After inflation figures last week that contained, in the words of one economist "a number of red flags" for the Reserve Bank, eyes are quickly turning to labour market figures out next week as crucial ahead of the RBNZ's next Official Cash Rate (OCR) decision on August 16.
Last week's figures showed 'headline' annual inflation as of June dropping to 6.0% from 6.7% - but domestically sourced 'non-tradable' inflation fell only slightly, and by less than expected, to 6.6% (from 6.8%).
The RBNZ's looking to June quarter unemployment figures (out on Wednesday, August 2) to start showing signs that the super-hot labour market is finally cooling. It's forecasting unemployment to rise to 3.5% from 3.4%. (We'll be doing a detailed preview of the labour market figures later in the week).
ASB chief economist Nick Tuffley says he doesn't think the June quarter inflation result is a smoking gun that will prompt the RBNZ to imminently hike interest rates in light of the restrictive OCR settings already in place and its recent messaging.
"Nonetheless, the risks are still tilted towards the OCR peaking above 5.50% this cycle."
The upcoming labour market data would be key.
"An easing in tight labour market conditions and cooling annual wage inflation should provide the RBNZ reassurance that future inflation should settle in the 1-3% inflation target range.”
Abhijit Surya, Australia and New Zealand Economist with independent global economic researchers Capital Economics, said with the labour market remaining resilient thus far, green shoots emerging in the housing market and a burst of government spending on the way, "we think inflationary pressures will prove more persistent than we had previously anticipated".
"Accordingly, we now expect inflation to return to the RBNZ’s 1-3% target band only by end-2024, as opposed to our previous forecast of mid-2024.
"However, if we’re right that the ongoing economic downturn has further to run, that shouldn’t stop the RBNZ from cutting rates by Q1 2024 itself. Indeed, the Bank cut rates during both the Global Financial Crisis and the Canterbury earthquakes despite the fact that inflation was running well above target in both episodes."
ANZ economists have tweaked their inflation forecasts and now expect annual inflation to decline only slightly in the September quarter, from 6.0% to 5.8% (previously they picked 5.6%).
"That, in part, reflects temporary price increases from the unwind of subsidies to the fuel excise duty, road user charges and public transport, which together add roughly 0.6%pts to annual inflation," they say.
"However, with big local council rate increases also on the cards, symptomatic of a still intensely inflationary environment, we’re expecting annual non-tradables inflation will slow only slightly from 6.6% in Q2 to 6.3% in Q3.
"That compares unfavourably to the RBNZ’s May MPS Q3 forecast of 5.7%," the ANZ economists say.
"The stickiness of non-tradables will be a real concern for the RBNZ. It was evident in the details of the Q2 CPI release that the underlying inflation impulse is yet to slow meaningfully. That, in part, reflects the ongoing resilience of the labour market, which is underpinning strong wage pressures.
"In order for the RBNZ to be confident that core inflation is trending down sustainably towards target, it will need to see capacity open up in the labour market. And unfortunately, that means the unemployment rate will need to rise from its current unsustainable level. However, the demand impulse from net migration, sizeable fiscal stimulus in the next 12 months, improving business sentiment and a housing market showing signs of life all amount to upside risks around labour market resilience and thus medium-term inflation."
They say they do expect to see the labour market loosen across the second half of the year, largely driven by migration-led improvements to labour supply, but expect that to occur "more gradually than the RBNZ does".
"In fact, we think it will be the middle of 2024 before the labour market transitions to an outright disinflationary state, at which point, non-tradables inflation should be firmly on a moderating path. That all said, we think it will take a higher OCR than the RBNZ is currently signalling to make this come to pass.
"Indeed, at the end of the day, it’s not really a question of whether too-high domestic inflation will slow; it’s a question of how high the OCR needs to go to make it happen.
"All up, following the Q2 inflation figures the RBNZ is likely to be feeling a little less confident that underlying inflation pressures are turning as quickly as they thought. And while it’s a high hurdle to recommence tightening [IE increasing the OCR] in the very near term (as the RBNZ waits to access the impact of hikes delivered to date), we think the evidence will be there come November that domestic inflation isn’t dropping fast enough and that more tightening will be needed."
Westpac senior economist Satish Ranchhod said while inflation is now ‘lower’, it is not ‘low’ by any stretch of the imagination.
"Underlying price pressures remain strong, and inflation is set to linger at elevated levels for an extended period. As a result, we continue to forecast that the RBNZ will need to raise the OCR again."
He said digging into the details of the latest inflation report, "there were actually a number of red flags for the central bank".
"Looking more closely at those domestic inflation pressures, there has been particular strength in the prices of services, which are up an average of 6.1% over the past year. That’s consistent with the ongoing tightness in the labour market and related strength in wage growth. We expect those conditions will see domestic inflation remaining elevated well into the new year.
