The Reserve Bank (RBNZ) has become more confident inflation is falling towards its 1% to 3% target and is thus more willing to tolerate surprises than it was in November.
Its first Monetary Policy Statement for the year struck a more dovish tone than many market participants had expected, especially ANZ's economists who had forecast further rate hikes.
The RBNZ held the Official Cash Rate (OCR) at 5.50% and lowered its projection by a few points, signaling the chance of a hike was diminishing.
It is important to note the OCR track still has a bias towards a hike. The February Monetary Policy Statement projects the rate going to 5.60%, but that is nine basis points lower than in November.
At its previous meeting in November, the RBNZ underlined it was impatient to get inflation back in the target range and it would not tolerate any surprises or delays.
After a summer of mixed economic data, they are feeling more comfortable that an extra hike will not be needed after all.
RBNZ Governor Adrian Orr said the Monetary Policy Committee (MPC) was now more tolerant of upside risk than it was in November, although its appetite was still asymmetric.
“What I would say is, the data we have seen has given us more confidence around the outlook that we've held for over a year or so now,” he said.
The central bank is forecasting a shock to the tradable inflation rate in the third quarter of this year, as increased shipping costs from the Red Sea conflict show up in local prices. Higher shipping costs will add to near-term inflation but the MPC has “looked through” the price shock on the expectation it will reverse.
When asked whether this counted as tolerating an upside surprise, Orr said the balance of inflation pressure was still broadly as expected.
“We're saying with the degree of excess capacity, and with our projected excess capacity ahead, we think we can weather through some of these relative price spikes at present”.
The Governor noted that other data points, such as headline inflation and gross domestic product, had been weaker than expected.
Lower-for-longer
Traders in the financial markets reacted swiftly. Two-year swap rates fell 20 basis points, to about 5%, and the New Zealand dollar fell 50 basis points to be about US61.2 cents.
Market pricing for future OCR settings dropped roughly 10 basis points, and a full rate cut has been priced in for the meeting in November this year.
Nick Tuffley, chief economist at ASB, said there was a high threshold for a move in either direction for the time being.
“The important take-out from this statement is that, after very conflicting signals in the key data out over the recent months, the RBNZ has signaled some degree of comfort with the inflation outlook,” he said.
Sharon Zollner, the chief economist at ANZ, said her forecast for two more rate hikes couldn’t have been more wrong.
The forecast for a hike at this meeting was always a “line ball call” but the RBNZ’s assessment inflation risks had become less pronounced since November was particularly surprising.
“We took the November MPS at face value as suggesting that the threshold for a further hike was low, whereas it appears there may indeed have been a bigger element of ‘talking tough’ to support rate expectations and thus mortgage rates over the summer,” she said.
Zollner said she still thought there was a “good chance” the OCR at 5.50% was not enough to bring inflation back to 2% in an acceptable time frame.
But the threshold for the MPC to pull the trigger on a rate hike was “clearly much higher” than it seemed from the November statement.
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RNZ Reporters
February 29, 2024, • 06:53am
The price of common food items saw a dramatic increase of more than 50% in New Zealand over the past year, similar to spikes seen in some of the world's poorest countries.
A report released on Thursday by World Vision shows the cost of 10 common foods - including rice, bananas, chicken, tomatoes, eggs and oil - had increased by 56% locally, despite food prices trending down globally.
Inflation is tamed....lol
More statistical soup. See Figure 7.4 OCR and nominal neutral OCR indicator suite (quarterly average)
Source: https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/…
No longer a single "neutral OCR rate". Instead we now have a "long-term", a "forecast horizon", a "short-term" and a shaded range that "indicates the range between the maximum and minimum values from our suite of long-run nominal neutral OCR indicators".
Talk about muddying the waters! I expected that the RBNZ would up their estimate of the "neutral OCR rate" from 2.75% to 3.0%.
But no! Far better to throw out a number of values that effectively says, "We haven't a clue."
Ho hum! Well, in any event, it is clear the current OCR at 5.5% remains contractionary as it sits above all four estimates of what the "neutral OCR rate" might be.
Nothing new here. Inflation will continue to fall and NZ Inc. will continue to contract (and investment in new plant and machinery - and more housing - will continue to be anemic).
I've never really understood the concept of "neutral rate" as it keeps changing so therefore by definition every time it changes it was not neutral in the past. One thing to be watching more closely is the "real rate ( inflation adjusted)". As the quarterly inflation numbers drop out and replaced with lower quarterly prints this real rate gaps higher and higher in a sense tightening policy significantly. If we are at 2.6% by year end the real rate is nearly 3% (currently at 0.6%: 5.50% cash minus 4.9% CPI) which is very contractionary. RBNZ will take note which is why I'd expect earlier rate cuts than they are predicting at this stage.
Agreed. (But aren't we talking about the same thing and just using different measures to get there?)
