BNZ economists say it would have been better for the Reserve Bank (RBNZ) to just raise the Official Cash Rate by 25 basis points and caution that further rate increases would be likely if labour market conditions and inflation did not move in the desired manner.
On Wednesday the RBNZ blindsided financial markets by unexpectedly hiking the OCR by 50 basis points to 5.25% when market pricing had been factoring in a 25-point rise.
The move has prompted fairly widespread concern and criticism as being maybe too much.
BNZ's head of research Stephen Toplis wondered whether the decision by the RBNZ "had very little to do with economic conditions" and more to do with the fact that falling global interest rates had driven New Zealand wholesale rates lower.
"There was no need to go like a bull-at-a-gate at this juncture. This is not the start of the tightening cycle," he said.
The RBNZ has now driven up the OCR by some 500 basis points since beginning this tightening cycle in October 2021. It's an unprecedented rate of increase and has taken the OCR to heights not seen for 14 years (at which time the OCR was starting to rapidly descend after the Global Financial Crisis).
"One of the things the Reserve Bank is supposed to take into consideration is that its actions do not generate unnecessary volatility in financial markets and the real economy," Toplis said.
He believed the approach taken by the RBNZ "will most definitely generate heightened volatility in both".
Toplis said the BNZ economists were "bamboozled as to what to forecast for the next [OCR] meeting, in May".
"We think the RBNZ has done more than enough to impact the things that it can impact," he said, and had believed that before Wednesday’s "bombshell".
"On that basis, we are strongly tempted to stick with our view that the cash rate peaks at 5.25% and, hence, assume rates are unchanged at the May meeting.
"But will the RBNZ get the data it needs to be comfortable doing this? We think not."
Toplis said the BNZ economists are forecasting that in the Consumers Price Index (CPI) inflation release due out on April 20 the quarterly increase will be "at least as big" as the RBNZ’s 1.7% estimate.
"Moreover, with petrol prices now again in the ascendancy it looks like most folk, including the [RBNZ], will be revising upward their Q2 CPI expectations," Toplis said, although adding that higher inflation outcomes "may already be baked into" Wednesday’s decision,
Toplis said on Wednesday May 3 the latest labour market data are released and "there is a reasonable chance" the labour market remains tighter than the RBNZ has forecast albeit that wage growth might not be.
And then on May 18 the Government releases its Budget.
"Who thinks there will be no fiscal slippage in this? To start with, revenue is already slipping meaning that this (and next) years’ operating balances are likely to be 'worse' than currently built into the Reserve Bank’s forecasts. You can then add on some spending associated with the cyclone relief. Of course, there is also the widespread view that the Government will deliver a typical election year Budget. It might but we think that the Minister of Finance will contain this as much as is possible given that he fully understands how the Reserve Bank would respond to any further stimulus. Some slippage is still likely.
"Taking all things into account we thus, reluctantly, forecast that the RBNZ will raise the cash rate a further 25 basis points at its May 24 MPS [Monetary Policy Statement] taking the cash rate to its final resting place of 5.5%.
"We say reluctantly because we think the Bank has already done more than enough.
"Our fear is that if the RBNZ sticks dogmatically to focussing more on the actual data than the leading indicators that it might continue to surprise on the upside."
103 Comments
In the last 2 weeks, got three calls from builders wondering whether I was ready to start my reno project. Add that to the 2 builders and an architect who want to know when I would like to re-start my apartment project. All of these builders I haven't heard from in three years. There's going to be a lot of tradies looking for alternative work quite soon. I wonder what they're like at pouring coffees for tourists? (Shock and Orr is a failed strategy!)
Imagine a building industry where there is competition and competitive bids.
Given how large the building industry is in NZ, it's fair to say that the excess profits due to building demand are a massive driver of inflation. Instead of paying taxes, these contractors have traditionally spent large on new "business assets" and the last 4 years were no different.
Drain layer wants $4800 incl GST to connect a sump and drainage coil to an existing stormwater drain! Backfill with scoria/metal. I've done most of the digging and estimate there is a days labour. Screw him, I'm calling in sick and doing it myself. Approx 1 days hard graft and approx $1000 in materials. Screw building compliance as its all underground and unseen.
