The searing hot labour market and inflation figures "demand a more aggressive approach" by the Reserve Bank than it indicated in its last Monetary Policy Statement in August, according to BNZ economists.
"The Reserve Bank is now well and truly behind the curve," BNZ's head of research Stephen Toplis says.
"Annual headline CPI has soared to 4.9% on its way to a number well above 5.0%. This is happening at a time when the labour market is exceptionally tight so will add to the already significant upward pressure on wage inflation.
"As wage inflation rises the elevated headline inflation rate will take on a much less temporary form than many still care to believe," Toplis says.
He says the data "strongly demand a more aggressive approach by the Reserve Bank than that espoused in its August Monetary Policy Statement".
"The combined state of the labour market and CPI inflation suggests the Reserve Bank should be increasing the cash rate 50 basis points at its November meeting.
"As we see things, the Bank had already shifted its least regrets strategy to one of being fearful that its withdrawal of the current stimulus might be too late when it raised the cash rate [OCR] 25 basis points [on October 6]. At the time it intimated that, had there not been so much uncertainty, it might well have been more aggressive even then.
"The question now is: has that uncertainty changed and what uncertainty are we talking about? Uncertainty about the economic outlook is undoubtedly equally as high, if not higher, than it was back in October thanks exclusively to the accelerating spread of COVID in New Zealand and the extended lock down.
"But, surely, today’s data must have provided more certainty that inflation is a big problem. And, it mustn’t be forgotten that the current restrictions are again proving to be a major supply shock which is putting even greater upward pressure on prices."
Toplis says the BNZ economists are not yet formally calling for a 50 basis point rate increase at the RBNZ's November MPS [on November 24].
"...But we do think the odds of such have jumped to just a tad under 50:50.
"We are, however, convinced the RBNZ will need to get the cash rate to neutral more quickly than previously believed so we have thrown in another 25 basis point increase (in April) to our rate track.
"The overwhelming balance of risk to our forecasts is that we continue to underestimate the speed and extent of the future rate increases required to return the economy to the balance of employment and price outcomes (not to mention the housing market) that the Reserve Bank desires."
Toplis says in light of the latest inflation figures the BNZ economists will reassess their inflation forecasts for the next few quarters.
"It’s reasonable to assume the risks to our current estimates are to the upside. But even if we keep the quarterly forecasts unchanged, it gives us two consecutive quarters of annual inflation above 5.0% and inflation does not fall below 3.0% until the end of next year at the earliest."
ANZ economist Finn Robinson and chief economist Sharon Zollner say that for the RBNZ, the inflation data will only reinforce that hiking the OCR in early October was the right move.
"Underlying inflation is too high, and further removal of monetary stimulus is needed to get things back on an even keel. With lockdown creating downside risks to employment and growth, uncomfortable trade-offs could quickly emerge. But with inflation this strong, the RBNZ won’t want to play fast and loose with their inflation-targeting credibility."
They say that inflation is now "markedly above" the RBNZ’s 1-3% target range, and while a lot of the increase in prices has been driven by temporary factors, "there are now several indicators of core inflation with a 4-handle".
"We think that a series of gradual OCR hikes over the next year will be effective at constraining the domestic inflation impulse, but the risks are rising that inflation pressures become ingrained into price and wage setting, necessitating OCR hikes over and above the neutral interest rate to constrain the inflation overshoot."
Kiwibank chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara say the RBNZ "typically looks straight through cost-push inflation, given it’s usually temporary in nature".
"Of greater interest, is where inflation will land this time next year. And the RBNZ’s latest forecasts expect the rate to drop to 2%, eventually.
"But with each forecasting round, near-term forecasts are revised higher, and the return to 2% is delayed.
"Supply chain disruptions are proving more persistent than expected. There’s great uncertainty as to when the issues at the ports will be resolved. With ongoing supply chain disruptions and capacity constraints, firms are facing rising costs which are squeezing margins. But there’s no signs yet of demand softening.
"Improved confidence around job security, a rampant housing market and the inability to travel (freely) overseas continues to support household consumption. In such an environment, firms are able to pass on the higher costs.
"Solid demand and constrained supply have created a perfect storm of higher prices."
The Kiwibank economists say there’s growing risk that businesses and households become accustomed to higher prices.
