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Inflation hits 18 year high, but RBNZ still likely to cut OCR

Posted in News

Annual consumer price inflation hit an 18 year high of 5.1% in the September quarter, but this was in line with market expectations and a backward looking indicator that is unlikely to stop the Reserve Bank from cutting the Official Cash Rate by 100 basis points to 6.5% on Thursday.

Statistics New Zealand reported that the CPI rose 1.5% in the September quarter from the June quarter, pushing the annual inflation rate to 5.1%, its highest level since June 1990, which was shortly after an increase in the rate of the Goods and Services Tax.

It is well above the Reserve Bank's target band of 1-3% on average over the medium term.

Non tradeables inflation, which is inflation not linked to international prices such as petrol and food and most able to be controlled by the Reserve Bank, hit a record high of 1.3% for the quarter and remains at 4.1% on an annual basis. It has consistently been above 3% since 2003.

Big contributors to the increase were higher food prices, higher petrol prices and higher local body rates, but economists are pointing to sharp falls in petrol prices and slowing global growth since the end of the September quarter that are likely to keep inflation in check.

Here's the key details below from Statistics NZ.

Nine of the 11 CPI groups recorded increases in the September 2008 quarter. The most significant upward contributions came from the food (up 3.7 percent), housing and household utilities (up 1.4 percent) and transport (up 2.0 percent) groups.

Other upward contributions came from the following groups: alcoholic beverages and tobacco (up 1.3 percent), recreation and culture (up 0.8 percent), health (up 1.4 percent), household contents and services (up 0.8 percent), miscellaneous goods and services (up 0.5 percent), and education (up 0.1 percent).

Two groups recorded decreases: communication (down 1.1 percent), and clothing and footwear (down
0.4 percent). The most significant individual upward contributions came from higher prices for petrol (up 4.6 percent), lettuce (up 94.9 percent), overseas package holidays (up 13.2 percent), and local authority rates and payments (up 4.7 percent).

The most significant individual downward contributions came from lower prices for second-hand
motor cars (down 8.0 percent).

Meanwhile, food prices rose 0.6% in September from August and were up 10.8% for the year, the highest food price inflation since April 1990.

Here are the key details from Statistics NZ on food prices. Pork and broccoli prices were particular culprits in September.

Food prices rose 0.6 percent in September 2008, following increases of 2.7 percent and 0.6 percent in August and July 2008, respectively.

In September 2008, higher prices were recorded for the following subgroups: meat, poultry and
fish (up 3.7 percent), grocery food (up 0.5 percent), restaurant meals and ready-to-eat food (up 0.4 percent), and non-alcoholic beverages (up 0.3 percent). Lower prices were recorded for the fruit and vegetable subgroup (down 2.2 percent).

The most significant individual upward contributions came from higher prices for beef (up 6.8
percent), tomatoes (up 16.3 percent), yoghurt (up 11.6 percent), fresh chicken (up 5.8 percent), pork (up 11.9 percent), and broccoli (up 19.8 percent).

The most significant individual downward contributions came from lower prices for lettuce (down 20.6 percent), and cucumber (down 43.8 percent).
 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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34 Comments

I'm hoping Bollard raises the

I'm hoping Bollard raises the rate or holds fast as a minimum.

Food price rises say it all - and in a slowing economy they are the critical indicator in keeping the population out of poverty/desperation during such a crisis. We may have asset deflation, but we have the very dangerous possibility of hyperinflation of basic commodities if the NZD plummets. Holding the OCR will help stablise the NZD for a spell - and this will be welcome relief for families at the grocery store.

I doubt even if the OCR is lowered that those same families will see much short/medium term benefit by way of lower interest rates on borrowing. And indeed in addition to the minor tax cuts - relief on domestic prices for food and fuel are desperately needed in many quarters of our society.

Bernard I think the RBNZ

Bernard

I think the RBNZ Governor needs to consider relinquishing his position. The PTA has moved the target of the inflation band higher over recent years with the added proviso "over the medium term'. And yet we are way above the stated levels of 1-3%.

