The Reserve Bank’s Monetary Policy Committee is expected to leave interest rates unchanged on Wednesday, April 10, and repeat the key messages from its February statement.
Stephen Toplis, head of research at BNZ, said the central bank preferred to make significant changes to policy at full monetary policy statements, rather than these interim reviews.
Full statements are backed up with fresh forecasts and a press conference, while monetary policy reviews only include a record of the meeting and the final decision.
Regardless, there have not been any big changes in economic data that would prompt the Reserve Bank to bring forward rate cuts or tighten policy any further.
Toplis said the central bankers could almost “cut and paste” the assessment from their meeting six weeks ago, when the Official Cash Rate was left at 5.50% where it has been since May last year.
“From a bigger picture perspective very little has changed: growth is moribund, the unemployment rate is rising, inflation and inflation expectations are trending lower,” he said.
Sharon Zollner, chief economist at ANZ, was forecasting more rate hikes prior to the February meeting but was surprised by its more dovish tone.
Unders and overs
Reserve Bank Governor Adrian Orr said the committee had growing confidence that inflation was coming under control and that it was more willing to tolerate upside surprises.
“We're saying with the degree of excess capacity … we think we can weather through some of these relative price spikes at present,” he said, during the February press conference.
Zollner said there had been some “unders and overs” in the data since then but nothing that should materially change the thinking.
She said she would look out for a comment on higher-than-expected consumption data and any discussion of near-term inflation risks.
Many economists expect the next Consumer Price Index data release to be hot. For example, ASB has forecast a quarterly number of 0.7%, compared to the Reserve Bank’s 0.4%.
Staff at the Reserve Bank will have similar updated forecasts which will be shared with the committee and may discourage them from sending any extra dovish signals.
“With the upcoming inflation data for [the first quarter] unlikely to give much comfort, it looks realistic for the Reserve Bank to wait for a further two quarters to establish more certainty,” ASB said.
Toplis said any upside surprise to inflation was “disconcerting” as it could feed inflation expectations and make it harder to get back to the Reserve Bank's 2% target.
ANZ’s Business Opinion Survey recently showed pricing intentions and inflation expectations were falling, although not quite fast enough.
Inflation expectations were down from just over 4% to 3.8%, the same level as October 2021, and a net 45.2% of businesses intended to lift prices — down from 48.2%.
Economic growth has been weaker than expected but employment has been surprisingly resilient. However, public sector job cuts are yet to appear in the data.
Distress?
While the Reserve Bank has signaled it won’t loosen monetary policy until next year, most economists and traders expect the economy to buckle before then and force earlier cuts.
Bond markets were priced for a full cut in August, as of Friday morning, while economists mostly expected the first shift downwards to happen in November.
Nic Guesnon, an economist at UBS, said it may be financial stress levels that will push the central bank to back off its policy settings.
The policymakers were faced with a difficult tradeoff in “balancing sticky domestic inflation, against clear signs of broadening financial stress”.
“The Reserve Bank is not yet signalling a rate cut in 2024. However, this outlook seems premised on a relatively benign outlook for financial stress,” he said.
But that assessment could change materially in the May Financial Stability Review, as arrears and nonperforming loans have been trending upwards.
While monetary policy and financial stability are separate responsibilities, they do feed into one another and the Monetary Policy Committee is tasked with avoiding instability.
Guesnon was still forecasting the first rate cut to be in November but thought the July, August and October meetings could all be considered ‘live’.
80 Comments
"Nic Guesnon, an economist at UBS, said it may be financial stress levels that will push the central bank to back off its policy settings.
The policymakers were faced with a difficult tradeoff in “balancing sticky domestic inflation, against clear signs of broadening financial stress”.
This is why monetary policy needs to be more dynamic. We all know any inflation coming through at present is purely cost push. Doubling down on inflicting household (and small business) pain is our one trick pony.
