Well, here we go. It is time for the Reserve Bank (RBNZ) to 'do nothing' again. Ah, but will it say nothing? Or will we get a tantalising hint of things to come? In November, perhaps?
This coming Wednesday (October 4) will see another Official Cash Rate (OCR) review from the RBNZ. And it should be another 'do nothing' one in the sense that there will again be no rate rise. The RBNZ has signalled rates are on hold - and that will continue to be the case. For now.
In its OCR reviews the RBNZ alternates between the issuing of a full Monetary Policy Statement and what is styled as a 'Monetary Policy Review'. This coming week we get the latter, which means it will be just perhaps three pages including the brief 'Policy Statement' from Governor Adrian Orr as well as the Summary Record of Meeting of the RBNZ's Monetary Policy Committee (MPC). It is the MPC that decides whether to move the OCR or not.
It is worth remembering just where we are and where we have been. The OCR currently stands at 5.5% where it has been since May 2023. At the May review the RBNZ indicated through its forecasts that it was, at least for the foreseeable future, done with OCR hikes. Since then we've had 'on-hold' decisions at both the July and August OCR reviews. So, the coming week's expected 'do nothing' decision will make that three consecutive reviews with no OCR movement.
Well, it was probably time for a breather.
The speed of rise of the OCR from its all time lows of just 0.25% as at the start of October 2021 to 5.5% was unprecedented and breathtaking. So, yes, have a breather.
The fact that said breather came in the run-up to an election and has enabled the stridently independent RBNZ to avoid getting itself in the middle of the kind of political posturing that a rate hike could have brought has been convenient.
Anyway, with the signalling in May of no more rate hikes, the RBNZ officially moved into what it likes to style a 'watch, worry and wait' mode, which is pretty much what it says on the tin. Basically, it is watch the development of data, worry about what it is saying and wait and see what develops.
Having raised interest rates at breakneck speed (mortgage rates shot up from well-under 3% in mid-2021 to now over 7%), the RBNZ needs to see what impact the moves have, given the lag between the rates being hiked and the full impact being felt. It then needs to work out just what this is doing to the economy. And then it needs to decide what more action, if any, is needed. All sounds straight forward enough. But it is becoming anything but.
What have all the OCR hikes done to the economy so far? No, really. The question's not rhetorical. I would like to know. Everybody would like to know. The signals continue to be decidedly mixed. Yes, there are signs of slowdown. But, yes, there's signs of resilience too. And signs that everything is taking longer than is desirable.
Annual inflation as measured by the Consumers Price Index stood at 6% as of the June quarter 2023. It has been falling only slowly from its peak in June 2022 of 7.3%.
The RBNZ, in urgently striving to get the inflation rate back down from the heavens, even went so far as to explicitly say late last year it was deliberately attempting to engineer a recession in order to cool the inflation monster down.
To date the recession has not appeared. (Rumours of a recession earlier this year proved to be an exaggeration.)
The most significant economic data to be released after the RBNZ's last OCR review in August was the June quarter GDP figures. The RBNZ had forecast 0.5% growth. What we got was 0.9% growth. In addition the March quarter figures were revised up by Stats NZ to 0.0% from the previously reported -0.1%, while the December figures were revised up from -0.7% to -0.5%.
In other words, the economy's been travelling quite a bit better than we had thought.
And then what about the housing market?
In its August OCR review the RBNZ did upwardly revise its house price forecasts. But even so, the central bank might have been surprised at the apparent strength shown in the subsequently released REINZ sales data for August.
So, we've got a decidedly not-in-recession economy and a housing market that's always had more lives than a cat now appearing as if it is awakening (yet) again. Problem here?
Well, this for me is going to be the key part of the OCR review in the coming week. Will the RBNZ give any indication either explicitly or implicitly that it is becoming uncomfortable with its 'on hold' rate stance?
I doubt that the RBNZ would explicitly want to raise such doubts publicly at the moment. But who really knows. As I've said before, under Governor Adrian Orr, the RBNZ has not minded surprising the markets. Indeed, it has seemed to set out to do so on occasions.
