The Reserve Bank’s monetary policy committee will meet next week for its next Official Cash Rate (OCR) review, widely expected to be another 25 basis point increase.
Economists and bond traders are divided on what will happen next, although most agree that the end of the tightening cycle is approaching.
BNZ head of research Stephen Toplis said the RBNZ still thinks it has more work to do fighting inflation and recent “banking sector ructions” will not put it off more rate hikes.
At the time of the February monetary policy statement, the central bank signaled its cash rate would peak at 5.5%, implying three 25 point increases from its current 4.75%.
“And then the wheels fell off,” Toplis said in a note on Monday.
Fourth quarter gross domestic product data was much weaker than the RBNZ’s forecast, the impact of Cyclone Gabrielle had become more apparent, and banking troubles had emerged overseas.
“Markets responded with a sharp about face questioning whether the RBNZ would ever raise rates again and pushing the expected peak in the cash rate down towards 5%”.
Kiwibank chief economist Jarrod Kerr said the RBNZ’s original plan to hike all the way to 5.5% was becoming increasingly unlikely.
The two-year swap rate has fallen from 5.5% earlier in the month to roughly 4.85% and the implied terminal (peak) OCR had dropped to 5.15% - also from 5.5%.
“We have always said a move beyond 5% would be a step too far,” he wrote in a note.
The US Federal Reserve chose to go ahead with a rate hike last week, despite direct exposure to the banking crisis, but watered down its outlook.
Traders then watered it down further, and started pricing in US rate cuts from June onwards.
“Historically the Fed has tightened monetary policy until something ‘breaks’. Well here we are, something broke,” Kerr said.
Fight inflation on the beaches
Westpac NZ’s economics team recently revised its OCR forecast to peak at 5% after a 25bps lift next week.
However, the economists said RBNZ chief economist Paul Conway's speech last week was tough on inflation and the risks are skewed towards further OCR increases beyond next Wednesday.
ABS economist Nick Tuffley said the speech was “Churchillian”, referencing the British Prime Minister famous for his war-time speeches, and reinforced the idea of more rate hikes.
“All that was missing from the speech notes was a bulldog themed coat of arms,” he said.
BNZ’s Toplis said since the central bank does not produce a rate track when it releases a monetary policy review, there may not be any signal as to what will happen next.
“There is a good chance that complete obfuscation leaves us none the wiser as to whether the bank has changed its view on the OCR peak or not”.
This gives the monetary policy committee more time to make a decision and wait for global banking conditions to settle. BNZ still expects a cash rate peak of 5.25%, but warned it would be “premature” for the RBNZ to send that signal.
Conway’s speech emphasized the importance of inflation expectations in setting policy. This means the ANZ business confidence survey, released Thursday, will be closely watched.
Both economists and the RBNZ will be interested to see the employment and inflation indicators and whether tighter monetary policy is having the necessary effect.
72 Comments
Some agents have faulty radar - I keep seeing sales advertised by 'Deadline'. Whenever someone tells me what the deadline is I have to remind the deadline is theirs, not mine. Perhaps that line is the one beyond which the market really is finally as dead as a parrot.
Stable prices are a Gigantic Myth. Unless prices fluctuate, economic activity won't flourish. Every one wants increase in income, profit,wages, etc. Which is what inflation is all about. Zero or unreasonably low inflation will result in stagflation only and slide into Recession. The Central banks have some wrongly thought out plans, designed decades ago. Not fit for purpose now. It is all being orchestrated by outdated economists and central bankers with outdated theories and practices. They will drag the whole world into Chaos. Good luck.
Why did ridiculous 1980s inflation plummet using Roger Douglas's high interest rates then? He faced the same totally unfactually based arguments our Reserve bank is facing. The only reason anyone opposes this inflation reduction method is due to their own immediate short term interest. Every time. Inflation solution is simple and obvious. Opposition is also simple and obvious.
Not to mention $3kg potatoes, $3kg rice, $10kg tomatoes at a time when they are at full harvest (last year $2.99kg), and don't even think about buying your lunch if you don't have $15 per day to spend.
Its really terrible, I don't know how families do it, a family of 4 spending $450pwk if you factor in fish n chips Friday at $5.50 per fish.
Mortgages have to go to 9%, the government is stupid giving out income support and raising minimum wage, their increases next week will only flow through to higher supermarket wages and higher inflation. So let's add another 1% to the OCR because the government doesn't understand economics. If they did understand economics they would not have printed $100billion and then turn around and say oh we didn't see inflation coming.
I'm not sure who is more dumb.... The govt, or the voter. But at least the RBNZ had woken up and realized it shit the bed and has changed it's sheets .
The market are fools if they think 5.15% is the OCR peak.
Inflation is rampant. If you think otherwise then you are obviously not the person doing the weekly grocery shopping.