100% agree. So one sided for so long that the speculative cant believe change is happening.
As the mighty Richard Werner refers to, credit creation for consumption and the pimping of asset prices results in inflation and eventually banking crises. The ruling elite, the media, the spruikers continue to ignore. You cannot raise the issue of the Japan experience without encountering a steady stream of reactionary strawmen as to why the West is different (which is partly true).
I agree Rastus regarding the 'engineering'. All that the RBNZ is doing is bringing people back down to the reality that already exists. We are already poorer as a result of less stuff being produced, resulting in the prices of those things going up. When businesses respond by increasing prices, and people demand higher wages, this does not mean more stuff being produced, just more inflation. The RBNZ's job is simply to nudge those expectations back to reality.
thats what happened in France with the Louisiana land pyramid scheme...let the markets decide...of course it led to the French revolution. You cant let money decide about money because it only cares about money...and those influential in the markets(like duopolies) are just another bunch of policy makers anyway
It is the Central Banks who put us in that place first, by flooding the world with QE money and keeping the rates depressed, to help America come out of the GFC. The American Bankers who 'Engineered' the GFC went scot free and made billions. And what policies were followed led to all kinds of aberrations and have brought us to today, when they have to 'engineer' a recession to cool off inflation. This cycle keeps repeating at the behest of American Overlords of International Finance.
The Swiss have stopped all bonus of the executives of Credit Suisse and are exploring claw back of earlier paid bonuses. That is the way America should go, instead of fattening the Bankers with more free runs.
There was a Government minister on ZB (I think it was Sepuloni) saying that the rises in minimum wage were non-infationary as most NZ inflation is driven by imported product from overseas and therefore local actions were insignificant. Container prices and many commodity prices are back to pre-pandemic levels. If overseas inflation is falling and local actions are insignificant, why does the RBNZ need to pile on the pressure. They were too late to act on the housing bubble and now they are continuing to apply pain when it is no longer needed and is damaging to NZ businesses and home owners.
2 points... ( Most of you forget here)
💥High inflation kills the economy quicker and harder than a high OCR!
💥If the Fwits in government gave tax breaks instead of wage increases this would put money into pockets without costing business's millions.. thus a softer landing and less fiscal pain!
💥💥💥💥💥💥🤔✔️✔️✔️💥💥💥💥
Toplis said the BNZ economists are forecasting that in the Consumers Price Index (CPI) inflation release due out on April 20 the quarterly increase will be "at least as big" as the RBNZ’s 1.7% estimate
Then the RBNZ's job really isn't done, and the banks are just whinging because the MPC didn't listen to their pleading/hinting at how they wanted things to go.
we think that the Minister of Finance will contain this as much as is possible given that he fully understands how the Reserve Bank would respond to any further stimulus
They're giving Robba far too much credit - it's pretty obvious he doesn't understand any of the ramifications of his policies.
RBA has grossly undercooked its monetary response to high inflation in order to protect the nation's housing market from meeting its inevitable doom.
The situation is getting so bizarre across the ditch that the governor is using public forum to push the onus on Aussie governments to tackle inflation with fiscal measures.
Reserve Bank Governor Philip Lowe told a gathering in Sydney yesterday that the onus was on local, state and federal governments to act to prevent a worsening of Australia's housing affordability crisis Link
Lowe is deeply compromised and should step aside and let someone else take over. His commitment to rates staying low for 3 years was far more explicit than RBNZ and he is too conflicted to make the right call. Inflation is just as bad in Australia, it's just not captured. Rent increases of 50% are common place in Sydney now.
https://www.smh.com.au/property/news/whiplash-rental-crisis-deepens-as-…
Going state-by-state, interesting to note that NSW and Vic incur huge trade balances while Qld and WA more than offset those with their mined commodity exports.
The point I am making is much like in case of NZ, Aussie relies on the far-flung regional and rural lands to bring in the export dollars, while the urban centres are overwhelmingly net importers. High migration levels are key to continue this inward-focused demand-driven growth or, as governments on both sides of the Tasman like to call it, economic diversification away from commodity exports.