You don't pay someone NZD 520,000 - 549,000 annually to be as accurate as a stopped clock.

I largely agree with Kate.

I largely agree with Kate.

At inflation of 5.1%, this would give an average after-tax real interest rates on savings of approximately 1.5%. At this rate, I might be able to get a few dollars after bank charges.

In light of this, John Key has championed the idea of reducing the base rates (not that politician's view matters here). How is this going to help with improving saving rates? Any lowering in rates would make me seriously doubt banks' ability to operate in the short to medium term. combine poor consumer outlook and reduced ability to pay debt, I would highly doubt any increase in foreign injection even if the Dollar is depreciating.

I have not seen a bank run in my short life, but i am not going to rule out seeing one in the near future.

Stephen, Even a stopped clock

Stephen,

Even a stopped clock is right twice a day.

Maybe Bollard hopes CPI will touch 2.8% sometime in the next few years.

Emir, Not too long ago

Emir,

Not too long ago

http://news.bbc.co.uk/2/hi/business/6996136.stm

It's clear preservation of capital is about the best we can hope for at the moment.

raf, I just cant understand,

raf,

I just cant understand, in principal, how banks can continue to operate given the way things are going. Savings guarantee has never been brought up before, until recently. Current conditions give reasonable cause for savers such as myself and others, to have concerns for absolute capital loss.

But the BNZ just announced

But the BNZ just announced a %9 increase in profits
http://www.stuff.co.nz/4734788a13.html

So banking has to be good. If we are providing security to deposits as taxpayers and letting banks create money why don't we just keep the profits?
I think our interest rates need to go up, or risk a run on banks as capital heads offshore.

Lowering the interest rate is

Lowering the interest rate is the most direct way of getting cheaper credit to struggling businesses and mortgage-holders. It may seem strange to ask for lower rates in the same week that inflation hits 5.1%. but take out food and energy costs and inflation is only 2.2%. Not only that, but oil and food prices are now dropping fast. Furthermore, all other central banks around the globe have dropped their rates so NZ's rate relative to other economies will remain the same. What are we waiting for?

But cheap Credit got us

But cheap Credit got us in trouble in the first place, why should more change things?

Andrewj, they had a good

Andrewj,

they had a good peak for the year ending September. They did imply that the recent crisis have hurt them. quote: although slowing "from the historical highs that we have seen in recent years".) unquote.

Ill wait for news after the next quarter to see how they are coping.

digitally reborn,

why would you isolate effects of increase in prices of grocery bills and power (basic needs) when they make out 15-30% of our income?

It wasn't so much CHEAP

It wasn't so much CHEAP credit but an over abundance of credit- 90-100% mortgages Or no interest, 2 years to pay where the interest was priced in to the cost of the item. This environment is changing- the days of excessive credit are over and will be over for many years.

Is this a the problem?

Bollard needs to be held

Bollard needs to be held to strict account for his complete abdication of his responsibilities on inflation targeting from 2002-2007.

A big cut on Thursday, though, can very reasonably be read as being consistent with his mandate to avoid undue fluctuations in the real economy.

AndrewJ I agree with digitally

AndrewJ

I agree with digitally reborn. The issue was not cheap credit only. The issue was the availability of credit because of some motivation by central bankers to step back from prudential oversight and allow market forces to dominate. (i just learnt this was created by the ideas of Milton friedman it can be argued).

But now things have dramatically changed. Banks are very much focused on prudential oversight and therefore credit *can* be cheaper *and* the economy can still contract.

The fact is if the RBNZ had focused on prudential oversight it could have had much lower interest rates than the silly 9% that has forced jobs overseas, destroyed buisinesses, sucked in imports and inhibited exports while all along people in love with property appreciation give the RBNZ the finger over the power of interest rates to in any way change their behaviour.

