Well, here we go. It is time for the Reserve Bank (RBNZ) to 'do nothing' again. Ah, but will it say nothing? Or will we get a tantalising hint of things to come? In November, perhaps?
This coming Wednesday (October 4) will see another Official Cash Rate (OCR) review from the RBNZ. And it should be another 'do nothing' one in the sense that there will again be no rate rise. The RBNZ has signalled rates are on hold - and that will continue to be the case. For now.
In its OCR reviews the RBNZ alternates between the issuing of a full Monetary Policy Statement and what is styled as a 'Monetary Policy Review'. This coming week we get the latter, which means it will be just perhaps three pages including the brief 'Policy Statement' from Governor Adrian Orr as well as the Summary Record of Meeting of the RBNZ's Monetary Policy Committee (MPC). It is the MPC that decides whether to move the OCR or not.
It is worth remembering just where we are and where we have been. The OCR currently stands at 5.5% where it has been since May 2023. At the May review the RBNZ indicated through its forecasts that it was, at least for the foreseeable future, done with OCR hikes. Since then we've had 'on-hold' decisions at both the July and August OCR reviews. So, the coming week's expected 'do nothing' decision will make that three consecutive reviews with no OCR movement.
Well, it was probably time for a breather.
The speed of rise of the OCR from its all time lows of just 0.25% as at the start of October 2021 to 5.5% was unprecedented and breathtaking. So, yes, have a breather.
The fact that said breather came in the run-up to an election and has enabled the stridently independent RBNZ to avoid getting itself in the middle of the kind of political posturing that a rate hike could have brought has been convenient.
Anyway, with the signalling in May of no more rate hikes, the RBNZ officially moved into what it likes to style a 'watch, worry and wait' mode, which is pretty much what it says on the tin. Basically, it is watch the development of data, worry about what it is saying and wait and see what develops.
Having raised interest rates at breakneck speed (mortgage rates shot up from well-under 3% in mid-2021 to now over 7%), the RBNZ needs to see what impact the moves have, given the lag between the rates being hiked and the full impact being felt. It then needs to work out just what this is doing to the economy. And then it needs to decide what more action, if any, is needed. All sounds straight forward enough. But it is becoming anything but.
What have all the OCR hikes done to the economy so far? No, really. The question's not rhetorical. I would like to know. Everybody would like to know. The signals continue to be decidedly mixed. Yes, there are signs of slowdown. But, yes, there's signs of resilience too. And signs that everything is taking longer than is desirable.
Annual inflation as measured by the Consumers Price Index stood at 6% as of the June quarter 2023. It has been falling only slowly from its peak in June 2022 of 7.3%.
The RBNZ, in urgently striving to get the inflation rate back down from the heavens, even went so far as to explicitly say late last year it was deliberately attempting to engineer a recession in order to cool the inflation monster down.
To date the recession has not appeared. (Rumours of a recession earlier this year proved to be an exaggeration.)
The most significant economic data to be released after the RBNZ's last OCR review in August was the June quarter GDP figures. The RBNZ had forecast 0.5% growth. What we got was 0.9% growth. In addition the March quarter figures were revised up by Stats NZ to 0.0% from the previously reported -0.1%, while the December figures were revised up from -0.7% to -0.5%.
In other words, the economy's been travelling quite a bit better than we had thought.
And then what about the housing market?
In its August OCR review the RBNZ did upwardly revise its house price forecasts. But even so, the central bank might have been surprised at the apparent strength shown in the subsequently released REINZ sales data for August.
So, we've got a decidedly not-in-recession economy and a housing market that's always had more lives than a cat now appearing as if it is awakening (yet) again. Problem here?
Well, this for me is going to be the key part of the OCR review in the coming week. Will the RBNZ give any indication either explicitly or implicitly that it is becoming uncomfortable with its 'on hold' rate stance?
I doubt that the RBNZ would explicitly want to raise such doubts publicly at the moment. But who really knows. As I've said before, under Governor Adrian Orr, the RBNZ has not minded surprising the markets. Indeed, it has seemed to set out to do so on occasions.