Toplis seems a bit concerned that the RBNZ isn't falling into line behind the economists at the banks it's supposed to be regulating, by acting according to their published "expectations". Rather, the regulator seems to have gone rogue by making its own decisions on how to proceed, and that is simply unacceptable.
I guess the banks will need to find a bit of extra cash to pay for the interest on all those FLP loans now, and the executive board will have to restrict themselves to just the one ivory ballscratcher this year.
Increasingly concerned messages from the top being relayed by the puppets below?
Kerr at Kiwi seems very jittery too. When I spoke to him in October last year he didn’t seen too concerned, didn’t at all agree with my gloomy prognosis on residential construction.
The profit outlook for banks will be souring by the day.
Funny that, at the end of 2021 when the housing market was the most over-priced BNZ and Kiwibank were the 2 that were aggressively picking up the new (massive) loans. Actually at the time ANZ was not lending to protect their capital ratios, Nov/Dec 2021 from memory. And now we have these same 2 banks trying to talk down the OCR. Heartland and TSB were also giving cheap loans at the time, however TSB have been fortunate so far as the Taranaki housing market has held up very well, lucky for them.
Ah yes the BNZ…..and the news narrative.
Don’t forget that the BNZ,Fletchers and NZME all have a common director who is also is a major shareholder in the NZ Initiative.
imagine the group think in that sordid circle
just one amongst a group of highly paid execs rewarded to push things to the limit and bugger the social consequences
many with grossly inadequate governance & bordering on criminal
surrounded by thousands who said nothing because, hey, their house was going up too and it felt so good
I’m amazed the share market hasn’t crashed yet. I can think of a few companies that make carpets, windows and everything else in a house and business ain’t looking good!
watch them all throw their hands in the air and blame it on pandemic and government.history would tell us these events happen regularly….world wars, earthquakes,disease,sharemarket collapses, banking crisis’,asset bubbles.
what on earth were they thinking was going to happen lending money on houses where the rent didn’t cover the mortgage ?
oh well at least the country has plenty of cash around and lots of collateral. The banks will just shake out the pockets of the customers who can’t pay the mortgage, and force them to shake out the pockets where they found the deposit….if they can!
I don't think the interest paid on FLP loans is a big deal. Banks have 50 billion on deposit at the RBNZ earning interest at the OCR, but only 20 billion in FLP loans where they're paying interest at the OCR. I imagine the bigger issue for banks is the high interest rates discouraging new lending combined with the falls in property prices caused by higher interest rates meaning people's new loans are smaller than a couple years ago.
Agree. I think Adrian Orr and Grant Robinson must have discussed what was coming and what was required. Grant laid out that he couldn't make the required political calls in an election year so agreed to reappoint him on the basis that the job will get done through interest rate rises rather than fiscal policy.
Probably why Orr cleared the decks of senior RBNZ establishment people a while ago. He knew they didn't have the stomach for it based on past performance.
Also means that National will not be able to change much if they get in as the course has been set. National will probably be alright with it anyway. They know it needs to be done and they can blame Labour and Orr for a few years. Saves them having to make the hard calls if they do get in.
Yeah - banks in NZ (probably globally) have zero community interest. just want to extract money at any cost.
Getting inflation down is the number one objective of the people and the reserve bank... banks need to get behind it or their credibility and public brands will take a big hit at some point
The maverick of The Terrace has just taken us from slightly high on the glidepath and correcting, to hitting the front of the carrier. Another fireball coming.
JK. While I think this was ill advised, it means a much quicker peak and sharper cuts. Getting close to time to buy something..... Just need to wait for our helpful media to whip the market into a frenzy.
He'll do another 25, then it's action stations.
I'd argue that stats NZ is a lot more culpable than the RBNZ. Probably the worst decision they made with little or no thought was to remove land from the basket of goods used to calculate CPI. This had far reaching implications.
https://neweconomics.net.nz/index.php/2012/03/land-went-out-of-the-cons…
Orr is sitting on the biggest mess of all his peers globally. he overcooked it more (reduced rates faster), grew asset prices more (read housing bubble) than anyone else. And let the government run riot with cash. He carries a massive risk of egg all over...