"And we’re not just seeing strength in the domestic components of inflation. Excluding the volatile food and fuel categories, prices for imported goods have also continued to rise at a rapid pace, increasing 6.5% over the past 12 months. That’s despite an easing in supply chain pressures, and it points to ongoing firmness in households' spending appetites.
"Inflation has already lingered above the RBNZ’s [1% to 3%] target band for over two years now, and the RBNZ’s own forecast show it remaining above 3% until the latter part of next year (meaning more than three years away from target). However, with domestic inflation stronger than expected and pricing pressures remaining ‘sticky’, there’s a risk that inflation could take even longer to drop back. As a result, we continue to forecast that the RBNZ will need to raise the OCR again."
Kiwibank economists say that we are "abseiling down from the peak of Mt Inflation".
"It’s still a long way down to 2%. But we will get there, in time," they say.
"By year-end, we see headline inflation decelerating to around 4%. Base effects will help, with last year’s spike in energy and food prices falling out of annual calculations. And a stalling post-Covid recovery in China will also weigh on imported inflation."
Domestically, the Kiwibank economists still expect a significant slowdown in economic activity heading into 2024.
"And a migration-induced boost to labour supply should extinguish the inflationary heat emanating from the labour market. Such an environment is no breeding group for inflation. With 40% of mortgages to be repriced later this year, we view the risks as tilted to the downside for growth and inflation.
"We do not believe that further tightening from the RBNZ is needed. Previous rate hikes are still working through the economy. However, the persistence of domestic price pressures will force the RBNZ to keep rates restrictive. We expect the RBNZ to sit tight for the remainder of 2023."
27 Comments
by Yvil | 24th Jul 23, 4:12pm
"Do you think his Guarantee is solid? I wonder what he will payout if/when interest rates are still available below 10% ?"
Translation - I now admit to myself that the Prophet will indeed be correct once again . Interest Rates will go to 10% This Year, Guaranteed ! To try and save face and not spook the market I will slowly try to deceive and manipulate others by suggesting The Prophet said There will not be a single interest rate available anywhere that is below 10%.
The thing is that fine, yes inflation has retreated slightly, but it is nonetheless still sustaining a level that is destructive and hard pressing commerce, business, industry, the people, you name it. It was never transitory, about which the government heaped lie on top of lie, it arrived, embedded itself and came to stay unabated. The date of return to a manageable rate of inflation is nothing but guesswork. The government might very well claim that a few points reduction is their salvation, and in little their political vacuum congratulate themselves accordingly, but for those in the real world it ain’t no salvation at all.
the (Reserve) Bank cut rates during both the Global Financial Crisis and the Canterbury earthquakes, despite the fact that inflation was running well above target in both episodes.
So absent another unforseeable disaster, the OCR won't be cut. Those Red Flags are out being waved for a reason - interest rate are going to rise a lot further than most think. That they are being waved at all, tells us that forecasters now have a sneaking suspicion that higher rates are on the horizon.
It appears to me that RBNZ tailwinds have evaporated with commodity prices appearing to be rebounding. In addition the local housing market may be finding price stabilisation which will give consumers more confidence.
Ideally RBNZ would react but with a rate pause in effect, I believe the term they used was "for the foreseeable future", it seems unlikely RBNZ will meet it's inflation goals any time soon.
There is clearly a very strong case for raising interest rates in August. If Orr does not raise in August, he will just prove that he is trying to save himself and this Government from the unavoidable side effects of the wasteful spending and stupidly ultra-loose monetary policy of these last few years.
If we compare this inflation situation with the past, we have a massive amount of wealth held by people over 70 years old. 875% more wealth is held by this age group than 30 years ago, and this will only increase as boomers age (Currently 57 to 75 years old).
These people are not impacted nearly as much by interest rate rises as the younger generations. So they can continue to spend up a storm and create demand in certain areas (old age villages, care homes, new cars, tourism, health, entertainment and eating out).
To balance this out is where their wealth is stored. 54% of NZ's net worth is locked into residential property. Compare this to the USA where only 28% of net worth is locked into housing. The rest is in financial assets like stocks or company ownership.
It's actually very eye opening, for every:
- $1 million of per capita wealth in nz, $540k is locked in the housing market, and $460k is held in financial assets.
- $1 million of per capita wealth in the USA, $280k is locked in housing, and $720k is held in financial assets.
In summary - interest rates will eventually effect those over 55. But it will be a much more gradual process, which could mean high inflation for much longer than expected.
Stats NZ data = 63% of household net wealth was held by individuals aged 55 and over.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.