I think a lot of what were typically middle class families have been pushed into a poor persons lifestyle. Its brutal out there. First Home buyers with a larger mortgage and a young family have been hit the hardest as they have seen their mortgage servicing costs double at the same time food prices have skyrocketed.
https://www.reddit.com/r/PersonalFinanceNZ/comments/120y6ut/really_need…
Different stage, different actors and different times, but we've seen this play before, and we know how it ends.
Inflation was threatening to rise further, as prices jumped 7.7 percent from the year before, according to the personal consumption expenditure index....The prevailing strategy of gradualism had been to bring the inflation rate down slowly over time through fine-tuned adjustments in the federal funds rate. By breaking with traditional operating procedures, and persevering despite a recession that was quite large by historical standards, the Fed re-established credibility for low inflation.... As a result of the new focus and the restrictive targets set for the money supply, the federal funds rate reached a record high of 20 percent in late 1980. Inflation peaked at 11.6 percent in March of the same year. In the end, the recession turned out to be smaller than many gradualists had predicted. That credibility laid the groundwork for the long period of sustained growth that followed.
https://www.federalreservehistory.org/essays/anti-inflation-measures
Referring to Paul Conway as "Churchillian" takes the cake, clearly Tuffley didn't read the almost unanimously scathing comments on this forum about Conways speech.
of course RBNZ are now in disaster recovery mode after following the 2 years of "Chamberlain" financial appeasment policies...
Conway’s speech emphasized the importance of inflation expectations in setting policy.
Once upon a time when collars were long and trousers wide, there were some cigar-chomping economists who came up with this crazy 'quantity of money theory' - they reckoned that inflation was the result of there simply being too much money in the system, and they postulated that the job of the central bank should be to control the money supply - reducing it to bring prices down, increasing it to stimulate the economy etc.
The more this wacky theory was disproven, the more they adjusted their position - claiming that inflation was actually due to 'unanchored inflation expectations' - you see, when people think prices will rise, they will.
They figured that the new bestest way to tame inflation was therefore for central banks to talk tough about taming inflation and increase interest rates to 'show how much they mean it'. The idea was that all the price setters and consumers would hear the brave and strong 'Churchillian' words of the central banks and inflation expectations would soon be well and truly adjusted and price increases would stabilise.
These economists have ended up taking the economics discipline backwards for the last 60 years, but, the lunatics are still in charge of the asylum. So on we go into a recession that will put 70,000 - 100,000 kiwis on the dole - sacrificed in the hope that their suffering will keep wages down and persuade companies to reduce their margins (rather than adjusting volume instead).
Perhaps it's time to know that Churchill did save the country from Nazi, but the empire collapsed.
The reason RBNZ targeted get CPI under control was because we need a stable economy, so far RBNZ has missed target since 2020, and now at real risk of overshoot again.
How many countries across the world have 'hit their target'? With imported inflation running at 6%+, RBNZ would have had to engineer a price *reduction* in domestic prices for things like rent, local govt rates, insurance bills, local food (where costs rely heavily on imported fertiliser, fuel and the... cost of borrowing!)
The only countries that have come close to target inflation levels have had Govts that have been prepared to intervene heavily in markets - price caps and controls etc. I am all for that personally - but I find that people who think the RBNZ should hike rates to the moon are often, weirdly, the same people who don't think the Govt should interfere in markets.
Well actually those people are people who have an understanding of economics. What you support is precisely what a communist state does, previously by two prime ministers during the last 45 years. One got voted out, and the other decided to step down before the shit hits the fan
I agree. "Heavy" intervention is bonkers but so is the idea that any meaningful intervention to fix our broken markets will spook businesses from investing in NZ.
Guess what, high cost of doing business and large players blocking market access for new entrants also paint an awful picture of NZ's business environment.
I am questioning if it was right for RBNZ to focusing on fighting inflation, than how much rates hike would reduce CPI.
RBNZ has caused so much turbulence by push gas peddle too hard, then sudden brake. Their focus is completely wrong.
in a economy, you have certain amount of cash in it, after print that much money back 2020, RBNZ should allow inflation happening, so that the prices can catch up with the limited goods and services the economy can serve.
this is why I said RBNZ is making another mistake by controlling CPI too hard.
Argentina has sought to "preserve" the economy by moderating interest rates. Interest rates are about 70% of the rate of inflation.
But that now means that they have inflation of 103%/annum with a short term interest rate of 72% /annum. To me, the lesson is that you have to get the rate of interest ahead of the rate of inflation as rapidly as possible.
https://www.bcra.gob.ar/PublicacionesEstadisticas/Principales_variables…
Asking what the bank economists think about OCR increases is like asking lambs about increasing daily slaughter numbers at AFFCO.
The banks have engineered an amazing source of income, fueled by the media's property spruiking department, by convincing everyone that interest rates would stay below 3% forever. Most people fell into the trap by borrowing the absolute maximum they were approved for, rather than only borrowing the fair value or walking away. This occurred in Canada, Aus, Ireland the UK and to a lesser extent the USA.
