of 7.2%, unchanged from September. But importantly the key domestically-generated inflation figure remained at 6.6%, when the RBNZ had expected much more at 7.0%.
Unemployment for the December quarter rose to 3.4% from 3.3%, against expectations. The RBNZ had forecast a fall in the unemployment rate to 3.2%. Average hourly private sector wages had an annual rise of 8.1%, against the RBNZ's forecast of 9.1%.
Also in December there was a marked drop in job adverts, and electronic card transaction data showed a reasonably sharp (seasonally adjusted) fall in spending.
However, moving into the New Year, we've seen job ads increase again and the latest electronic card transaction data showed quite a rise - 2.6% - in January. Spend, spend, spend! So, contradictory signals.
And then there's the weather. These 'events' we've been having in January and into this month make an already unclear economic picture even more murky.
If, for example, you need to go out and buy a new carpet, this will boost spending figures and it may likely also be inflationary, since it's not hard to imagine shortages if a lot of people all suddenly need to buy new carpets.
Then there's lost production, food and grocery shortages, need to repair infrastructure etc. All inflationary.
The RBNZ's happy to 'look through' one-off inflationary impacts, but I can well imagine the one-off impacts from the appalling bout of weather are going to be quite hard to differentiate in terms of the overall inflation picture.
We could see both sides of the economic equation occurring here too. There's the aforementioned spending boost and inflationary impact of a sudden surge in, for example, durables buying, along with supply chain problems leading to increased prices in a whole range of areas. But then there's also the prospect that we could see a simultaneous pull-back in spending due to the damage and costs associated with the weather. It is, dare I say, a recipe for the dreaded 'Stagflation'.
This is all a nightmare for the RBNZ, which is wanting to see some sort of pattern emerge that tells it whether its efforts to curb inflation are starting to work. It needs to have 'good visibility' on what's happening in the economy, so, that it neither undercooks nor overcooks its interest rate hikes.
One helpful development for the central bank in the past week has been the results of its own Survey of Expectations, which showed a drop in the expected inflation level in two years time. The point about that survey is not whether the expectations are accurate or not. They key thing is that the survey acts as a test of the RBNZ's credibility in achieving its target of reining in inflation into a 1% to 3% range. If inflation expectations soar, it means the respondents to the survey don't think the central bank has got the inflation target under control. If the inflation expectations fall this indicates that the survey respondents think the bank is heading back in the right direction in terms of getting on top of inflation.
So those survey results were helpful for the RBNZ and will give it the impression it is getting to grips with the situation.
However, for now, the central bank's 'least regrets' approach will, I think, see it continue to do what it thinks it needs to in order to get inflation back towards its 1% to 3% target range. Hence therefore the expectation of either a 50 point or 75 point rise to the OCR, taking it from the current 4.25% to either 4.75% or 5%.
But then what?
At the moment, based on its November MPS, the RBNZ is forecasting a peak OCR of 5.5% by the middle of 2023. As ever there will be huge interest in what its new projections for the path of the OCR will be when it releases its new MPS on this coming Wednesday. Some economists are thinking the central bank may trim its estimate of the peak OCR back to 5.25%.
If it does that and we assume a 50 point rise to the OCR on Wednesday, this will make the OCR 4.75% and the RBNZ has just another 50 basis points left to play with. The peak could be reached quite soon, before the halfway point in the year.
As I wrote recently, once the perceived top of the rate hiking cycle has been reached, that's when it gets quite tough for the RBNZ. It may be faced with a situation in which it doesn't particularly want to raise the OCR further, but it doesn't want retail interest rates, particularly mortgages, starting to actually fall either. And that might happen once the wholesale interest rate markets feel an OCR peak has been reached.
The RBNZ will clearly want to indicate to the markets that it doesn't envisage (want) interest rates coming down for some time. How the central bank does this once it looks as though it is getting to the end of the interest rate hikes will be crucial. Fail to get that message across convincingly and the RBNZ risks the markets themselves pushing interest rates down and effectively 'easing' monetary policy. Could happen.
Actually, the above is one reason why I think the RBNZ should really be looking now at 'just' a 25 point rise in the OCR this coming Wednesday - albeit that I don't think it will do that. The RBNZ is getting to the point where it may need some flexibility, the ability to throw in a maybe surprise hike to off-balance the markets if needed. The more perceived 'headroom' it has between the current OCR level and the perceived peak then the more flexibility it has.