Our OCR rises also take longer than those in Aus to impact the economy - so if they pause one month they can hit hard the next. if Orr pauses and prices rise rapidly it may take months for RBNZ to regain control by which time it will already be an economic disaster.
I think Orr has also realised if it goes wrong everyone will happily let him carry the can.. he can see government is still handing out cash to anyone that might vote (regardless his request to stop) .. and he can see his banker mates just want to wring the last profit and send to aus before it goes *** up... so he is going to keep hitting hard to save his own skin and let everyone else do what they want to save theirs..
be inetresting
Orr know's they got the Covid response horribly wrong and that fixing it is his responsibility. That's his path to some sort of redemption. There will be casualties and some tough times ahead but inflation has to be brought under control, non-negotiable. It's clear NZ needs a recession to remove excess demand from the economy and it will happen. As for Topliss, who cares. Many here have done a better job than him with their forecasting. He's the next Tony Alexander in waiting.
I wasn't referring to the pandemic, our problems originated far before then. It's the result of decades of mismanagement and bad policy that has encouraged and rewarded speculation over productivity and hard work.
I would have also preferred if we didn't have a pandemic but yeah, can't do much about that.
Very grim when you compare renting the same 3 bed house for $750 per week (no home insurance, rates or maintenance costs to worry about). In addition, any savings you have are earning 5% interest at the bank.
Renting is almost half the price of ownership when compared to an $800k mortgage. Saving $700 per week in a 5% savings account is $36k a year.
Just don't forget that the average rent is double what the median mortgage was for a long time. It's not like renters are sitting pretty either - their housing costs were significantly higher than owners.
Rent is dead money - and so is interest. People just forgot that when interest rates were low and capital gains were aplenty.
Remember me talking about flatlining Auckland House prices after the new 2016 Unitary Plan introduced much higher densities? See the link. Thanks to CoreLogic.
Note that Auckland's flatline is blindingly obvious when compared to other centres. Christchurch you'll remember also allowed greater densities as part of their rebuild following the eathquakes. But the other major centers? Nada. But now they're being forced to follow suit thanks to National and Labour introducing the MDRS.
So where's the bottom going to be? Just look at Auckland's flatline. The days of housing investment being a one-way bet for outsized capital gains are over! Probably for 20-30 years or more.
https://www.corelogic.co.nz/news-research/news/2023/corelogic-house-pri…
It has become quite likely now that we will see an OCR peak at 6%, or at the very least 5.75%, before the end of the year. I have the feeling that further bad surprises on the domestic inflation front are still to come.
And it has become equally likely that the OCR will stay above 5% for years to come. Inflation is not as easy to beat once firmly embedded into the economy, and it will take years to tame it. At the end of this cycle, house prices will be just a fraction, in real terms, of the 2020-2021 values.
Yep - buckle up
Listings from one local agent into my inbox this week:
Thinking of buying?
If you are wanting to purchase a property I have the following opportunities for your consideration:
- 308 Remuera Road, Remuera – The choice of 10 x brand new two & three bedroom apartments.
- 2 Tagalad Road, Mission Bay – The choice of 4 x brand new two bedroom apartments.
- 18 Grampian Road, St Heliers – The choice of 7 x proposed new four bedroom standalone homes (off the plans).
- 1 Siota Crescent, Kohimarama – The choice of 5 x proposed new townhouses.
- 6-14 Meadowbank Road, Meadowbank – The choice of 12 x proposed new apartments and 5 x proposed new terraced townhouse.
- 25 The Strand, Parnell – The choice of 21 x proposed new apartments and 31 x proposed new hotel suites.
- 24 Patteson Avenue, Mission Bay – The choice of 4 x brand new townhouses.
- 3B Colenso Place, Mission Bay – A large 927 sqm section offering development potential.
Well worth taking the time to read. Sobering stuff that looks pretty spot-on to me.
The problem with assessing risk is the full risks are never clear until it's too late. Everything is being repriced, including risk itself, the cost of capital and labor and the value of all assets.