Similarly if the government had not also fiscally (tax and spending) done the opposite of what Friedmans opposite economist Keynes had recommended it would *not* have been spending large amounts of public money during a boom which worked oppositely to the effects of the hardly effective interest rate policy that was making our problems much worse anyway.

NZ is a great country to live in I believe. But as the germans commented of the British after WW1, "the British are lions led by donkeys". Nzers are similarly led, I have to conclude, at this point in time.

Alternatively perhaps NZ as a small isolated economy that is easily studied has been part of some horrible experiment in monetary policy as the price of being bailed out from the mess we ourselves created 30 years ago when the economy had to be rescued after the mother country cut some of the apron strings? Even so New Zealand is still a great country to live in and it is not all so bad! :-) I hope!

All of those contributors who

All of those contributors who believe that low interest rates were not a contributor to excess credit creation over the last 20 years and particularly the last 10 should think again.

Let me explain.

When short term rates are inordinately low the interest rate curve steepens, that is, the curve is positive over time. This is brought about by a number of factors - credit risk worries inflation concerns etc.

Nevertheless, it allows banks in particular with access to the repurchase agreement (RP) markets (collaterlised borrowing) to fund position, that is, borrow short and lend long for a positive interest rate gap return.

I can assure you investment banks will find myriad ways to create longer term investment instruments such as mortgages, CDOs, CLOs RBMS etc to be eligible for funding by this method.

It was a failure to find willing cash rich RP counterparties to lend against the junk collateral offered by the likes of Bear Strearns and Lehman that led to their downfall.

That is why the RBNZ will have to cut interest rates by 100 bps, just like the RBA, so our banks can submit residential backed mortgage securities (RBMS) yielding in excess of 8% in return for cash costing around 6.5%, if the need arises at the RBNZ open market operations RP window.

That money can then be relent for new mortgages thus preserving the banks' profit margins.

And the really tricky bit is the accounting rules allow the banks to retain and record continual ownership of the RBMS even though they are lodged with the RBNZ as collateral.

The other problem is the cash offered by the RBNZ in the above example is created out of thin air, hence contributing to inflation. Devaluation of saver's deposits by any other name.

That's why we need higher interest rates and a negative yield curve to stop such shenanigans, when inflation is already elevated.

The current credit crisis was

The current credit crisis was caused by too many people borrowing too much money to buy property at inflated prices, while at the same time too few people were putting their money into savings. So how does the RBNZ propose to solve this problem. It reduces interest rates to make mortgage repayments more affordable and make saving money much less attractive. At the same time inflation is running at over 5%. This policy is guaranteed to make the situation worse. Never mind my savings are guaranteed by the Government using my money!

Stephen is correct. Governments will

Stephen is correct.

Governments will attempt to allow banks out of the corner by steepening the curve.

They did it in Japan for years........

Inflation? They don't care. That much has been obvious from the RBs approach in recent years. Bollard will go after the election on whenever his re-appointment is due.

But for holders of cash it will get progressively harder. Tough to buy assets in this market, knowing they are still overvalued but knowing the authorities will do anything to keep them from falling.

Oh well...back to the veggie garden. Another lovely day in the Garden City.

Re: US Repurchase Agreements Market.

Re: US Repurchase Agreements Market.

While some of you digest what I had to say above may I graphically detail the enormous size of this market in the US for just Federal Reserve registered primary dealers: http://www.omo.co.nz/primary_dealer_rp_lv.gif

And yes we were talking about nearly USD 4.5 trillion dollars back at the beginning of this year.

This data is sourced from the bottom of page 4 of the PDF file under the title of Memorandum here: http://www.newyorkfed.org/markets/statistics/deal.pdf

To Emir : digitally reborn,

To Emir : digitally reborn,

"why would you isolate effects of increase in prices of grocery bills and power (basic needs) when they make out 15-30% of our income?"

I was referring to the oil and commodity up-tick which is now receding quickly.