Damien Grant burns Orr
https://www.stuff.co.nz/politics/350235132/reserve-bank-governor-adrian…
(PS I expect the usual suspects here to revert to their usual ad hominem attacks on Grant, those who actually read his opinion will find little to disagree with)
He is on $500k+ a year, had his contract extended and will likely be hired at the end an paid way more than most kiwis can ever imagine.
I would suspect if we paid someone a small salary and offered significant bonusses based on actual short, medium and long term performance. We would get a much better outcome. Orr and the CEO of Boeing seem to get their dosh no matter the outcome... and for Orr his likely next role would be with a bank, so it kinda makes sense to keep them sweet vs the peasants
Agree - and a reminder to all how the OCR level responds to boom and busts.... its vital that everyone can understand the rules of the game and plan their risk appropriately.
IF we ever start RBNZ messing with other tools to affect inflation/economic situation then its really hard to manage risk and the outcomes would be very unpredictable.
for me its the simple cycle of boom and busts, mainly driven by human nature but every few years the OCR drops, asset prices inflate, employment peaks, we all spend too much and demand soars so inflation starts to rise...
as now..
so the reserve bank raises the OCR, and morthage rate rise and demand falls and inflation once again drops.
The key is that this process repeats over and over.. the actual drivers for things vary slightly (e.g. energy prices can rise due to oil prices - driving inflation). BUT ultimately as long as everyone is aware that the OCR is what is used to control it - then we can all plan accordingly ... if we assume the OCR will normally be somewhere in the 3 to 7 bracket with outliers in the 1 to 15 bracket... (0 in some cases) then its pretty simple to work out how we and our businesses will cope as the economic cycle changes and the resever banks adjust rates. Everyone can decide what risk level is accepatable and their plan for a change.. and life is always good.
The issue now as I see it is that it is only having a muted impact on mortgage holders vs in the 1990's and early 2000's when we had a much greater percentage of home ownership at the time, peaking at ~74% in the 1990's. Either way, it is interesting talking to people of late as so many seem to act as if we have never had a recession before and the world is ending.
What like the Uni of Otago deserves him as they are a good match, both showing severe financial mismanagement that livelihoods and lives were on the line and great amounts of fraud were blindly accepted as standard practice. Cant imagine why anyone would say something like that about Grant, nosir, a genius of such financial acumen that angels wept as he graced the earth.
"Did he [Grant] criticize Orr back in 2020 when he [Orr] was doing exactly the same as the rest of the world"
The 'rest of the world' did NOT do what the RBNZ did!
Only a few countries unleashed both a government support package and a central bank support package, and of those that did only one or two came at the massive scale NZ unleashed.
Grant's articles regarding economics always display a lack of understanding and that one is no different. His interpretation of QE is quite incorrect as it isn't money printing but an exchange of assets and where reserves are returned to the banks in exchange for their bonds and these were first purchased by using their reserves in the first place and so it's purely a rotation of money. Banks cannot lend out these reserves either and they must remain within their exchange settlement accounts in the Reserve Bank.
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/april/qua…
To be fair, RBNZ's QE purchases were in the secondary market, so the sellers of bonds did receive hard cash in return (and, yes, banks' settlement balances also increased). But, very little of that hard cash received by bond sellers was spent into the real economy, it was reinvested in other financial assets (corporate bonds, stocks, equity, property etc) and / or saved. That is what QE does - it supports bond prices and drives up the price of other financial assets as investors look for alternative investments that provide some security / return. QE also holds market interest rates down because it hold bonds prices up.
Anyhow, your basic point is correct - QE did not drive up up the cost of goods and services, and Grant's whole 'debasing the money' line is tired, disproven dogma that does not apply in the modern economy.
"Bond purchases very much creates inflation"
In and of itself this statement doesn't hold up. It depends very much on the overall state of the economy and whether the economy is okay, tanking or overheating. (And the quantity and duration of the bond purchases.)
But taking your statement in the context of when the RBNZ engaged in bond purchases - you are IMO 100% correct.
It doesn’t matter what state the economy is in. Forcing the term structure of yields lower (they purchased 1year to 30y bonds) encourages borrowing and investment. It could mean less deflation, but that’s still inflation.