Your point about how the OCR becomes even more contractionary as inflation falls is well made. It is a core reason for my saying the RBNZ should have been easing back in Nov and yesterday. There is no good reason that I can find for an excessively high OCR as we have now.
The vast majority of your posts to me are put downs. In fact, I'm not sure you've ever had a civil exchange with me.
If you're deeper and smarter, your position should be able to substantiate that. You should be able to reinforce your words about me, with some sort of sound position.
This might be your first cycle, or maybe just perhaps the first cycle that's of personal interest to you. Fair enough, it's been a while. But there's a method to the central banks that differs to the rather simple script they read to us from. And then behind that, a much greater story being played out.
How much of this *waves hands around at modern life in the West* is on fairly shaky ground?
Do the same mechanisms that enable the "housing ponzi", also underpin much of current human wellbeing and living standards?
How much "value" or "worth" measured today is underpinned by fundamentals that can actually pay for it?
The common line of thinking seems to be if only we pulled this lever, and not that one, tweaked this levy, or put in this rule in, hey presto. I'm less than convinced it's anywhere near as rudementary as that.
Maybe I'll be wrong, and this time it's not going to be a case of another boom bust cycle, pump some money in (amazing coincidence there's a lot of fat in the OCR, maybe that's the "good reason") and put the issues on another Afterpay to add to the pile. Our governing bodies will make sensible, considered decisions for a soft landing.
Good thing is, the near future will will tell us I'm wrong or not.
Sharon Zollner, the chief economist at ANZ, said her forecast for two more rate hikes couldn’t have been more wrong.
Surely bank economists need to start being held to account for rediculous predictions... especially given the influence they have on borrowers to make decisions on their finance. Zolners gets its drastically wrong - again, shrugs her shoulders and moves on to making further predictions without any implications...
Sharon could tell us something useful. Like how many delinquent mortgages are ANZ currently managing and how much dollar value is involved?
January reports were that 20,800 (1.4%) mortgage accounts past due, which is up 21 percent year-on-year, with many loans due to be repriced in the next 3-6 months. ANZ holds 30% of the New Zealand mortgage book at approx 107 billion. So very simple math would say they have about 1.5 billion worth of mortgages where the borrowers are behind on payments. That could be as little as 1500 secured properties.
But 1500 forced sales could move the market quite a bit and undermine the property values that secure their entire book.
Orr had only one choice: Support the New Zealand mortgage holder or support everybody else who fills up his car with petrol or diesel. He choose the first. With the RBOB Gasoline futures only showing an upward trend and the NZD cut short by his action the pain will be felt at the pump the coming months.
Ready for a LOL moment?
from Table 7.5 Summary of economic projections
(see page 56 in https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/…)
The OCR average % will be:
2024: 5.5
2025: 5.6
2026: 5.0
2027: 3.7
Meanwhile GDP % will be:
2024: 0.3
2025: 1.2
2026: 2.8
2027: 3.0
Seriously? I mean, battering NZ Inc. for 3 years with a contractionary OCR and yet they believe NZ Inc. won't be in a recession for 3 years? Does anyone sanity check their stuff before it goes to print?
Does anyone believe that's likely? If so, reasons for those beliefs appreciated. (And simply saying HFL isn't a reason.)
Could be.
That's a lot of immigration though. And the immigrants will be bringing lots of $$$.
Hmmm ... Did NACTF supporters vote for that? (Of course they did! The rentier class sees lots of un-taxed property price appreciation.)
If immigration is indeed the source then we'd probably be looking at further negative per capita GDP growth. And people wonder why the rich keep getting richer.
Lol, I was looking at the same data yesterday.... Are They Mad?
The GDP forecasts have clearly been fixed so that they don't forecast a recession, which would upset the new loons in the Beehive.
At least someone in Treasury has finally had the guts to tell Nicola Willis that the (mind-numbingly stupid) budget surplus they promised in 2026/27 is impossible. Cutting Govt spending into a recession, while interest rates are high, the housing market is flat, and we are reliant on expensive imports of fuel, tech, teslas etc, will NOT generate a surplus - it will collapse the economy, tank revenue, and force Govt spending up on accomm supplement, welfare etc etc.
jfoe,
But the tax cut for landlords must go ahead as promised. 100 days ago, i would have guaranteed that National alone or in the embrace of Act or NZ First would have at least 2 terms in office, but now? If and it's a big if, Labour can sort itself out, all is not lost at the next election.
Labour need to remember where they got their name. The open goal for them is going into bat for people who actually work for a living (whatever their salary level) and explicitly call out the parasitical rentier class in NZ who make money by simply owning money and land.
It is a relief I agree, the spectacle of a government actually trying to make government deliver what it should (and not the stomach churning largess of Labour's bloated Bureaucracy) and yes there may be some front-line impacts as things are improved.
A government actually following through on it's policy, quite the spectacle!