With this OCR release coming out just 10 days before the election though, I doubt that surprises would be what the RBNZ would want to offer. I would expect the Governor's statement to again be 'hawkish' and reiterate that an extended period of elevated interest rates is needed, but I would be surprised indeed if there's any explicit suggestion that the 'on-hold' status is being reviewed. However...
In ANZ's preview of the forthcoming OCR decision economist Andre Castaing and senior strategist David Croy note that one of the key things they are looking for is whether the RBNZ's Monetary Policy Committee will at its OCR meeting discuss any options other than a hold - IE whether they may discuss the possibility of a hike.
"The freshly updated MPC Charter specifically instructs the committee to include 'the policy options discussed', which we hope will encourage transparency if there are differing opinions on the forward path of monetary policy," the economists say. So, in other words if the MPC does discuss the possibility of a hike at this meeting, it will have to let us know it at least had the discussion, even if the final decision is (as it must surely be) another 'on-hold'.
It's a very good point the economists make, and if there IS such a disclosure made when the OCR decision is released - IE that the RBNZ has held the OCR at 5.5% but actually considered raising it - then you can for sure expect markets to react and an OCR hike in November may well quickly become seen as a nailed-on certainty. Mortgage rates, which have been edging up again anyway, may well move up more definitively in such circumstances.
So, what about November? Well the OCR decision then (it's November 29 - mark the date in your calendars) shapes as being a biggie. It is the last one till February 2024, so, if the RBNZ is inclined to ditch the 'on-hold' stance this will be when it does it. And the fact is, the economic data to come between the October 4 OCR decision and the one on November 29 is absolutely pivotal.
Once we've got the October 14 election out of the way we plunge, headlong, into the release of the September quarter inflation figures on October 17. The RBNZ's forecasting that annual inflation will be unchanged at 6% as of the September quarter, but it then forecasts a reasonably sharp fall to 5.2% as of the December 2023 quarter.
The September quarter CPI figure was always going to be a strong one not least because of the end of the 25c a litre cut to the fuel excise duty on June 30. But in the meantime oil prices globally have been on a tear (as I'm sure you and your car have noticed). We'll be doing a full preview of the inflation figures closer the time, but I'll just say briefly here that there appears every chance that the so-called 'headline' inflation figure will actually rise higher than 6% again. Which is not what all those OCR hikes are meant to have been achieving.
The key thing will be the breakdown of those inflation figures into the non-tradeable (domestic) inflation and the tradeable (overseas imported) inflation. It's the non-tradeable inflation that's really the key because that's the one that the RBNZ can target through its OCR hikes. The RBNZ can try to 'look through' imported inflation as it can't really control it. However, the trouble with 'looking through' the figures is that a large headline inflation figure - no matter the cause - can influence the price setters, businesses and the like, to raise their prices in reaction. Yes, all of which could mean higher for longer for our inflation.
Fairly hot on the heels of those October 17 inflation figures comes the labour market figures for the September quarter on November 1. Unemployment as of the June quarter was 3.6% (up from 3.4% in March). The RBNZ's picking the figure to rise to 3.8% for the September quarter and then 4.4% by the end of 2023. The RBNZ wants to see slack develop in the labour market to take heat out of the economy. If the labour market proves more resilient than the RBNZ's picking, then trouble...
An unpleasant surprise in either the inflation figures or the labour market figures will likely see an OCR rise become a live issue for the November review. If there's an unpleasant surprise in both the inflation and labour market figures than another OCR hike in November becomes a certainty I would have thought.
So, all these potential machinations are ahead of us.
For now we brace for the October 4 OCR decision, which as said above in this article will be a 'hold'. But it will be a 'hawkish' hold and it may yet provide some clues as to the prospect of future rate hikes. My best guess is the RBNZ won't want to indicate for sure at this stage that future hikes may be on the cards. But it will be awaiting those September quarter CPI and labour market figures with bated breath. Much may happen between now and the end of the year.