Yes sir. At least in the drunken sailor nations (the Anglosphere), the lower the cost of credit, the greater the desire to load up on assets. That also has some implications for the wealth effect - a key driver of consumption demand.
The fact remains that whatever the mechanism, ultra loose monetary policy via low interest rates, QE and funnelling money to the banks via LSAP has led to house prices experiencing near hyperinflation now followed by a severe correction. Homeowners and developers are now in crippling debt, soon to be bankrupted, just at the time we need more housing. This was the opposite of price stability!!
Not to mention the opportunity cost in real losses to NZ which is in the 10s of billions? Could have bought a fleet of new hospitals or motorways or ferry terminals instead.
it’s madness that Orr has been appointed for another 5 years by the outgoing government who are also responsible for this financial disaster.
Appalling policy management for sure. That said the risks were there for those taking on extended debt risk, as they always are. Anyone that thought rates would stay that low for ever clearly blinded by their own greed to miss the extreme abnormal actions taking place at that time. The only winner were those offloading old rentals and sections purchased in the previous decades.
The bag holders finally see that they are all in on the pot, and that the bank is holding a royal flush...
ultra loose monetary policy via low interest rates, QE and funnelling money to the banks via LSAP has led to house prices experiencing near hyperinflation now followed by a severe correction. Homeowners and developers are now in crippling debt, soon to be bankrupted,
These are merely symptoms of a false belief system, flawed human values.
The fact remains that our concept/construct of monetary wealth combined with fear (greed, lust, control, etc) is the root cause.
List of approved Legal Entities in Yieldbroker
- ANZ Bank New Zealand Limited
- Bank of New Zealand
- Citibank N.A.
- Citigroup Global Markets Limited
- Commonwealth Bank of Australia
- Deutsche Bank AG
- The Hong Kong and Shanghai Banking Corporation Limited
- JP Morgan Securities Australia Limited
- Morgan Stanley & Co International plc
- Rabobank New Zealand Limited
- The Toronto Dominion Bank
- UBS AG
- Westpac New Zealand Limited
- Westpac Banking Corporation
His interpretation of QE is quite incorrect as it isn't money printing but an exchange of assets and where reserves are returned to the banks in exchange for their bonds and these were first purchased by using their reserves in the first place and so it's purely a rotation of money. Banks cannot lend out these reserves either and they must remain within their exchange settlement accounts in the Reserve Bank.
When the Australian Government borrows from the banking sector, it holds the borrowed funds as a deposit at the Reserve Bank until the funds are spent. As the Australian Government spends these funds in the economy, such as in the form of JobKeeper payments to businesses, it adds to deposits held by businesses and, subsequently, to deposits of the household sector through employees of those businesses. Link
Even central banks don't always get their facts right as they are supporting the mainstream view of the monetary system and they don't want to let the cat out of the bag that government spending creates new money. The Australian government is a sovereign currency issuer and it spends and taxes and borrows in its own currency and which it cannot spend twice, it has to issue new currency when it spends.
Am in depth description here from University College London of the UK Governments monetary operations. https://www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_pur…
Outdated and misleading’: is it time to reassess the very concept of money? https://www.theguardian.com/books/2024/apr/02/outdated-and-misleading-i…
Banks do not purchase government issued debt at syndication and tender events with bank reserves. They credit the Crown settlement accounts with what they owe the government for the bonds, which we call deposits. Bank reserves are simultaneously debited from bank settlement accounts since they are immediately in receipt of coupon bond interest and have yet to pay interest to beneficiary bank accounts. When the government enacts transfer payments to banks, an equal amount of reserves are credited to bank settlement accounts at the RBNZ
That's my understanding. But if RBNZ buy a bond on the secondary market for $100m, is this not correct?