I listened to his latest audiobook a few weeks ago as well. Really fascinating book, felt very depressed after lol.
I would like to find a book that has some contrasting viewpoints as what he says make sense but I'm sure there are some alternative perspectives that could have valid counterpoints.
What would be interesting to know from these bank economists. For Jan, Feb and Mar separately.
For the banks they work for.
How many customers have they asked to give a statement of position?
How many customers have been given a letter of demand?
How many customers have been served a Property Law Act notice?
I was thinking about that this morning. By my gross estimate (based on C40) there was approx $30B lent out since 2020 at DTIs >7. That's a lot of people who are in some seriously sticky stuff (though a small percentage of all borrowers). The banks know who they are, too.
FHB are a tiny fraction in that crowd, and we know how hard it is getting for them.
Many of those people might have an "on paper" healthy equity position. A 20-50k line of credit mortgage alongside their fixed rate loans. They could use that line of credit to make their main mortgage payments for months before the bank realises, gets worried or whatever.
The simplest thing that can be said about current financial market and banking conditions is this: the unwinding of this Fed-induced, yield-seeking speculative bubble is proceeding as one would expect, and it’s not over by a longshot.
I expect that FDIC-insured, and even most uninsured bank deposits will be fine. I also expect that hedged investments will be fine. In contrast, a great deal of market capitalization that passive investors count as “wealth” will likely evaporate, possibly including steep losses to bank shareholders and unsecured bondholders. Investors and policy-makers have confused speculation and extreme valuations with “wealth creation,” but it never was. A parade of seemingly independent “crises” will emerge as this bubble unwinds, including bank failures, pension strains, and market collapses, but they all have the same origin. Link
Mike seems to be ignoring the fact the banks weren't listening - they could have chosen to tighten up credit conditions themselves way before Jo Public did (and in fact, they did - remember the furor around the introduction of the CCCFA that they tried to scape-goat their own tightening on around December 2021?). The banks got greedy and left it as late as they possibly could.
However well you may or may not be communicating doesn't matter if no one is listening - and the RBNZ has been warning people for quite some time now that their main concern is fighting inflation.
I note MacCulloch also denigrated the earlier +75 pts as well.
ABSURD.
RBNZ let interest rates go too low and provided excess liquidity and now they are cranking interest rates too high as they stuffed up.
Also by removing all house prices, (we only have rent and new build costs now) from the CPI, interest rates swung too low and will now swing too high. housing is the biggest consumer good.
And they loosened the LVR restrictions.
People will lose their jobs and mortgages won’t get paid due to the RBNZ incompetence.
They need to be sacked.
"Our fear is that if the RBNZ sticks dogmatically to focussing more on the actual data than the leading indicators that it might continue to surprise on the upside."
Translation: We're concerned that the RBNZ doesn't understand how the OCR transmits through the economy with a time lag, and focuses to much on near term indicators rather than the economic conditions expected over the 1 - 2 years it takes the OCR to flow through.
People on the lower end of the income scale don't have mortgages. Those hit hardest will be middle-class borrowers, many of whom have quite spectacular incomes but equally spectacular outgoings and debts. Tradies and the like. They are not the underclass. It hasn't been possible to buy property in NZ on anything except a very healthy income for quite some years.
Starving the poor via inflation to protect property owners doesn't seem to be very socialist to me, but it's somehow becoming a leftist consensus. Boggles my mind. Maybe it's because the thought leaders of leftism - union economists, Labour MPs, academics and the like - tend to be property owners but don't consider unearned capital appreciation on their house to be the same thing as the nasty unearned capital appreciation that business owners get.
"unnecessary volatility in financial markets and the real economy," Toplis said."
The real economy is that Geo-political forces determine what we pay at the pump at that is still 60% of our total energy consumption. OPEC+ will make sure those prices remain elevated!!!
On the other hand the current account deficit remains at historical high levels and the latest reports from Fonterra, PF Olsen (Log exports) are not showing any encouraging signs. So with slowly diminishing exports we want to fund our increasing imports. No wonder overseas investors want more premium to fund our shortfalls. To protect us RBNZ has raised that premium. Simple as that. Just 101 economics.
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