48 Comments
The RBNZ will also be considering DTIs now as an alternative to more raising of the OCR. Sadly for NZ a DTI of 7 is being talked about, showing NZ house prices are still overvalued (mainly in key cities, obviously Auckland. If they are serious about stability the max OCR would be 6.5 (still much higher than most of the world). The monthly CPI figures will be key now, the oil price must have an effect in the next few months. RBNZ Nov meeting will be very interesting.
Honestly I don't think the DTI thing will ever happen. Its kind of pointless really, the banks stress test the loans anyway. You end up just having to set the DTI at like 10, so what's the point ? Do people honestly think that a setting of 7 will suddenly reduce house prices ?
Its kind of pointless really, the banks stress test the loans anyway.
Sort of, but if DTI's were in place (and at a sensible level such as 5) when the rates dropped to the floor and the stress test rates followed, the DTI would have kicked in because they aren't interest rate sensitive (as would the LVR's if they hadn't been thrown out right when they were 'needed').
Of course, there would've been a lot of screaming about how the DTI was stopping X and Y buying a house in Nov 2021 with 1mil mortgage they could afford at 3%, but ultimately, they wouldn't have lost a couple of hundred thousand equity by 2023. Therefore, I think DTI has a place/use given we're determined to otherwise let property have a free ride as far as capital gain/land tax goes.
Do people honestly think that a setting of 7 will suddenly reduce house prices ?
If it stops banks lending, then yes it will. Prices would have to drop to match what the setting allows (assuming DTI is currently greater than 7).
It will, despite the likes of Grant Robertson being concerned about the impact for no good reason, help FHB. This is because the income a rental generates (say 30-40k in Auckland) will be less than the salary of a FHB. So as a LL buys more rentals, their income gets spread more and more thinly, the more rentals they buy. Eventually they wouldn't be able to outbid the FHB due to DTI ratio.
Will also level the playing field better than removing of mortgage interest deductibility. Assume a DTI of 5:
$2m home, $400k mortgage (20% LVR). 1 rental 100% leveraged $600k earning 5% gross ($30k). Total loans $1m on $230k total income.
Wants to buy another $600k rental returning 5%. Total income $260k. DTI of 5 = $1.3m. Current loans = $1m, can only borrow $300k and needs to find another $300k cash.
DTI of 7 probably will mean having more equity. Those kids without bank of mum and dad will have the housing ladder ripped from their grasp
When I bought my first house with my first wife we had a 20 percent deposit and the national bank staff told us, not many people have that much money... $30,000
Now they need 150k and there will be the same response, "not many people have that much money". Will 150k even be enough
Footnote: Retire poppy saved REALLY hard and would be an exception. Living in a one bedroom property isn't a sacrifice unless you did it with kids poppy
...RBNZ can try to 'look through' imported inflation as it can't really control it.
No one ever tried to make this argument when we are importing deflation, everyone argues rates need to be cut "to support consumption and prevent deflation." This is one of those arguments that only gets rolled out when inflation is high to argue against setting appropriate interest rates to control inflation.
The RBNZ mandate is overall consumer price stability, not non-tradeable price stability (and ignore the rest.) If the CPI read is higher than 3% RBNZ will have to raise rates. If it is reducing on-target to that 2% mid-point by 2025 they can hold. If it crashes below 1% they can cut.
Last time RBNZ went down the rabit hole of not setting rates appropriate for the inflationary environment we ended up with "transitory inflation" which turned out to be less transitory than inflationary. They just need to do the job here and not try to make wild guesses about future data they don't have yet.
Perhaps got 1 OCR increase left in them this year to try and tame the property market/inflation... But I reckon early next year we'll see a similar statement issued by RBNZ to that when they stated slashing the OCR in 2008...
"Recent oil and food price increases mean that annual CPI inflation should peak around 5 percent in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.
"Economic activity is likely to remain weak over the remainder of 2008. The ongoing correction in the housing market, together with the very high oil prices, will limit household spending and constrain the extent of recovery.
https://www.rbnz.govt.nz/hub/news/2008/07/ocr-reduced-to-8-0-percent
by Nifty1 | 1st Oct 23, 8:13am 1696101230 - "The ongoing correction in the housing market, together with very high oil prices, will limit household spending and constrain the extent of recovery"
You just posted this yourself!