Of course, I would stress that there's nothing at all to stop the RBNZ taking the OCR much higher still if it feels it needs to. But I've long since suspected the RBNZ would probably prefer to see mortgage rates not going much higher than they are.
The thing is though, it just doesn't want to see them coming down, yet, from these levels.
Anyway, in the immediate future, Wednesday will most probably bring either a 50 or 75 point rise and some continued fairly 'hawkish', work-to-be-done language from the central bank. It's a coin toss but I think the easier inflation expectations recorded in the RBNZ survey (as further up in the article) might just have been enough to tip the balance to 50.
Beyond that we will then have to wait and see what happens with the economy and whether it will cool and take the heat out of inflation.
Nothing can be taken for granted at this stage.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
90 Comments
Good article but it lacks the view on current day to day spending in the country. As a normal household spender and with a fairly good amount of known people, I do not see anyone spending less or putting brakes on their opulent life style whether rich or poor.
There is a lot of money in pockets of public and they are spending like no tomorrow. If anyone can afford weekly payments on something and some financial institution is ready to lend them, they are taking it. There are no second or after thoughts.
This cycle of debt is so far into the life of people that there is no easy way out. The logic of being debt free is not there any more. This current working generation getting 30+ year mortgages will probably keep working till they are 80 because they will have no savings.
I don't think RBNZ can save the country now unless they put some policy to curb the unrelenting lending going on which is their own making by practically giving free money to institutions to pass it on to the bilnd folded debt hungry people in this country.
There would be a chunk of people that have to apply the brakes quite hard, but also a large chunk that have no debt and interest rates don’t matter to them.
But it’s all about the unemployment rate really. Maybe we will see unemployment in the building sector (although less now with the storms), but otherwise there doesn’t seem to be much likelihood of unemployment.
You are very right and that is the case. Most people I know are not in that rat race of making more and more, so they are comfortable and relatively debt free I would say. They are travelling, spending and can't see any slow down in their part. And that's 60-70% of NZ population.
But yeah the thing that gets me is when some with vested interests try to put a different picture to others in the comments column. How do they live with themselves by lying day in and day out. Either they are just naieve in their view or very kniwing.
The question willbe for those lucky enought to inherit a reasonable sum from their parents, will they have the luxury of making good of the lot, or will they have a chunk taken from increased taxes and other costs associated with the ageing population, infrastructure updating that is sorely needed, and need to fund NZ super. Healthcare demand due to increase, NZ super will baloon out, infrastructure is front and centre now, big calls needing to be made govt both central and local which most won;t be happy with as the funds have to come from somewhere.
When I find myself getting a bit short, I do one of two things.
- Reduce the number of barista coffees and cafe lunches I have.
- Rummage through the house for decent stuff I no longer use and sell it.
Is there any national data on these markers?
A third option is to pay for things with my credit card and make sure I pay the balance in full so I don't get charged interest.
A good read, probably summarised by "Damned if they do. Damned if they don't"
But the most important variable of them all is rather casually addressed, "the RBNZ is forecasting a peak OCR of 5.5%". That can, and probably will, as Gabrielle demand kicks in, change to 5.75%, 6.25% and to wherever it might have to be reviewed to. Let's recall that not that long ago the OCR was 8.25%, in a vain attempt to reign in demand, even as the CPI was 4% odd at the time.
Gabrielle was localised to New Zealand. Inflation is globalised, and as such, we shouldn't expect local OCR decisions to change that. As we all know, it actually isn't the price of Debt or the amount of it that ultimately matters, it's what we use it for.
I am utterly convinced that the RBNZ will not change the current forecast of a 5.5% OCR peak, and that they will "see through" the cyclone's inflationary effects and therefore raise by 50 bps only. I am not saying that this is what they SHOULD do, only that this is what they WILLl do.
RBNZ are notoriously poor at forecasting, they change their targets all the time. In some ways a big forwards rates forecast might help RBNZ by putting the frighteners on spending.
We had a really good run of ultra low interest rates between 2008 and 2021, that may have been a historic aberration.
Interest rates need to be above the inflation rate to pump the brakes. Accordingly more rises to come. The speculords will cry foul loudly and that enough has been done, and oh dont hurt the flood victims more. They have a vested interest in inflation allowing the rest of NZ to bail out their debt positions.