"These so-called “transitory pressures” may become entrenched and long-term expectations may adjust higher. In the transitory vs persistent inflation debate, the latter gains points the longer the disruptions continue."
They note that the RBNZ has already "fired" a 25bp hike and a further 100bps or so "have been loaded".
"With full employment achieved and mounting inflationary pressures, the RBNZ has good reason to continue firing. We expect the RBNZ to pull the trigger in November, and in February and May of the new year. Of course, the OCR trajectory is Delta-dependent. So long as the current outbreak is reasonably contained and there’s ample fiscal support, demand appears intact and the medium-term outlook remains broadly unchanged."
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46 Comments
Whenever I read such an article cannot help but recall the saying around the traps, pre 2008 GFC, Dr Bollard’s tenure, “The RB always arrives at the party too late, does too much and stays too long.” Someone else here added for good measure “and someone goes and turns off the lights.”
The problem with real estate is that it's already been juiced to the gills almost entirely due to borrowed money and the central bankers will be forced to counter CPI inflation with higher lending rates.
Higher mortgage rates and the New Zealand property bubble are a train wreck just waiting to happen. The risk of a sizeable correction is very real and growing.
"The risk of a sizeable correction is very real and growing."
If I had a $ for every time I've heard this, I'd be richer than Croesus. You are correct that RBNZ only has interest rates as an inflation counter. But property values have historically risen at the same rate as inflation. Yes, there is the potential for a correction, but it won't be sizeable (to be fair, I don't know what your definition of sizeable is, for me, it would be 30% +). And if most owners lose 10%, then they still won't have lost a years gain. Also, property prices are driven out of Auckland, and whilst Auckland retains its Urban Boundary, the supply of land is going nowhere. Therefore, with demand exceeding supply, a softening is the best that can be expected.
The rise in inflation is a direct result of Labour's monetary policy. Printing money (increasing money supply) is pretty much the definition of inflation. Bad money chasing limited goods. If production doesn't match the increase, then it is inevitable that inflation will follow. But the current bunch of politicians in Cabinet have no grasp of this. I'd go further to suggest that they don't have a grasp of much at all.
Yes real estate and commodities good safe-ish bets idea, although...
If you choose to denominate in Bitcoin, and look over any long period (4 years), the NZ property market is getting crushed.
It will continue to do so over any 4 year period for atleast a decade, with significant volatility of course (monetisation phase).
Bitcoin is digital property, sound money and is arguably a superior store of value to real estate / gold etc (minimal cost of carry / super liquid market / absolutely scarce / can rent to anyone in the world p2p)
Hence, the TAM of this asset is >100s of trillions (i.e. global bonds / real estate / forex / gold / and all the monetary premium that has soaked itself in to stocks).
100 million users now. 113% user growth p/annum. 1 billion users by 2025.
If you think that all sounds crazy then all good, stick with real estate & commodities ;)
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Realistically - are Zoomers gonna get rich buying real estate in NZ? No, they literally can't buy a house.
They are natively digital, and will get rich buying the right digital assets (and some will also get completely wrecked buying Dogecoin).
It's a shame that interest.co.nz no longer do their money supply series. M3 (or whatever it's called now) will be the metric to watch here, because that tells us what's happening with monetary inflation, which tells us a lot more about the economy than just looking at the nominal price of things.
Trading Economics seems to keep track of this, and it will be worth keeping an eye on it over the next few months. Zooming out on the chart, you can see the short-lived deflationary impulse when the GFC hit around 2008, and the massive inflationary impact of ultra-loose monetary policy with COVID-19. My suspicion is that we will now start to see deflationary pressures return with policy tightening and the increased cost and reduced availability of credit. CPI, while not entirely irrelevant, is a bit of a red herring.
No one can give you a clear number. The first step ought to be a normal monetary stance, which RBNZ has indicated is about 1.75% - 2.00% OCR. Beyond that is actually where the monetary policy starts becoming effective to control inflation. But that is also the territory where businesses start getting hurt. My educated guess is that stubborn inflation over the next six months would meet the criterion for OCR to be in the 3% range for two to three quarters and I suspect it would be trial and error from there on until things get under control, it could easily take 2-3 years to get things under control, quite possibly more.
