After a summer of speculation and volatility, wholesale interest rates have settled back to roughly where they were in November after the previous Reserve Bank (RBNZ) Monetary Policy Statement.
Karen Silk, an Assistant Governor at the RBNZ, said the central bank had been “pretty consistent” in its message from meeting to meeting.
The one-year swap rate swung almost 50 basis points during this time as market traders reacted to weak economic activity and, later, stronger non-tradable inflation and labour data.
RNBZ Chief Economist Paul Conway gave a speech at the end of January on the importance of quality research, but also discussed the economic data releases. His comments were interpreted as being hawkish.
While market reaction was limited, it set the stage for a huge rally in interest rates after labour market data printed above expectations and ANZ lifted its Official Cash Rate forecast to 6%.
Silk said the chief economist’s speech was intended to correct interpretations of the Gross Domestic Product data and not to set the tone for future policy settings.
“[When] talking to some of the market strategists the other day, I said you need to just sit back and reflect on how you’ve interpreted that”.
The market reaction to historical revisions in the GDP data, which coincided with some dovish US Federal Reserve commentary, sent interest rates tumbling.
“The market kind of went wildly one way without actually understanding what the data was saying,” Silk said.
Conway’s speech was intended to correct an interpretation that capacity pressure had “fallen off a cliff” when really it had declined a more modest amount.
“It might have felt hawkish to the market, relative to where they were, but I don't think it was hawkish relative to what we had talked about in November”.
Silk suggested observers should interpret speeches between meetings narrowly and not attempt to extrapolate them out to an entire monetary policy stance.
“My guidance would be to think what he is saying around those very specific pieces, realising you’ve got to stand back and look at it in a much broader context”.
Cutting floor
While market traders will remain alert for possible signs of a rate cut, the RBNZ is driving home the message that they remain in the far future.
Policymakers want to be sure that inflation is on its way back to 2% and not just falling into the target band.
“Everybody kind of goes ‘surely you get to 2.9%, now’s the time’, well, not if you're going to bounce back to 3.5% by doing that,” Silk warned.
This was why the US Federal Reserve was holding off rate cuts. Headline inflation data in America has been hovering above 3% since July, while core inflation slowly tracks down.
Core inflation has dropped just 0.2 percentage points in the past four months, to 3.9%, and there are signs of strength building back up in the US labour market.
RBNZ policymakers were watching this experience and would need strong evidence that inflation was anchored to 2% before easing interest rates in New Zealand.
However, an easing of policy could come sooner if the Federal Reserve does find the confidence to cut its rates.
Silk said the difference in interest rates between the two countries would strengthen the NZ dollar which, all else equal, would lower import prices and headline inflation.
The central bank will continue to pay more attention to core inflation and domestic dynamics, but a stronger dollar would help more than hinder.
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27 Comments
"Everybody kind of goes ‘surely you get to 2.9%, now’s the time’, well, not if you're going to bounce back to 3.5% by doing that,” Silk warned."
Really doubt they are going to make any drastic cuts this year except possibly in reaction to a 2008 global financial crisis type event occurring. Still too many inflationary factors. Rates have still not normalised since the policy reaction to 2008 and really we should not rule out that they could go higher still.
What probability do you put on the RBNZ raising rates later this year?
I'm concerned that the RBNZ are using retrospective data up to 3 months old. Those posting on sites such as this are looking out of their window every day at work and talking to colleagues in other industries and can see that the economic contraction is more advanced than the data is showing. I am also concerned with every passing week that the RBNZ are ironically developing into our largest threat to economic stability.
They have about 4 different versions of it, and they all give different answers
https://www.rbnz.govt.nz/-/media/d71819db70ef47888a9da1151979bcd0.ashx?…
Easy job now.. one target = cut inflation to target.
The rest of the economy is down to 7house-luxon and his merry band of property investor MPs
So... for the team at rbnz.. simply hold rates until inflation is safely target then slowly drop rates . If inflation rises... then hike rates appropriately.
No surprises here.