Bring it on.
When has an economy beaten inflation ‘with’ using it?
the most recent example before now in NZ of a high inflation environment was 2006-2008. I would suggest it wasn’t high interest rates that beat inflation, but rather the arrival of the GFC.
did NZ beat high inflation in the 1970s with high interest rates?
10% would annihilate the economy
Is there any other way to kill inflation?
https://www.gdplive.net/Dashboard
8.2% OCR to be precise
It very much depends on why you have inflation. High borrowing costs prevent some investment into things that will lower inflation. We have a reduction in supply rather than an increase in demand. We should be focusing on the root cause of inflation rather than suppressing demand to fit. Take a cafe for example, if they can’t get the supply of labour they need to open 7 days they end up reducing hours which in turn results in selling less which in turn results in less units (e.g coffees) sold. The overheads need to be spread over less units so the price has to go up. There are some machines etc that help reduce the labour intensity which will help but if interest rates are high then that adds more cost. The current solution is to make the cafes go bankrupt.
The compassion and humanity of Adrian Orr isn't at stake on the 22nd. Nor is his responsibility for cyclone recovery.
What at stake is the very credibility of the RBNZ.
Since late 2021 they've been suggesting that the OCR would go higher and to take whatever pre-emptive measures we all saw fit. Then they came out and shouted at us, "Get ready! It's coming" and those of us who took note, are ready. Arguably, New Zealand is more able to handle Gabrielle because we are better placed to deal with it than we would have been without the RBNZ warnings.
If the RBNZ waver; fail to tread the path so well signposted, then next time (and there will be a next time) no one will take any notice. And the RBNZ will then have all the credibility of the RBA - none.
Yes there is a sniff of reputations, relationships and respective agendas in the air isn’t there. A disturbing factor to consider is the almost camaraderie attitude that has evolved during this government’s tenure with the higher echelons of the public service and it is rather obvious that the political independence of the latter is not as distinct a line as it should be. This is neither a good nor healthy culture as undue or selective influence, in either direction, can easily distort or dissuade from the proper policy required. A public service that is opinionated, self serving and unaccountable is a threat to society and democracy itself.
... further if Orr stalls for short term effect then people will relax and spend and hire... as a result inflation will rise further, asset prices will boost again and we will create the mother of all bubbles.
In that event in the short term all will be great and we will feel good and richer... but in the medium term the OCR will end up way higher than was needed and assets will bomb.
Basically the longer we pretend we can take a smaller pill tjan is needed. the worse the outcome
The RBNZ and Government have lost the respect of many of the public, where the one most crucial thing they need to function at all is the belief by the public that they are credible and worth believing and following. Without this, public won't listen, adapt behaviour, or in extreme circumstances, follow the law set out by said government. RBNZ needs a 100bpt hike and a stern speech to the nation to bring everyone into line and realise the seriousness of what may come if inflation gets away on us any further through lack of behavioural change. The conundrum they seem to have is how do they change behaviour without inciting panic as we approach a steeper drop in housing, could this indeed be too much of a cash cow to make the harsh calls needed?
That's true but Robertson must have incriminating photos of Orr in a paddock somewhere.
Just watch as Orr goes all political and fails to go "high and hard" on inflation with a .75- 1% increase.... As needed to get the economy in balance.
Orr's to easy to manipulate by the pollies. He needs to HTFU and sort the economy out first.. not cover Robbing sons and Dipkins poor economic mismanagement asses!
That's true but Robertson must have incriminating photos of Orr in a paddock somewhere.
Just watch as Orr goes all political and fails to go "high and hard" on inflation with a .75- 1% increase.... As needed to get the economy in balance.
Orr's to easy to manipulate by the pollies. He needs to HTFU and sort the economy out first.. not cover Robbing sons and Dipkins poor economic mismanagement asses!
Why do we need to move in 25 basis point increments? I'd like to see 60 basis points this week and suggest that's followed up with 40 then 20 basis points if that's what the data tells the bank. Nothing to stop them doing 10 basis points up or down after that to keep in line with current data. Would show a willingness to be flexible and timely and that they are responding dynamically as the facts change. May lead to less forex speculation and give more confidence in the rbnz handling of monetary policy. Going months with no change precovid may have lead to a mindset they were too dovish.