RBNZ can act now when the unemployment is 4%. It has plenty of reasons and room to act decisively.
A best-case scenario appears to be one in which RBNZ starts acting now, and we might be lucky to see price rises under control in 2 years time, still with the base prices up about 20% from 2020
What is the bet that they will be looking for every excuse to do little or nothing to keep house price rises going. If the inflation undershot the target range by this much then what would their reaction have been? They are not there to serve the average hard working Kiwi.
Was it Klaus Schwab who said/wrote 'you'll own nothing and be happy'?
Communists try to limited private ownership as much as possible, this combined with "green passes" and the accelerating climate agenda.. well everything would seem to be on track.
NZ is definitely falling inline for now.. Choo.. Choo..
Just a reminder that every 0.5% increase in the OCR increases the interest that Govt pays banks on their settlement accounts by around $150m per year. Increasing the OCR also indirectly pushes up the interest that banks get paid on new Govt securities.
So, remind me why we give bank economists a platform to comment on interest rates - it's like asking Fonterra economists whether the price of milk should go up.
Increasing the interest rate *might* slow house price growth, but there are other things we could do to target this more directly. Increasing interest rates is NOT going to reduce the cost of oil, petrol, commodities, building materials, international shipping costs, tradies salary demands, groceries etc - in fact increasing interest rates increases the term structure of prices - i.e. it could actually be inflationary.
Completely misplaced point. You want the credit (money supply) to have a fair price, up until very recently it was practically zero. You don't want to create more demand by keeping rates low when the bottlenecks are on the supply side.
Same deal as you wouldn't want your foot on the gas when you actually want to slow down.
There are a lot of assumptions in this logic that don't necessarily hold true - e.g. that cheaper credit encourages more businesses to invest (no empirical evidence of that - businesses invest when they are confident about the future), or that higher prices / supply bottlenecks encourage businesses to borrow etc. My point is that changes to interest rates may have more negative impacts than positive - transferring of wealth from borrowers to savers, driving up forward prices etc.
You’re oversimplifying and the argument is incomplete and incorrect. I wasn’t talking about the hurdle rates of the businesses, which is a complicated argument and the answer depends on how it wants to fund via equity or debt. There is no one standard answer. Btw, there is incontrovertible evidence that cheaper rates increase borrowing.
Wrong. Increasing interest rates will promote savings, thus reducing the rate of consumption increase, and it will also provide the benefit of finally breaking the back of the housing Ponzi, reducing the illusionary "wealth effect" that was touted by the RBNZ as stimulatory.
Increasing interest rates will also help re-balance the current disconnect between demand and supply. Less inflated assets -> less "wealth effect" -> less excess consumption and pressure on prices -> higher rate of savings.
Also, excessively low interest rates create huge distortions to the economy, such as:
- asset bubbles
- unsustainable increase of debt levels
- fragility of the financial system
- mis-pricing of risks and mis-allocation of resources, including zombiefication of the whole economy
An increased OCR will also reduce, indirectly, the cost of imported materials (including petrol etc.) as it usually produces a stronger local currency.
It is clear that current ultra-loose monetary settings were un-sustainable and highly damaging - the OCR must be normalized with urgency, to more neutral setting, and it must be therefore raised to at least 3% by mid next year at the latest. Actually, there is a case to require that it should go even higher, lest inflation starts settling down and structurally damaging the economy.
Wow - I can't wait for all of that to be solved by the magic wand of monetary policy!!!
Seriously, rate changes are re-distributional - some people win (banks, savers, rich folk), and some people lose out (people in debt, mortgagees, etc). Interest rate hikes won't reduce prices that are the result of huge international shifts in power and disrupted supply chains, and a cent or two on the dollar won't mitigate a 30% increase in oil prices.
No it didn't! As you can probably tell, I think monetary policy is fundamentally flawed. The idea that a single lever can be used to adjust the outputs from a highly complex system is crazy stupid. Economists of the future will look back in dismay and amazement that neoclassical economic theories were dominant for 50 years. In fact, the economists of the 1930s and 40s would laugh at current practice.
You clearly have no idea what you are talking about. Banks don't "win" when interest rates go up - they earn money off the margin between the lending and deposit rates. If the last couple of years have taught us anything its that Banks earn far greater profits with low rates as people can borrow more, creating more debt they can earn their margin off.