- RBNZ credit the institutional settlement account with $100m (creating a laibility for the Crown and an asset for the relevant bank)
- The bank credits the bank account of the bond seller with $100m (creating a liability equal to the settlement account asset, thus expanding the balance sheet of the bank)
- RBNZ take ownership of the $100m bond (expanding the RBNZ balance sheet)
The Reserve Bank's purchases of government bonds have created deposits
As part of the package of monetary policy measures announced in mid March, the Reserve Bank began to purchase government debt from the private sector, to support the three-year yield target and address market dysfunction. Around $50 billion of government bonds were bought from March to early May, and around $1 billion in early August. These bonds were purchased by the Reserve Bank from a panel of commercial banks via auction, and were paid for with newly created money credited into banks' Exchange Settlement Accounts (these balances do not count as deposits, as they are not held with the private banking sector). Some of these bonds sold by commercial banks would have been purchased from non-bank investors, generating a flow of funds into non-bank investors' deposit accounts.[5]
Damian Grant is right but it is not only the RBNZ governor but also his partner in 'crime' the minister of finance. First of all domestic inflation has always been around at about 4%. It was masked by imported disflation during the pre-pandemic global economy years. That fell away due to the 'supply' shocks after the pandenmic and nowadays because of 'friend shoring' supply chains and the political tensions.
Their main fault is that the pandemic money was unconditional; no strings attached! They should have used the money to 'modernise' the New Zealand economy to reduce the domestic inflation. Reduce the impact from our 4 Ozzie bank monopoly, our supermarket duopoly, our electricity gen-tailers, our slow decision processes aka RMA and many others to move this country up the ladder. Invest in the relationships between research institutes and the market to develop new economic initiatives and /or products. Create science and entrepeneurs communities to develop high value dairy and wood sugar (aka cellulose) products. Danmark, The Netherlands, Finland, Switzerland have shown the way how it is done and stop moaning about the distance to markets. If the intrisic value of your product is high enough, the transportation costs are only peanuts.
All that good stuff you mention requires a shed loads of bureaucrats to review what's wrong with the current system, research and develop policies that will enable those outcomes, draft legislation to bring them into law and then the political will to implement the required solutions.
These things don't just come about, and you can't rely on private enterprise to deliver them as the private sector's overriding objective is to make profit, the good of the country doesn't come into play in their considerations.
So I agree with you but that process is a multi-year cross party agreed pathway. Not the 100 day slash and burn this government is doing. If anything their approach will be making things worse.
- Job seeker recipient numbers nationwide are 12% up on last year (16% in Auckland and Wellington).
- The miserable mortgagors have stopped spending on discretionary items and this is driving job losses. Some households are in real trouble.
- Meanwhile people with savings and assets are doing fine (thanks very much) and are spending away. Remember that households in aggregate are beneficiaries of higher rates.
- Businesses are the big net payers of interest. They are also dealing with higher costs of insurance, fuel, rent, and having to increase wages because people expect their pay to catch up to living costs. The lack of competition in NZ (and standard pricing practice) means that most businesses just pass cost increases through to customers - reducing capacity and costs (not margins) to adjust to lower demand.
- Meanwhile local govt rates are shooting up because of the infrastructure deficit, insurance costs are flying high due to climate risks, and now diesel is back on the march upward thanks to price fixing by the Saudis under cover of global events.
- New arrivals are pushing up the price of rents because they are happy to convert lounges and garages into extra bedrooms and pay higher rent. Higher rents are putting pressure on wages.
- The construction of new homes has stalled thanks to higher cost of credit + lower sales prices tipping most business cases onto the 'do not proceed' pile. The new govt is cutting Kainga Ora off at the knees so no help there.
The recipe above is very clearly for stagflation with higher prices crippling workers and businesses alike. Falling demand is already driving the job loss / low demand spiral, which is being masked by fixed income businesses filling long held vacancies with migrants (health, care, ECE etc). The country is slipping into a deepening self inflicted recession.
Sadly, we have a robotic central bank who won't shift rates until they get the right number out of Stats NZ, and a Govt ideologically opposed to intervening (indeed their actions will worsen things considerably).