To Raf: Inflation? They don't care. That much has been obvious from the RBs approach in recent years.

Rate have been consistently high for a number of years in order to target the inflation genie. Our inflation stats are no different from any other country in the western world that has also been hit by the price rises in oil and commodities-0the UK's is 5.2, Australia is 5%, .Bollard has done well - this country has a lot of room to move re the cutting of interest rates in order to give assistance to businesses and home owners. But where can the US go?

Stephen i got send this

Stephen
i got send this from a banker friend. He thinks its all going to go belly up These CDS"S are going bad fast.

>
>
> The following is an excerpt from an article by Christopher Cox, the SEC chairman, appearing in today's NYTimes examining the role in our financial meltdown caused by "credit default swaps" -- unregulated insurance documents issued to facilitate the purchase of the sub-prime mortgage and other securities by promising to repay in the event of default. The amount of CDS's issued by AIG is huge ($440billion) but the amazing aspect of this, for me, is the magnitude of the total amount issued world-wide -- $55 trillion, or, as Cox states, more than the GDP of the entire world!! As you know, the federal bailout of AIG is a paltry $130 billion -- so far!
>
> "A.I.G. had issued $440 billion in credit-default swaps "” which are like insurance contracts on bonds and other assets that are meant to pay off if those assets default. But as markdowns on A.I.G.'s investments in subprime mortgages led to downgrades in its credit ratings, the holders of the credit-default swaps demanded more collateral, which A.I.G. could not provide.
>
> As large as A.I.G.'s swaps exposure was, it represented only 0.8 percent of the $55 trillion in credit-default swaps outstanding "” this total market is more than the gross domestic product of all nations on earth combined. Yet despite its enormous size, the credit-default swaps market has operated in the shadows. There is no public disclosure nor any legal requirement for these contracts to be reported to the SEC or any other government agency."

Stephen.... Even thou they use

Stephen....

Even thou they use Repurchase agreements to borrow short and lend long ( so they can get a fatter margin..??? ).... They still carry the same risk as anyone else who borrows short term to invest long term...??

If the RBNZ drops the rate by 100bps they would be making it even more difficuilt for all those Uradashi holders etc......???
If they drop it by 100bps, can we assume that the banks have been unable to roll over those international short term loans...????
AND that the RBNZ has decided to step in as "lender of last resort"...????

IF SO....
Are u saying that the the RBNZ is about to contrive a situation so that the banks can still get a margin on their existing mortgages...???? ie... borrow at 6.5% on mortgages that they have already lent out at 8%..????

In the process savers get shafted..

Even thou that RBNZ cash may be created out of thin air, if it is replacing money borrowed offshore , it should not be that inflationary.... and hopefully the banks will pay it back...

What really pisses me off is Bollard lecturing us about being better savers..... And here he is with 5% inflation and about to cut rates by 100 bps...

All those poor retirees who have saved for a lifetime, been beaten up by the finance companies debacle. What ever they have left is probably in banks, ...and if short term rates drop much further they will get -ve real returns when tax is deducted from their interest income.... And i would say that the costs that matter to retirees have been going up more than the CPI index.

I reckon if the reserve bank has to help banks out ... they should play hardball...Screw them.
After all , when Bollard was calling for restraint the banks went on an aggressive mortgage marketing offensive.

I find it unfair and dishonest that banks will get bailed out and carry on as usual and repatriate their profits offshore as usual... (they should pay for their greed, imprudence and stupidity)

We do live in a mixed up world.... Is their anything more contrived than the financial economy...???? There seems to be nothing free market about it... Not at all a level playing field.

The financial economy should sit at the feet of the real economy ... not the other way round.

Andrewj mentioned ,.. $55 trillion in credit-default swaps outstanding... How insane is that..!!!!

Andrewj The horror story is

Andrewj

The horror story is there were no laws enforcing the writers (sellers) of these contracts to make capital reserve provisions against possible losses.