"they earn money off the margin between the lending and deposit rate"
Hilarious. Banks earn money from selling and trading loans / mortgages and other financial assets. They are particularly adept at making money as rates change. Watch bank profit forecasts for the next few months and then come back to me and tell me I have no idea what I'm talking about.
Bank economists are just doing their jobs. Their narratives and comments are there to give insight information about how banks determine their future rates, so that investors and borrowers could get a heads-up. OCR is just one of the factors for banks to consider when they determine their rates. There are other costs are involved. If you think bank economists are not in position to make comments about OCR trend, just why exactly do you think banks hire economists? Coudn't they just follow RBNZ's OCR decisions to determine their rates? No, they will go bankrupt if they do that.
Yes, Increasing interest rate is not going to reduce the cost. However, it is necessary to do so to prevent inflation getting worse. Remember, what RBNZ is doing right now (or should do right now) is to bring inflation down. What you are talking about is deflation which is irrelevant with current 4.9% inflation rate.Their mandate is to keep inflation rate below 2%, after that they can think about deflation / recession. It's time to keep their credibility by increasing OCR until inflation rate drop below 2%.
Just a question: All other thing being equal, if I am pricing something for future delivery and the OCR is 3%, do I price that item at a higher or lower price than I would if the OCR was 1%? The answer is almost always 'higher'. This forward pricing channel is more important than people think - and it is one of the reasons that people are increasingly questioning the orthodoxy that higher interest rates will slow inflation.
The RBNZ must urgently normalize rates. The have to go up to a neutral level as soon as possible, and as the neutral level should not be too far from the CPI indicator, we are talking about an OCR that should be at around 3% by mid next year at the latest.
There should be, at the very minimum, an increase by 75 bps next months. An increase by 50 bps only will only force him to steepen the curve even more early next year.
If Orr was really independent or competent, he should raise the OCR by 100 bps next months, to an OCR of 1.5%.
Do your job RBNZ, acting on a judgment call was too hard for you, at least act quickly on the data, facts and trends!
Normalise the rates, so money has a fair price and people start caring for the risks - that they all seem to have forgotten
They are screwed because they wanted to be screwed. Putting themselves in a corner where can use it as an excuse to support housing ponzi.
For them is a win situation as are able to achieve what would have taken a decade - double the house price in year, if not months.
If anyone feels, readers or experts and feel that the above analysts is wrong, please comment.
"The searing hot labour market and inflation figures "demand a more aggressive approach" by the Reserve Bank than it indicated in its last Monetary Policy Statement in August, according to BNZ economists."
Are you kidding...Mr Orr has mentioned number of time, not to worry about inflation as is temperory (Temporary = Decade). Besides Mr Orr is supporting the economy = housing market.
The RBNZ are fast losing any credibility. They "had" to drop rates to emergency levels for a temporary interruption to the economy (covid). But when inflation runs rampant they "look through" it as a temporary price increases. The real truth is they are so worried about the housing ponzi they have helped enable will come crashing down.
No one is suggesting interest rates should have been raised above where they were pre-covid, but they have been so outrageously slow to remove the emergency rates, and have utterly failed in their primary mandates of price and financial stability.
Sounds great if pay was based on skill and experience, but now with "diversity hiring" and government stipulations that 15% of contracts must go to Maori contractors, it doesn't matter. Recently, I applied for assistance under a government program to assist small businesses and first had to fill in a questionnaire. The first question was whether or not I am Maori. After completing it I was told that I would be contacted by a real, live human being. That was 13 days ago. My friend who put me on to it got a reply in two days and the assistance, financial and technical with his web site, within two weeks. But then, as he said, he has the advantage of being from Mumbai and having a much more swarthy complexion than my male, pale and stale self.
A RBNZ that is behind the curve is a dangerous one, because people get sucked into big mortgages then the RBNZ has no choice but to raise the OCR.
I can't understand how the RBNZ has got the last 3 years so badly wrong, they had it wrong even before covid when they had the OCR at only 1% in August 2019.
I can only guess that it's quite likely that Labours changed instructions for them are the main reason for this.
Very poor performance, by both of the above.
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