Why 60? Sounds like you're just trying to do things differently for the sake of doing things differently. Sure we'd like them to be more precise with their increments if it's going to have precise and measurable outcomes, but that's just not the case.
It would be like asking a firefighter to calculate a precise pre-determined amount of water they're going to need for each house fire to cut down on wastage.
Yes that's know that's exactly what I'm suggesting provided the mission is to cool the fire to an exact temperature. Current temp plus total stored energy of materials on fire, less required temp equals exact amount of retardant required. It's hardly ever likely to be 50 or 75, 000 litres. That's the science side. The art side is the markets shouldn't be so certain that the bank will follow its forward guidance in prescribed steps as it just all gets priced in.
If we want to know the effects of rates increases on the economy, Australia is the canary in the coal mine. This is because in Australia, most mortgages are on floating rates, meaning that the RBA rate increases are felt immediately. In NZ, the majority of mortgages are fixed, so there is a lag of about one year, between the RBNZ raising the OCR and the effects on the economy. How the Australian economy tracks over the next few months, will show us where NZ is heading.
Yet recently Shane Elliot, CEO ANZ, was quoted as saying:
“As of today, 70% of our customers are ahead on their home loan repayments and of that 70%, a half of them are more than two years ahead. As interest rates rise for many of those customers, nothing changes. Why? They are reducing the amount of time they are ahead on their repayments..... ANZ’s customers are heading into an uncertain time in “very, very robust shape.”
It's not looking good over the ditch:
This is an interest rate shock that was never meant to happen.
Before October 2021, banks were only required by the Australian Prudential Regulation Authority to apply a mortgage repayment test that involved using an interest rate that was just 2.5 percentage points above the actual product rate. The RBA has already increased its target cash rate by more than this (ie, 2.85 percentage points). Market pricing expects the totality of the RBA’s interest rate increases to reach 3.75 percentage points.
A staggering 15 per cent of all borrowers will have their spare cash turn negative in the RBA’s base case. That means they are at a very serious risk of defaulting on their loan repayments.
A total of 23 per cent of all borrowers – or more than one in five – will see their spare cash shrink by between 60 per cent and more than 100 per cent.
https://www.afr.com/wealth/personal-finance/interest-rate-shock-just-ar…
To use the punchbowl analogy, the RBNZ is trying to close down the party by... removing the punchbowl, hoping sobriety will allow people to realise its 4am and they need to calm down and go home. It seem many want to party on... a whisky drink, a vodka drink etc..... Its the RBNZs job to close the party down, eventually the police and dog vans will areive and the last hangers on and spruikers will either go home by themselves or with the police. Make no mistake the party will close down this year.
I’m still trying to get my ahead around the usefulness of surveys that go two years out and ask people what they think inflation will be?
I hope they don’t forget the survey of pricing intentions from businesses that showed eighty percent intended to raise prices this year.
Construction materials,food,imported goods….. all up.
Time for the breaking of the seal on a new scroll I think…..10% mortgage rates for some if they don’t get a handle on this quickly.
If they have indicated a peak of an OCR of 5.5% and now we have the storm issues to add, then surely they should increase this by 1% to warn those borrowers what they may well face.And to give an indication to share investors of what finance costs will be added to the p&ls of those companies.
I am sure that growth and low inflation can coexist like they did before
All in all for the amount of stimulus that went on, this inflation is not excessive.
The govt stimulus now withdrawn, we are getting back to day in day out life. The cyclone the latest kick to recover from, condolence to those who have lost loved ones and pets
They do include costs, and these are all rising…
Housing costs are measured in the consumers price index (CPI) and the household living-costs price indexes (HLPIs). Rent prices specifically are also measured in the rental price indexes (RPIs), as well as in the CPI and HLPIs.
We outline what housing costs we measure, the data sources we use, and why we measure housing prices the way we do for the different indexes. These differences contribute to why the HLPI all-households group sometimes differs from the overall CPI movement.
Summary of differences:
- For the CPI, we measure the cost of building a new house, which is the international best practice when the main purpose of the CPI is to set monetary policy.
- For the HLPIs, we include the cost of mortgage interest payments, which aligns with their use as cost-of-living measures.
- For the RPIs, we use tenancy bond data to measure price change for new private rentals and existing private rentals. This data is combined with other data and used in the calculation of rent in the CPI and HLPIs
Note they only measure Mortgage INTEREST payments - not the raw cost. So the inflation in house prices over the last decade was not measured, as interest rates were dropping.