One has to wonder where the risk managers were hiding other than enjoying paid holidays to ignore risk.

The upshot is they all perceived there was money for nothing. Such fools. And these fellows are meant to be the bright guys and gals.

As a taxpayer I find it difficult to eat these mistakes through higher taxes and inflation because politicians deem we have to. When will there be repercussions for the perpetrators?

I would be appalled if

I would be appalled if Bollard lowers the OCR, but fully expect him to do so. Emir mentioned real returns of 1.5% on a TD, I dont know where this figure comes from. If OCR drops 1%, and TDs go to 7%, then after tax = 4% return, a lreal oss of 1%+ after inflation.

Absolutely disgraceful that savers are getting punished. Its like the good child missing out on his birthday party because his older brother's party got out of hand and the family budget is stretched to foot the repairs. Where is the recompense?

Complete disgrace, and another clear favouring of one constituent (home owners) over another (buyers). If the govt try hard enough they have the resources to make dog poo a great investment, and thats what worries me. If market forces no longer are allowed to take their course, how the hell can we intelligently analyse what we should invest in??? Better to get advice from a political spin doctor than a financial adviser.

Stephen As much as i

Stephen
As much as i love my friends in the USA and as much as I love the country I have to conclude that power and greed have bred Corruption. I can find no other answer to whats happening. How can the banks in the USA and UK be paying 10% of the bailout packet in bonuses. They have become so removed from the real world and working people it really is a great big casino. Here we have a smaller problem yet the Govt is happy to use subterfuge , hide the real facts from the people. Thursdays cut is about banks, I agree with you its obvious and yet it remains hidden the main stream media to scarred to report what really happening. We are going to pay for this for years and years through lower standards of living we should all be up and arms yet nothing.
I think payday is tomorrow for Lehmans CDS and then 23rd for final WAMU settlement,Ive been reading as much as possible and the feeling Im getting is that some hedge funds will default on payment. These hedge funds have leveraged on the share market at 30 to 1 so as they sell up it could decimate equities, mind you not like Fannie and Freddies leverage of 150 to 1.
are you expecting any action?

The net CDS Lehman settlement

The net CDS Lehman settlement is $6b (gross $400b). Relax.

More interested in the tripling (Sep 08 v Mar 08) in impaired assets at BNZ announced today. All this with unemployment at record lows. Treasury's prediction of a 20% fall in house prices looks a touch light. What will the NZ bank's capital ratios look like under that scenario I wonder?

cheeky monkey The USD 6.00bn

cheeky monkey

The USD 6.00bn you quote is that net settled through DTCC : http://www.dtcc.com/

The rest and the majority has to be settled face to face between the OTC counterparties.

Some untruths are always meant to be told and the DTCC has been passing them round lately.

I'm not an expert on

I'm not an expert on CDS settlement mechanics but I thought the ex DTCC settlements were just counterparties who want to deliver bonds. Wasn't there a fair amount of gloom abound coming into the much larger Delphi settlement.

where is the incentive to

where is the incentive to save when the return is negative in real terms,the sharemarket is screwed as it is too late to sell and too soon to buy and nobody trusts the ratings on corporate bonds any more.pay off debt and do cash jobs on all those things you have been putting off.stockpile all the things with long shelf lives that are imported and you enjoy and gloat when all the commission salesmen in real estate,cars etc; suck the big kumara!always look on the bright side of life.

Some great comments on here!

Some great comments on here!

We have an 'independent' central bank, I am dismayed that both Helen Clark and John Key have been openly saying that rates should be cut. Why do they see fit to interfere with the decision-making of an independent organisation? This sort of political pressure, which tends to be strongest during elections and in tough economic times, is exactly the reason that most Western countries moved to independent rate-setting committees.

A 1% cut would be very bold in the face of the latest inflation figures, although the principal concern at the moment must be the stability of the currency. Excessive rate-cutting will drive the NZ dollar down, increase imported inflation and run the real risk of the NZ dollar going the way of the Icelandic Krona (massive currency depreciation, difficulty in importing any goods, enforcement of currency controls).