I was betting on an April rates drop by the way. It is still absolutely the right thing to do to prevent deep scarring, but I doubt it will happen now given the US data and the return of supply-side inflationary pressures. So, buckle in for 2024.
Many people that aren't really paying attention to any of this are saying things like: "Hopefully the new government can sort everything out". I think they are in for a big disappointment. Some will do better than others with National but overall we are going to keep getting poorer, and I think crime will get worse.
This country incentivises our smartest and richest to do unproductive things with their time and money with our whacky form of capitalism. No one cares if you setup a new exporting business, they care about how many houses in your "portfolio" you have.
Seymour is now proposing for foreigners to build our houses and then rent them out to us but as we have our own currency then finding money is not the issue, it's only the limited capacity of our building sector which restricts us. https://www.scoop.co.nz/stories/PA2404/S00022/new-zealand-open-for-busi…
...any private sector monopoly who had these customer service results should be looking over its shoulder to see what's gaining on it with disruptive innovation
https://www.nzherald.co.nz/nz/police-abandoned-60-per-cent-of-reported-…
Weren't those the same police who said they needed more money to do their job? Looks like they might have been right after all? Never mind, I am sure the new government of 'law and order' will invest strongly in the police force. Oh no, they are cutting the budget by 6.5%. So guaranteeing next year's unsolved crime numbers will be worse. Better put a burglar alarm system for your house on HP with that $20 a week tax cut we might get?
OIL - the biggest granddaddy on future inflation. It's up almost 15% in the month. This feeds into future inflation over the coming months as it infiltrates supply chains like a "price hike terrorist" sleeper cell.
MORE immediately we will see big fuel price hikes this coming week. Time to fill your cars and your strategic petroleum reserves.
Big ques at the Costco 25pump mega station!
Interesting to note, the Biden admin has just cancelled their planned SPR refill......due to high oil price.
My my, what will the USA do if and when a yet wider war conflagration occurs and the SPR caverns are near record low fill volumes......USA is fortunate however, their drill baby drill (more so during the Trump years) has yielded more local US crude available by their own natural reserves.
NZ is stuffed, as we inhibit our local oil industry, that is currently on life support.
US FED - not cutting, makes NZ cutting just not possible.
IMHO, NZ inflation to move higher in 2024, from the recent lows. Cost of money to stay high or higher.
Stagflation on roids is here!
And as an imported product - there goes our balance of payments.
What a shame we're not all driving electric vehicles as we make most of our electricity using renewables and have the the capacity to make a lot more.
But hey - the swing voters wanted the Simian Brown and his band of environmental and economic terrorists.
On oil and transport.
1. We reached peak oil years ago, every gallon that we extract from now on will be more expensive (it might fluctuate short-term but prices will continue to go up exponentially as more is used by developing countries and supply is reduced).
2. Transport is one of our primary consumers of oil and oil products (e.g vehicles and bitumen). In fact, transportation and fuel are the two highest import costs (taking up around 30% of our import costs and having a major impact on our balance of payments.
3. This government is doubling down on oil consumption heavy transport policies by focusing heavily on building more roads and encouraging more road travel in petrol/diesel vehicles (less support for electric vehicles, less public transport, less rail, less walking and cycling).
4. This locks in oil based transport options going forward guaranteeing higher cost of living for moving people and goods around. We will be left with petrol/diesel vehicles we cannot afford to run.
5. We rely on asphalt to build and maintain our roads, when oil runs out (by run out I mean economically viable to extract not necessarily cease to exist), we will be left with pothole ridden roads we cannot afford to fix.
6. Most of New Zealand's roads are owned/managed by council's not central government (+85%). We can already see local council's having to increase rates massively to cover the cost of maintaining roads.
7. Central govt. is exacerbating this asset maintenance cost crisis by committing to build even more roads at a time when we can't afford to maintain the ones we have and know the maintenance costs will only get worse.
8. Think about that before you put your weight behind more roads. Labour was almost as bad with their commitment to more roads but at least their commitment to other alternatives (interislander ferry, rail, public transport and walking and cycling funding) was slightly better.