What they are effectively measuring is people's ability to service the cost of their mortgage, pretending everyone is on IO, while we all know there has been massive inflation in house prices (and thus market cap) that simply isn't measured by this metric.
Also, last I saw rent increases were only given a 9% weighting in the CPI, yet the last time I spent such a low % of my income on rent was 20 years ago.
Rents and interest payments (for new mortagages) have more correlation with incomes than they do house prices.
It's a catch 22. If I take out a mortgage now, and in 12 month's time CPI and my salary are up 7.2%, my principal payments have not gone up 7.2%. But let's say my interest rate has gone from 6% to 6.43%, then my interest costs have gone up 7.2%.
It's ironic that the one thing that is most sensitive to CPI movements, and thus the OCR changes, is how much someone buys a house for using a mortgage and it's not included in the CPI !!!!
Thats the problem. The only people feeling it are those who are too heavily indebted... and the real estate/construction and related industries. I reckon orr has so far hit about 5% of the midclass to elite population meaningfully.. so probably the only people feeling any pain are the poorest though inflation (who arent causing inflation anyway).
He needs to take out a sledgehammer and smash up 150 basis point and threaten more unless people stop spending, stop raising prices and stop hiring. The way our fixed mortgaes work it will be a couple years before his current changes actually affect anything and by then we will be in a monster mess.
It would also help if the govt and private business announced some major project delays or cancelĺations, maybe some layoffs and some fear of recession.. the way Robertson, Chippy et all are behaving are role models.. they need to spread some fear.
A lot of it is about killing sentiment.
Put it another way, house prices are slackening, sales are down, and there's this big question mark over inflation and interest rates being high maybe for years.
That's not an environment to be putting much money into, even if you aren't carrying much debt yourself. Some have deep pockets and others are dumb or brave, but they're few.
RBNZ last met its inflation mandate in Q1 of 2021. After two years of missteps I think RBNZ will just want to really show they can reduce inflation and reset inflation expectations. This probably isn't a good time for guessing what the terminal rate may be, they just need to fly by the instruments and get to the target altitude.
Before When mortgage rates were 6% or 7% it was doable but now with some people with 700k to million plus mortgages only just a matter of time before monthly payment put huge amount of financial burden on them, we will start to see many taking loss rather than losing everything.
HM, I think there are many on here who think it's a possibility, as the RB can do whatever they want and justify it, anyway they want. The question is, should they? There seems to he a resounding 'no' from the posts I've read. So if they hold off raising please don't crow that only you and a few others foresaw it.
Norm, almost no discussion that it’s a realistic possibility. Maybe many think it’s a genuine and real possibility. I don’t know, because they don’t say. But most seem to be assuming the decision is a given from the tenor of the comments which on the whole seem very confident it will be 50 or 75 BPs.
I would have thought a sophisticated conversation would have canvassed the option of no hike (or 25BPs) a bit more.
What ‘should’ be done is one thing. What ‘is’ done is quite another.
And the implications of a zero or 25 BP hike are quite significant.
shouldn’t a sophisticated discussion be a bit more nuanced and consider a range of plausible scenarios?
Imagine, just for a second, thinking that the central bank of a tiny island in the south pacific can do anything about a global change in the price level. Imagine the actions of Adrian (shock and) Orr sending shockwaves through international oil markets, or a reduced demand for 800g blocks of Tasty at New World leading to a catastrophic collapse in global dairy auctions. Jeez.
Hipkins talking building back with more resilience. So is it 2N or 2N+1, it's either twice as expensive or three times.... not putting power substations in flood planes would be a start mate.... just relocating all existing major power sites to make them non flood vulnerable should be number one priority....., perhaps we do need to push Vodaphone to have 48 hours battery at cell sites vs the seemingly 10 hours they have now..... as an IT Guy who has a lot of big datacenter experience... 2N+1 is not going to be cheap. I think he is just talking it up. I had a 6.5kw genset running for about 1/2 of the 82 hours that I had no power. I suggest anyone living rural get a genset capable of keeping all your freezers cold etc, cost me about 1k 3 years ago, with inflation same unit is now 1.5k. if these events get worse I will get a diesel 10kw unit and wire it into house. don't expect vector or this government to do much before the next few major weather events hit, this stuff takes decades.
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