Right now, like I previously posted, for FHB's, the current market can indeed be defined as a "Suckers Market" and I think should consider making lowball offers from early 2024. There is no hurry - no need for FOMO.
What does the RBNZ need to see occurring with employment, spending, wage expectations and asset pricing in our economy in order to commence OCR reductions? It's certainly the right question to ask. If history serves as a guide, things will soon get quite ugly.
Now there's the global pricing of credit to consider. Those who think the pricing of credit centers on the fortunes of the NZ Property market, need to do a drastic rethink.
S T A G F L A T I O N
This unconsidered scenario may be looming - deep recession hits, unemployment increases, tax take craters, inflation and interest rates remain high, loan defaults rise, population is angry, Politicians and RBNZ panic at the possibility of serious civil unrest so drastically cut rates to avoid the possibility of civil disobedience and violence.
We have been used to, I think, imputing to the Fed immense powers of foresight and control. But oftentimes, the Fed, like so many of us, finds itself not in the vanguard of action or thought, but rather running behind to catch up. You know, the Fed can will all it likes to return the 2% world it has defined for itself, but if the past is prologue, the Fed will be evolving a new set of narratives to explain the new world. And I expect that to be coming at Jackson Hole any summer now.”
The rule would be that interest rates ought to be discovered in the market rather than imposed or suppressed. We have decided over the course of many years to conduct our monetary affairs by kind of a Ph.D. standard of improvisation. There are no rules, per se. The dollar is uncollateralized as it had been from the beginning of the country to 1971. So, to some extent, we are playing tennis without a net, and without baselines, and without sidelines. So, circumspection in public finance is out the window.” Link
The central rate in the current system has to be reactionary, otherwise all it is is a bunch of hoopla signalling, which we’re getting a lot of at the moment. Even so, are people listening? There’s general conviction that we’ll see the rate cut “before Christmas” or “early next year” which completely goes against the forecasts and signals given. Time will tell, but markets move so fast and then central bankers must react, and that takes time to filter through into actual liquidity levels in the market.
We haven’t seen the full effect of the tightening reaction post covid response, and people are preemptively making market moves based on the next response, of which the effects will be felt 18-24 months after, if we get it at all
There’s general conviction that we’ll see the rate cut “before Christmas” or “early next year” which completely goes against the forecasts and signals given.
Something blows. Rates will be cut. Think of the better picture and the only options available.
Chyna already well into rate cutting cycle.
Yea I’m not arguing it won’t happen, but rather that the only forward initiative the central bank has to control future movements, “hawkish” signalling, is being called out. And therefore everything else in the toolbox is reactionary to conditions. But also the fact that people are putting all their money on the house is a little baffling to me right now, but I don’t invest in property and therefore do not have the “acumen”.
But also the fact that people are putting all their money on the house is a little baffling to me right now, but I don’t invest in property and therefore do not have the “acumen”.
It's the punt of all punts. In fact, I don't know people fully understand the extent to which the Angloid nations have doubled down. I don't either. Perhaps it's BAU. Only time will tell.
Nevertheless, any water cooler party you attend, you can be assured that people will be talking about how dire the Chyna situation is. I haven't got around to understanding the whole Evergrande et co as a proxy for capital flight / foreign property is as yet. What I can speculate is that public monies will have been involved. Hence the arrest of Evergande's top dog. Heads are going to roll (literally) for sure.
JC - You are right to example the situation in China and Evergrandes default followed by Country Garden a bigger property developer and the flight of foreign capital cited at $1t+ with the consequent loss of jobs and the faltering bank system and the flight of money to Hong Kong are signals ignored by all of NZ MSM, its possible that Xi Jinping is in trouble internally hence his bellicose rhetoric and actions over Taiwan and the S China sea. I note that HSBC is effectively withdrawing from NZ.