Correct. We are slowing the economy down by:
- crushing the disposable income of about 10% of NZ households (the 200,000 or so households with larger / recent mortgages)
- loading businesses with billions of dollars of extra interest costs
- stopping investment in building stuff and new productive capacity (and the jobs that go with it)
When those households doing the heavy lifting start to lose their jobs, things will go south very, very quickly. Winter is coming for Wellington.
How do we address the causes behind the financial stress, ie the ever expanding debt believing it's justified by asset prices?
It's the debt that is the problem and how it's used, not the interest rates.
Decades of malinvestment by central and local govts., households, and corporations. There's a bigger shift required to solve any of this and I don't believe we as a collective, are capable of choosing differently. The status quo thinking and doing, BAU isn't going to provide any meaningful change.
X causes y.
For rates changes it would be good to go down to the next level of detail in a table.
Rows are: raise .25, hold, lower .25, plus and one or two variables.
Columns are: the impact that the change or hold would have on the various things people are interested in:
Property, prices and repayments
Debt repayments
Inflation
Unemployment
NZD value v. Other currencies
Imports
Exports
You can think of a few others. Table can show impacts as positive, negative, neutral or mixed.
Would help to convey the mixed impact of any decision and give context to comments where people desire a particular outcome for one dependent variable (y), and so then argue for their independent variable of choice (X)
They should cut next week. As they should have done way back in Nov 2023.
But no. Central bankers doing what they always do - hold for far too long and then wonder why the economic situation is so bad.
Silly questions:
- Had they cut 0.25% and then another 0.25% next week - would the markets really have noticed given we're already in a Recession and we've had anemic growth for almost 18 month (which included another Recession)?
- Is 0.5% off the mortgage & lending rates really going make any difference to our moribund housing market?
- When the rates cuts come, will they be big? Will they start another boom cycle?
- Are overseas FX traders lining up the NZD in anticipation of rapid cuts?
An alternate method of calculating inflation in the US may tell a different story:
Hidden inflation tanks Biden re-election campaign - Asia Times
There's a lot to like in that opinion with regards the covid response. But like our thinking in NZ (from too many pundits!) you can not point the finger at just government. Or just central banks. Both have been a problem. And both took it upon themselves to be white knights with little regard, nor understanding, of the effects of the other. Take this bit ...
"The Trump Administration provided emergency assistance during the Covid shutdown, a defensible measure when the economy shut down. But Biden accelerated the outlays when the economy was already in recovery. That touched off the inflation."
Anyone remember that the Fed, the USA's central bank, chose to "look through" inflation ... Until they couldn't. And now we have the US government spending hard to prop things up. Until they can't. (Or more likely, the post-November Congress decides that a 'balance the budget' crisis is needed using high school level accountancy principles as the justification.)
In New Zealand there are 692000 people employed in businesses with 1-19 employees. Many of those businesses have their assets and access to working capital secured over the owners family home and other properties. They are also based largely in more competitive sectors of the economy. Ask yourself what those owners will do when given the choice between losing their assets or reducing employee headcount. Once it starts it will be exponential.
Nah, Won't happen. New Zealanders will be replaced by overseas cheap labour and SME owners will amass more cash!
https://www.1news.co.nz/2024/03/26/low-skill-immigration-is-nzs-dirty-l…
If we cut before the US FED does then we immediately devalue the NZD, the effects of the OCR cut won’t flow through to consumers for at least a year to help the economy, but we will run the risk of importing more inflation as a result nearly immediately.. the RB monetary statement almost needs to talk about the US economic conditions as much as the homegrown conditions.
You still believe Mr Orr will cut rates in August? He should of course be cutting in April or May, but he won't, and neither will he do so in August. By then, GDP will be down a further 1%, and consumer spending down by goodness knows how much! I think the figures for sales using electronic transactions will be out this week, and expecting a drop again of anything up to 5%. Small retailers, cafes and restaurants will be feeling it.
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