Nice work if you can get it
But surely their only task is inflation.
If gdp needs to drop to facilitate inflation dropping then so be it?
Their original intent when hiking the ocr was to engineer a recession if needed? That would drive unemployment up which would reduce upward pressure on wage rises and thus reduce inflation.
Fingers crossed. I don't see many prices falling or actual redundancies.felt like a tipping point was nearing but national has started talking up new govt projects and has to deliver tax cuts soon... which may result in everyone hanging in there
Must be hard for luxon and co to watch the economy nosedive immediately after their win and not be seen to react (knowing if they react to much to fast they will make the whole thing worse)
‘Australia’s economy is much worse than it looks’. Same in NZ
https://www.macrobusiness.com.au/2024/03/australias-economy-is-much-wor…
From the August 2020 RBNZ MPS.
With significant spare capacity and a higher New Zealand dollar TWI, headline inflation is expected to be below the 1-3% medium-term target range until late 2022. Headline inflation rises back to the target mid-point in 2023. Annual non-tradables inflation falls to 1% in 2021 as excess spare capacity emerges. Annual tradables inflation averages -0.4% over the scenario horizon due to the relatively strong New Zealand dollar TWI and generally soft import price inflation.
Just sayin.
Policymakers want to be sure that inflation is on its way back to 2% and not just falling into the target band.
If Orr had any decency in these specific circumstances (inflation and $11bn of direct losses) he’d have resigned. The terms of 2 of 3 external MPC members expire v shortly, but still no hint of what sort of person the govt wants to replace them. Link
The message from the RBNZ seems to be clear: "No OCR change until inflation within 1-3% and clearly heading to 2%".
Might I pose the question: At what level above a neutral OCR will economic contraction occur? i.e. Why didn't the RBNZ simply keep ratcheting up the OCR again and again to make the OCR even more contractionary than it is now?
If you think they should have, then you're in the camp that believe 1% or 2%, or as now, 2.75%, above the neutral rate isn't contractionary enough and even higher would be better.
But if, like me, you believe 1% or 2% above the neutral rate will bring about further contraction, you'd be wondering why the RBNZ seems to think 5.5% is enough. Wouldn't 4.5% be enough too? That is still a contractionary rate.
But what of the rate of economic contraction? Will 5% above the neutral rate bring inflation down faster than, say, the current rate of 2.75%? Five percent above the neutral rate would be an OCR 7.75% which implies mortgage rates near 10%. Golly. Like rates just before the GFC - and we all know what happened after that.
Good luck finding out how the RBNZ derive what is too little, enough or too much from the MPSs. To me it seems like a thumb suck built into some model they have - or, more likely, multiple models using multiple thumb sucks, with further human thumb sucks to agree the final outcome.
And I wish anyone even better luck with trying to understand, based on the MPSs, just how fast inflation would come down based on a lower, but still contractionary, OCR. (Sure, the MPSs have predictions, but many could have been drawn with a Sharpie for all we know.)
Like I've said, economies are like oil tankers. Once propulsion is reduced, 'economic friction' plays a much larger role in slowing the oil tanker. And even an OCR at 4.5% is going to create a lot of 'economic friction' in an already contracting economic environment.
And once the oil tankers stops dead in the water ... A significant amount of energy will be needed to get it back up to an economical cruising speed. Those DTI ratios will need to fall real fast if a blunt tool like the OCR is going to be used to get NZ Inc. moving again.
Some believe that for monetary policy to be truly restrictive or contractionary, the yield on 10-year government bonds needs to be higher than the rate of core inflation. This perspective is grounded in the concept that real interest rates (the nominal interest rate adjusted for inflation) influence economic activity. If the real interest rate is positive, meaning the interest rate on a government bond exceeds the rate of inflation, it implies that the return on investment, in real terms, is positive. This can discourage borrowing and spending, and encourage saving, leading to a slowdown in economic activity, which is the essence of a restrictive or contractionary monetary policy. I think we are only close to that now in NZ, but maybe not in the US, and the RBNZ tends to also factor in the US rate.
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