Eggs were probably the fastest mover they went from $8.50 a dozen to $12.50 a dozen almost overnight. I don't eat much cheese but meat prices, even decent mince now is expensive. Eye Fillet went from $40 a kg to $60 a kg now. You are living on shit food if you have not noticed the jumps.
So inflation is still running hot, low unemployment, a housing market coming back to life, and the RBNZ are going to sit on their hands and wait for what is expected to be another quarter of 6% inflation, and then hike at the end of the year? Longer they wait the more ingrained the price inflation, and the higher they will need to hike.
My thoughts.
Inflation is likely to stay higher for longer than most people expect.
Current Account deficit likely to worsen in next 12 months and cause ratings agencies to downgrade.
NZD/USD likely to fall below 0.55 in next 6 months.
Stagflation (no GDP growth & high inflation) will continue to haunt us for next 12 months or more
National and Act likely to form next government.
Labour supporters will strategically vote for NZ First but will have a low turnout as know they can’t win. Winston likely to be back in parliament but will be disappointed not to be Kingmaker.
OCR likely to increase in Nov as global bond markets will continue to keep pressure on interest rates.
Government excessive spending will also keep pressure on interest rates staying high for next 12 months.
But in the meantime oil prices globally have been on a tear (as I'm sure you and your car have noticed). We'll be doing a full preview of the inflation figures closer the time, but I'll just say briefly here that there appears every chance that the so-called 'headline' inflation figure will actually rise higher than 6% again. Which is not what all those OCR hikes are meant to have been achieving.
Like I keep saying. OPEC isn't looking at NZs OCR rate in making decision to cut oil production. They are doing it to make more money from their main product, so they can build stupid engineering projects like The Line. And with completely inelastic demand and a captured market, why would they not? Its just a global monopoly exercising its monopoly power.
The sooner we build more power plants and use more energy efficient, better for the environment and our own power sourced locally, the better. Yes, we might be relying on electric cars/trucks/boats and battery imports, but they come from a group of companies that don't have a global compact to screw everyone that isn't them. In fact they are a highly competitive group of companies participating in a highly competitive manner, unlike OPEC. Once those vehicles arrive, they also last for anywhere between 200-500k km without being tied to a far off dictator.
"We are seeing signs in the [insert whatever shrinking sector you like] market / industry that the current level of the OCR is doing it's job. Therefore we are content to hold and adopt a watching and waiting stance. Should further contractions occur in the [insert whatever shrinking sector you like] market / industry we are prepared to act quickly as the situation dictates."
And some waffle about DTI ratios ... And why the RBNZ still hasn't got their act together!
The central banks may all be "taking a breather" but you know what doesnt take a breather? Inflation. So while the banks have been sitting on their hands, inflation has started creeping higher.
USA - from 3% in June, to 3.2% in July, then 3.7% in August.
Canada - from 2.81% in June, to 3.27% in July, then 4% in August.
Its like they learnt nothing from the early 1970's. Inflation isnt dead, its just waiting for banks to take their foot off the brakes.
That's terribly funny. I mean, you take 3 months and see a trend.
We'd all like trends to be straight lines from top to bottom, or bottom to top, but they never are.
This link provides a graphical interface to various time periods. Enjoy.
https://tradingeconomics.com/united-states/inflation-cpi
I think its funny that you think its funny. Its like you arent even paying attention to the global bond and stock markets. Everyone is preparing for higher interest rates due to inflation being on the increase again, except you it seems.
https://www.afr.com/markets/equity-markets/asx-to-plunge-global-bond-yi…
"The Australian sharemarket tumbled at the open after the rout in US Treasuries intensified overnight as money markets continue to recalibrate for a higher interest rate environment to bring inflation under control. The $A dropped over 1 per cent.
The moves followed more hawkish messaging from the US Federal Reserve amid concern interest rates will need to climb higher to curb inflation. Michael Barr, the Fed’s vice chairman for supervision, said the big question for central banks was how long to leave interest rates elevated while Fed governor Michelle Bowman reiterated her call for multiple rate increases at a banking conference."
If in doubt, take a look at the NZ stock market since 1 August. Down 7.6% in 2 months and still dropping like a stone.
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