I knew it couldn't last and simply kept chipping away at my 2013 mortgage balance over the years. I didn't use the equity to buy other real estate. I didn't buy a boat or other similar toys. And now I am being rewarded, the people who took risks and over-leveraged themselves need to learn their lesson. This will also act as a good lesson for the next generation to not fall into the same trap.
Home price decline since peak around the world: NZ is winning, just like it was winning on the way up. Given the reduction in how much people can afford to borrow (30%) - it looks like we are about halfway through the crash.
NZ -16.2%
Canada -15.8%
Sweden -13.1%
Aussie -9.1%
Germany -4.1%
UK -2.9%
US -2.7%
Inflation up = OCR up = mortgage rate up = housing freefall crash continues.
House prices are not in freefall. The very second people think that they can afford the capital and interest payments on the loan, both now and for what they see as the future, they will be buying. I am just not sure when that will be. I myself have missed out on buying at at least 3 market bottoms in my life.
"BNZ head of research Stephen Toplis said the RBNZ still thinks it has more work to do fighting inflation and recent “banking sector ructions” will not put it off more rate hike"
They have but one tool...the gift of the gab.
Unfortunately it appears to have largely lost its effectiveness...I believe it's called "a loss of credibility".
Central banks by their actions push banks into failures, leading to consolidation in the banking industry, reinforcing the status of the TBTF Banks.
Their single minded focus on inflation control (Is 2% inflation a Holy Grail worth chasing ?) is pushing Banking, Finance and Economies into tailspins all over the world.
There are not enough financially/economically savvy politicians to understand and direct these Central Bankers, Regulators, etc. The unintended consequence of only Lawyers becoming Politicians in the US ?
QE helped only the US Banks. The US rammed it down Europe's throat, because of the dominance of the USD.
Europe had no alternative but to follow with QE, with all the unintended consequences. Many Pension Funds lost their wealth and no one has been held to account, 15 years have passed. The cycle is repeating now, once again, there will be massive loss of wealth, with the final concentration increasing with the US.
Idiots in government. Struggling to keep a future work flow for my team but I am in a better position than most. Decided to up the rent on one of my three bed rentals that is 25% below market rent. Increased by $40 per week - why not, the tenants got a government inflation adjustment. My people will just be thankful to keep a job (to pay their taxes for the government to hand out to the unemployed).
Something that I have been thinking about is a point JimboJones has made a few times about unemployment.
It looks like employment might be more resilient this time, despite lots of economic headwinds. At least in the short term as the OCR hikes take time to work through the system. Because we went into this storm with some severe shortages, and probably also demographic and social factors at play.
Arguably, this resilience gives the RBNZ more scope to hike the OCR. Why not go to at least 6% in light of this employment resilience?
of course, in doing so, unemployment will ultimately go a lot higher. It’s just that the OCR hiking / unemployment rising relationship doesn’t play out at anything remotely close to real time. And even less so this time because of the general severity of worker shortage from the start.
so unemployment might only be 4.5% at the end of this year - but perhaps 7% at the end of 2024.
Interesting times
Ask anyone over 45 whether they think they could get another job in NZ if they were made redundant. They'll answer, "Of course!" Until they try. And suddenly they don't fit in any job. 55? They're toast! And soggy toast at that!
So what's going on? Employers want the immigration gates opened!
Why? Because they can pay peanuts for years while the poor immigrant works through years until they become a resident and can get another job. All the while the poorly immigrant has the sword of Damocles hanging over their head should they dare step out of line.
Another issue? The unemployment stats are a joke. Why aren't they including ALL people who want a job? Even people over 65 still want to work. And where is the 'sample set' they use coming from?
The next quarter will show NZ is well and truly into a massive recession. The next unemployment survey should show that there is now much more unemployment as people are searching for 2nd and 3rd jobs to pay their mortgages - but will it?
Heard Grant Robinson on Newstalk yesterday about 430pm,
He simply does not get the link between rasing beneficiery and minimum wage and inflation, seems to want richer NZers to forgo there quaility of life for peoplke who won't work while we have record job openings....
I can see way higher OCR coming up so long as Labour is in power....
Roll on Oct 14th
seems to want [working] NZers to forgo there quaility of life for peoplke who won't work while we have record job openings
Found an error in your statement, fixed it for you. By reindexing benefits from LCI to CPI and giving multiple off-cycle benefit increases, the current government is sending a message that sitting on your couch all day means you get a bigger pay increase than working Kiwis.
There's quite a few of us centrist (previously labour voters) who initially voted labour thinking it would be a centrist labour government much like the labour government that Helen Clark led, but what we got was a very left labour government. Hipkins might be in power now but he was an integral part of the Ardern leftist policies and I see no fundamental change. Robertson is a finance minister that doesn't know how to manage money wisely, let alone economically. They will lie and bribe you this election. And the alternative National party will usher in the return of the property bubble and the immigration floodgates. It's time we have a government that puts NZ First. Excuse the pun. But thanks Jacinda, you did a great job in Farking the country.
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