The Reserve Bank is a sheep in wolf's clothing, the economists at Kiwibank are concluding.
This follows the decision by the RBNZ last week to leave the Official Cash Rate (OCR) unchanged at 5.5% in an announcement that had a tone seen by the market as indicating a 'dovish pivot' by the central bank. While most economists had expected the OCR to be unchanged, the tone of the announcement had been expected to be much more 'hawkish', including a slight revising down of the chances of a future OCR hike .
Kiwibank's economists have long since been adamant that the RBNZ has already done more than enough with the OCR hikes - which have seen the OCR raised from 0.25% in as of October 2021 to 5.5% now.
In Kiwibank's latest First View publication, chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado said they had learned last week that the RBNZ was "all bark and no bite".
They say they know the saying ‘a wolf in sheep’s clothing’, but in the RBNZ’s case, they see a sheep in wolf's clothing.
"....Because after some ferocious barking, and a lot of huffing and puffing about potential rate hikes, the RBNZ stripped off their wolf skin. Not only did the RBNZ keep the cash rate unchanged at 5.50%, but they also lowered their OCR track," they said.
"It seems that after a three-month break, the RBNZ came back to the drawing board and concluded: Monetary policy is working."
The economists said with the RBNZ's dovish tone and lower forecast OCR track, thoughts of rate hikes have all-but evaporated.
"And our call for a cut in November looks a little closer."
The economists said that looking at the offshore situation, central banks around the globe "have done enough", by hiking interest rates, to stifle growth and strangle inflation.
"Global growth is below trend, and our trading partner growth is expected to remain weak this year. The RBNZ sees downside risks to the global growth outlook. That points to softening commodity prices. And we’re a commodity exporter. Without a fall in our currency, our exporters may face another awkward year. The inflationary impulse reaching our shores is simply softer, with deflation in China, our largest trading partner. Yes, shipping costs have spiked with the skirmishes in the Red Sea. It will feed through to inflation (somewhere between 0.3-to-0.7% according to RBNZ). These added costs, and time, will impact the bottom lines of exporter and importers."
All of the focus is around central banks, especially the Fed, cutting rates this year.
"They have done enough, and will need to cut rates in order to achieve anything close to a soft landing. The Fed cutting first, followed by the likes of the RBA, may put some upward pressure on the Kiwi currency, which helps dampen tradables inflation. We need the Fed to act as an icebreaker, for others to follow."
Locally, the RBNZ’s comments around migration and the labour market were key, the economists said.
"Signs of a slowdown in economic activity are abundant. Whether it’s retail sales, construction, or manufacturing, tighter financial conditions are weighing on activity. Household consumption is weak and business activity is subdued.
"The RBNZ’s new forecasts were little changed and continue to paint a soft economy, continued rise in unemployment, and a (slightly) faster return to the RBNZ’s 1-3% inflation target band. Monetary policy is restrictive and having the intended impact. The need for further pain is unwarranted.
"The Kiwi economy is weak, and has been for 18 months. We saw a massive 3% decline in economic output last year, on a per head basis. Economic growth is expected to have been flat in the final quarter of last year. And looking beyond, we’re in for a few more quarters of rather subdued growth. Restrictive interest rates and below-trend global growth is weighing on demand in the economy.
"Rapid population is supporting aggregate output, and remains an upside to the economic and inflation outlook. The demand impact of strong migration is emerging in the form of rising rents. And retail sales volumes, down 4% last year, would be weaker still if not for population growth."
However, the Kiwibank economists say the supply-side impact of migration is being felt, to a great extent.
"With high migration and weaker demand, capacity constraints in the labour market have eased, and will continue easing. The unemployment rate may have increased by less than the RBNZ had expected, but wage inflation has eased. It’s clear evidence that slack is building in the market. A softening in wage inflation is key in driving a continued slowdown in domestic inflation. Unemployment is still expected to rise, hitting a peak of 5.1% by the second half of this year."
23 Comments
Economists have always had their slanted bias towards these things and their statements need to be taken with a pinch of salt however I feel the RBNZ is no better in that Orr is all over the place, seemingly attempting to sway behaviors with veiled threats and posturing when in fact he has no intention to follow through. It's like he is unsure himself of where things are going to go from here and is hedging his bets.
however I feel the RBNZ is no better in that Orr is all over the place, seemingly attempting to sway behaviors with veiled threats and posturing when in fact he has no intention to follow through. It's like he is unsure himself of where things are going to go from here and is hedging his bets.
He was quite condescending of the hoi polloi when he chuckled with his mates about what power he had to 'print money' without the vast majority understanding what was going on.
Not what one would expect from someone who draws on Maori deities to frame his narrative on how his central bank is somehow center of the spiritual-cum-wellbeing universe.
Personally I would prefer less Gandalf and more straight speaking.
A "sheep in wolf's clothing"?
Hardly apt given the OCR hasn't moved, (it remains seriously contractionary), and the RBNZ's projections of decline have barely moved.
What the RBNZ should be doing is acting like a dove but talking like a hawk.
Doing the reverse just reflects how very lost and confused they are at this juncture. This is common at inflection points and reflects the quality of central banks. Not for the first time I'm beginning to believe the RBNZ needs some personnel changes.
Like a school teacher.
Warning people to be good.
Banks hooked up to scare people.
Get more people secured into longer fixed rates while they can.
And today they have dropped longer rates and increased the 6 month rate.
So mortgage holders and the productive sector are giving back all of the money that was spread around during COVID.
Spread it all out and give everyone the same. Only some pay the price.
Less than 4% mortgage rates?
Not for a long time. Using:
- RBNZ neutral rate - currently 2.75% (ignoring the recent statistical soup estimations)
- Retail bank margins - scandalously high at 2%
We get 2.75 + 2 = 4.75%.
So that's 4.75% when we get back to an even keel.
If NZ Inc's productivity increases we could get a 'normal rate' of about 1% less, i.e. 3.75%. But given NZ Inc. doesn't do productivity increases - (because price increases are about all most businesses can think about to increase profits, and the only way politicians conceive growth is through further immigration, and politicians counter that with restrictive planning regulations combined with knee-jerk regulation) - I expect that won't be the new normal for at least a generation, possibly 2 or 3.
edited: As always, black swan events excepted.
Guaranteed.
https://www.interest.co.nz/charts/interest-rates/ocr
In the above graph the OCR goes up at much the same rate as it comes down. The exception being Jun 2015 to Nov 2016 - which was 17 months.
I can't see any reason why "this time it will be different." And when I've asked for any suggestions why people might think so I've been greeted with silence.
This graph - CPI - shows much the same thing. All peaks are inverted 'V's.
https://www.interest.co.nz/charts/prices/consumer-prices-index2
It’s hard to believe how brainwashed so many people are to low rates if most people loaned 100k you would expect 10% return each year at minimum especially when inflation is 5%. To the people on here who think rates are going back down to under 5% your are dreaming, central banks had to put some backbone into fiat currencies or inflation will run rampant like in Turkey’s up 67% today. All the banks and credit card companies have done is taken cheap money and pushed up asset price’s and will now be raking it in from all the people who have debt the money they gave you was at very low rates but now you have to pay at higher rates with mortgage payments that for 30 years.
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