With this OCR release coming out just 10 days before the election though, I doubt that surprises would be what the RBNZ would want to offer. I would expect the Governor's statement to again be 'hawkish' and reiterate that an extended period of elevated interest rates is needed, but I would be surprised indeed if there's any explicit suggestion that the 'on-hold' status is being reviewed. However...
In ANZ's preview of the forthcoming OCR decision economist Andre Castaing and senior strategist David Croy note that one of the key things they are looking for is whether the RBNZ's Monetary Policy Committee will at its OCR meeting discuss any options other than a hold - IE whether they may discuss the possibility of a hike.
"The freshly updated MPC Charter specifically instructs the committee to include 'the policy options discussed', which we hope will encourage transparency if there are differing opinions on the forward path of monetary policy," the economists say. So, in other words if the MPC does discuss the possibility of a hike at this meeting, it will have to let us know it at least had the discussion, even if the final decision is (as it must surely be) another 'on-hold'.
It's a very good point the economists make, and if there IS such a disclosure made when the OCR decision is released - IE that the RBNZ has held the OCR at 5.5% but actually considered raising it - then you can for sure expect markets to react and an OCR hike in November may well quickly become seen as a nailed-on certainty. Mortgage rates, which have been edging up again anyway, may well move up more definitively in such circumstances.
So, what about November? Well the OCR decision then (it's November 29 - mark the date in your calendars) shapes as being a biggie. It is the last one till February 2024, so, if the RBNZ is inclined to ditch the 'on-hold' stance this will be when it does it. And the fact is, the economic data to come between the October 4 OCR decision and the one on November 29 is absolutely pivotal.
Once we've got the October 14 election out of the way we plunge, headlong, into the release of the September quarter inflation figures on October 17. The RBNZ's forecasting that annual inflation will be unchanged at 6% as of the September quarter, but it then forecasts a reasonably sharp fall to 5.2% as of the December 2023 quarter.
The September quarter CPI figure was always going to be a strong one not least because of the end of the 25c a litre cut to the fuel excise duty on June 30. But in the meantime oil prices globally have been on a tear (as I'm sure you and your car have noticed). We'll be doing a full preview of the inflation figures closer the time, but I'll just say briefly here that there appears every chance that the so-called 'headline' inflation figure will actually rise higher than 6% again. Which is not what all those OCR hikes are meant to have been achieving.
The key thing will be the breakdown of those inflation figures into the non-tradeable (domestic) inflation and the tradeable (overseas imported) inflation. It's the non-tradeable inflation that's really the key because that's the one that the RBNZ can target through its OCR hikes. The RBNZ can try to 'look through' imported inflation as it can't really control it. However, the trouble with 'looking through' the figures is that a large headline inflation figure - no matter the cause - can influence the price setters, businesses and the like, to raise their prices in reaction. Yes, all of which could mean higher for longer for our inflation.
Fairly hot on the heels of those October 17 inflation figures comes the labour market figures for the September quarter on November 1. Unemployment as of the June quarter was 3.6% (up from 3.4% in March). The RBNZ's picking the figure to rise to 3.8% for the September quarter and then 4.4% by the end of 2023. The RBNZ wants to see slack develop in the labour market to take heat out of the economy. If the labour market proves more resilient than the RBNZ's picking, then trouble...
An unpleasant surprise in either the inflation figures or the labour market figures will likely see an OCR rise become a live issue for the November review. If there's an unpleasant surprise in both the inflation and labour market figures than another OCR hike in November becomes a certainty I would have thought.
So, all these potential machinations are ahead of us.
For now we brace for the October 4 OCR decision, which as said above in this article will be a 'hold'. But it will be a 'hawkish' hold and it may yet provide some clues as to the prospect of future rate hikes. My best guess is the RBNZ won't want to indicate for sure at this stage that future hikes may be on the cards. But it will be awaiting those September quarter CPI and labour market figures with bated breath. Much may happen between now and the end of the year.
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