Bollard: please resist any political pressure, and make your decisions on sound economic grounds!

Stephen this is the US

Stephen this is the US Govts view of CDS
this was in the Washington Post

Unlike stocks and bonds, credit-default swaps fell outside the government's purview largely because they are private contracts. A law backed by leading Republicans and passed by Congress in 2000 specifically exempted swaps from oversight by the SEC and CFTC, which oversees commodity trading.

Since then, big hedge funds and other traders discovered that swaps could be traded and used to speculate on how close a company was to collapse. The market mushroomed. Its total value outgrew that of all publicly traded stocks combined. The swaps market began to affect the financial system in once unimagined ways.
Meanwhile, the New York Fed has been meeting with private companies to set up a private clearinghouse for swap trades that could be in operation by the end of the year.
The clearinghouse, for a fee, would act as an intermediary that would guarantee transactions between swaps traders. In order to make those guarantees, the clearinghouse would require traders to maintain a sufficient amount of capital in their accounts. That would make it difficult to trade swaps without having the resources to cover a contract should a default happen.
One of the firms working closely with the New York Fed is the IntercontinentalExchange, or ICE, which plans to set up a clearinghouse in New York under the Fed's authority. ICE was established by some of the country's biggest banks, including Goldman Sachs and Morgan Stanley.

So there it is, the US banks most involved and most at risk now want to take control for a fee of course. This is a joke and typical of what to expect out of Washington. I suspect the EU would be a bit pissed if the USA tried to take control of such a powerful weapon.
Im still thinking that the size of the USA debt and future commitments and funding shortfalls for its deficit means that the US$ must be toast in the future. Do you agree on this?

This is a good article

This is a good article on why the Bail out will fail.
http://mises.org/story/3064

Of course the rates should

Of course the rates should be cut, You with the myopic inflationary focus are missing the point.

1/ Where does all this interest go, overseas, it is a huge portion of our balance of payments, its control has not had the amount of control of inflation that we attribute to it, we are now importing inflation (oil/food) the way we imported deflation from opening our borders (Chinese shoes etc).

2/ Our interest rates only need to be high enough to attract the funds we need and keep some stability in the NZD (which is so small it should be fixed to the AUD, like Austria used to fix its currency to German mark pre Euro), keeping a margin over the rest of the world when we have highly rated banks and strong real economy only means 'artificially' supporting the NZ dollar.

3/ The resulting inflation may alter our profligate ways re imported non-essential goods, which is a good thing.

4/ Alright it will hit those with fixed incomes (mainly baby boomers) but isn't this the group that everyone has been demonising re their greed. Just as you acquire capital in boom times its is non sequitur that this capital is not at risk during a downturn.

5/ Those burdened with long term lending (mortgages) are not in the position to alter their state, you can alter your consumption but without moving house its difficult to alter your long term position, putting the burden on the middle class borrower is politically acceptable.

6/ What really pissed me off is the "Savings" mantra promoted by Cullen, We need to save more!, Where would our savings go? into housing (via banks), into primary produce (farms via banks), into local manufacturing (which the state seems to see as expendable). The only thing I'd like to put my savings into are infrastructure assets in NZ which i'm not allowed to because that is evil privatization and all the good ones are owned by Cullen.

Neven

shuttle Says: "The current credit

shuttle Says:
"The current credit crisis was caused by too many people borrowing too much money to buy property at inflated prices, while at the same time too few people were putting their money into savings."
No ...that was the result of removing tools from the RBNZ where they could play with ratios, and legistarion orginally put in place decades ago to prevent such things happening..by 'experts' who just did not think to look into why the legistation they wanted to scrape was put in place.
Which is the basic reason why not just ecomonic, but also social and industrial legistarion has also creadted problems...
By All Governments in the last 30 yrs.

"History repeats"

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