I do wonder whether ANZ had a nice side-bet on the go. Talk up a rate hike knowing that there was literally zero chance of an increase, influence the market, play the odds, ker-ching!
My money is still on rate reductions first half of 2024. Keep an eye on the January 2024 data that RBNZ publish at 3pm today. I suspect credit flow into the economy might have turned negative (loan repayments > new loans). I was a bit surprised by the January earnings / jobs data yesterday. I expected it to be a lot worse.
GDP for Q4-2023 out on the 21st March with lots of data in between from which extrapolations can be made (not that RBNZ seem to have much interest in doing this).
I too am a bit surprised by how well employment is holding up. Businesses that I know have been holding staff - and hoping. But now they are being forced to let some go. They're accepting of the fact that it costs to get staff and there will be future costs built into any scaling back up (RBNZ take note!) but for now cash is king. So delayed - but growing.
Lots of NZSE companies reporting less than stellar results and their management will be forced to 'return to growth' (meaning growth in profits) so we're going to see a steady stream of news articles about people losing their jobs (to add to the existing stream) and increasing prices. Likewise many SMEs are getting their books in order for the 31 March EOFY and the results are clear there too - costs need to cut - and fast.
So ... By April 10th's next MPS the RBNZ will see quite clearly what effect their backwards looking analysis has had. Will they cut? They should. (As they should have yesterday!). But no. They'll probably feel the need to do what all central bankers do and hold until even later.
But by 22 May 2024 the MPS after - the howls will be loud and clear.
Will the RBNZ point to inflation - from sources that are almost completely unaffected by the OCR, think Council rates (monopoly), electricity prices (oligopoly), insurance premiums (oligopoly,) etc. - and claim the OCR must stay at current contractionary levels?
I hope not. May it is. That's what you suggested quite some time back? Still looking good IMO.
My own view is that they should have made small cuts from Nov 23 and yesterday.
By May (or later) they run the very real risk they'll be making larger cuts - and quite possibly far faster.
Knee jerking because they've overcooked it is the worst type of central banking action as it's massively distortionary.
Did they learn nothing from dropping the OCR down to 0.25%? Apparently not.
Yes, May remains my forecast for the first cut - but April is a possibility.
I think the last few months of employment growth is the result of new immigrants filling long-standing vacancies in fixed / guaranteed income businesses like early years education, hospitals, aged care homes etc (based on the filled jobs by industry sector data). A one off bump if that's the case.
Yes, that was a tongue-in-cheek comment. Appreciate the insight though - I hear this a lot from people who work in finance (and in big corporates). The bank economists live in some weird fantasy world where complex systems behave in the simple ways assumed by their dumb equilibrium models.
Sadly the system is set up so that they have to work towards KPI's and that's often including having to "predict" rate moves which is frankly a mugs (or a traders!) game. Economists are really good for providing insights into longer term themes but that doesn't fit the bill for financial institutions any more. It's based on impact into the client base which is crazy. One of the best economists I worked with was Saul Eslake who is an Australian economist and has the most phenomenal wealth of knowledge in the history of Australia, predominantly the political history. Worth a follow if you subscribe to Linkln.
NZD value is tumbling as we import a huge amount of products this will push inflation up. When they do lower OCR the NZD will tank all central banks around the world needed to put some backbone into fiat currencies and still inflation is well above targets. I don’t think rates will be coming down for a long time.
US has some much debt and has to sell treasuries to other governments to keep the dollar going other countries will not buy unless a good return is on offer so expect rates to stay around this level for much longer, The FED is between a rock and hard place growth with OCR around 5% is only way USD remains the reserve currency.
re ... "the RBNZ's dovish attitude now"
Hmmm. Stretching quite a bit there.
re ... "It takes some time for it to happen"
It does take time. And the longer the RBNZ overcooks things the further away it will be.
When do you think the NACTF will be able to claim credit? First half 2025? Earlier? Or later?
The Big Bond Steepener Is Flopping as the Fed Delays Rate Cuts
Bloomberg is out with a story covering the yield curve. In particular, they discuss how the popular curve steepening trade has NOT played out. What's going on with the yield curve? Link
...if anything Non-Tradables will stay stable or increase with talk of +20% rates rises, insurances premiums increasing, and electricity going up effective 1 April.
The Tradables component isn't helped with out falling dollar.
Don't see significant decreases in the short-term.
How realistic is the RBNZ's justifications for the "assumption" of house pricing reverting to long term mean of ~5% PA increases over the coming 3 years?
In the MPS they cite increasing immigration and an assumption about reverting to a mean... Meanwhile in the real world prices are a mixed bag with some increases and drops around with increasing mortgage delinquency.
Would price rises rely on importing people into high paying roles or sacks of cash, or property looking better than other investment options, or a shock?
Without a shock, I can't see ocr dropping substantially in the short to medium term.
Anyone else have a view of the fundamentals' trends and their potential impact?
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