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Kiwibank economists say the Reserve Bank may soften its tone around the outlook, acknowledging the waning strength in forward economic activity indicators

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Kiwibank economists say the Reserve Bank may soften its tone around the outlook, acknowledging the waning strength in forward economic activity indicators
Source: Copyright: peshkov

The Reserve Bank (RBNZ) will likely raise the Official Cash Rate by another 50 points to 2.5% next week (Wednesday, July 13) - but may "soften its tone" around the outlook - acknowledging the waning strength in forward economic activity indicators, Kiwibank economists say.

In their weekly First View publication Kiwibank's chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara, say there are a lot of things weighing on confidence at the moment.

They've titled their weekly outlook: "It's now a crisis of confidence".

"Scarce labour. Scarce materials. Rising rates. Rising cost of living. Falling house prices. There’s lots weighing on confidence," they say.

"Firms’ activity and profitability outlook is looking weaker by the day. And for households, inflation and rising mortgage rates are claiming bigger and bigger chunks of the budget. Given the strong correlation between confidence and economic activity, the outlook for the Kiwi economy is dimming."

They said the latest ANZ business outlook survey was "yet another sobering read".

"For the fourth straight month, business confidence has been on a downtrend. In June, confidence fell to the lowest level since the pandemic began (-63 vs -55.6 in May). Across the board, the activity indicators continued to flash red.

"Compared to a month ago, a greater share of the firms surveyed expect their own activity to deteriorate in the coming months (from a net 4.7% to a net 9.1% expecting a decline). Profitability expectations also weakened and fell to 2008/09 GFC lows (-41.5 vs -31.3 in May).

"Supply-side issues remain at the core of the growing pessimism across firms. Top of the list is the difficulty in finding skilled labour. Cost and wage inflation too are weighing on the profitability outlook. And the ongoing supply chain disruptions are still creating logistical nightmares.

"Given the lack of resources, it’s no surprise to see investment intentions slip into negative territory – the first time since August 2020. A pullback in investment points to weaker economic growth ahead."

They said pricing intentions "remain uncomfortably high", especially across retail. In June, a record 96.1% of retailers expect prices to go up in the coming months. That’s well above the previous high of 89%.

"In aggregate, the suite of inflation indicators – pricing intentions, cost expectations and inflation expectations – may be slightly off their peaks, but they are yet to moderate. The combination of a weak activity outlook and persistent inflation pressures underscores the current state of the Kiwi economy: severely supply-constrained."

On the household side, consumer confidence too is down in the doldrums, the Kiwibank economists say.

"The ANZ-Roy Morgan consumer confidence index plunged 1.8 points to 80.5 in June, just a few points above the record low (77.9). Perceptions about next year’s economic outlook deteriorated and a net 3% expect to be worse off in a year’s time. With rising mortgage rates and reduced credit availability, households are also second-guessing splurging on big-ticket items."

Despite the softening confidence, however, the Kiwibank economists say the RBNZ is "unlikely to veer off course" when it has its next Monetary Policy Review on July 13.

"Reining in inflation is the name of the game," they say.

"Inflation indicators may be plateauing, but they’re plateauing at elevated levels.

"We suspect the RBNZ would want to see these indicators moderate before easing up on their current tightening pace.

"We expect the RBNZ to lift the cash rate through neutral next week, by delivering another 50bp hike to 2.50%. The July meeting would mark the third straight 50bps hike.

"But similar to offshore central banks, the RBNZ may soften its tone around the outlook, acknowledging the waning strength in the forward activity indicators."

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It's now a crisis of confidence

Can we please ban the word crisis... it's an everything crisis these days


There was a fairly obscure British reality TV show from a number of years ago about a man called Francis Fulford (some kind of hereditary peer who had a big crumbling estate and no cash to pay for it).

I don't recall much from the show, but there was one line that stuck with me - when the producer asked Mr Fulford if his situation was a crisis:

"Crisis point? I wouldn’t call this a crisis point. One of my ancestors was hung, drawn and quartered in 1463. That’s what I call a f***ing crisis point.”


I agree, we should now call it a Catastrophe.

As Paul Claudel (1868 - 1955) noted:

'Gentlemen, in the little moment that remains to us, between the crisis and the catastrophe, we may as well drink a glass of Champagne.'




Cool clip, thanks for sharing


It's a crisis of crises!


It’s about keeping us living in a state of fear. It allows for drastic action and is an excuse for otherwise unjustifiable regulations.


"Scarce labour. Scarce materials. Rising rates. Rising cost of living. Falling house prices. There’s lots weighing on confidence,"

No sh*t Sherlock - RBNZ have completely over-cooked their response and messaging already, and they have stalled the economy. This was obvious to anyone with half a brain two months ago. Rate hikes are *increasing* the cost of living and doing nothing to resolve high prices, supply chain issues, or labour 'shortages'. That said, leading indicators of unemployment started to trend up a month or so ago so at least companies will be able to fill some of their vacancies without increasing wages - hurray! 




The issue from the perspective of the RBNZ is not just inflation, it's inflation expectations. If their commentary suddenly turns dovish, then inflation expectations can be expected to rise regardless of what actually happens with the OCR. Higher inflation then becomes a self-fulfilling prophecy, and that's exactly the situation that they're trying to avoid.

Just as Orr said he wanted to see "the whites of the eyes" of inflation before raising rates, I suspect he's going to want to see some real progress in the other direction before doing the opposite. This balancing act between recession and inflation results in flip-flopping which negatively affects the credibility of central banks, and reduces the impact of their forward guidance. Just look at the RBA.

I expect the tightening path will be followed to its logical conclusion - recession - at which point it will be thrown into reverse. By then, however, central bank policy will have be overtaken by events beyond its control. It won't matter much what they do or say at this point. We'll be facing the inevitable consequences of our past decisions whether we like it or not.


Inflation expectations are a nonsense. Like most of the reckonomics that guides monetary policy.


If you ran a business, and expected the cost of goods and labour to increase, would you be putting prices up to match?


In my view inflation is partly psychological and partly the result of changing market conditions. The interaction of the two result in inflation/deflation...

I also agree with Jfoe around how crazy it has been with central banks trying to play god and moving interest rates around - often irrationally - to creating very severe boom/bust cycles that could possibly be avoided with a more measured approach. 


I understand the theory - and it sounds plausible. There is just zero evidence to confirm it actually happens in the real world (and plenty that says it doesn't... › ...PDF Why Do We Think That Inflation Expectations Matter for Inflation ...).

See also the 'rational man / consumer' theories that Brian Easton discussed today.

Economics is a truly dismal science.


Interestingly the 1930's depression was also a confidence crisis. Can we artificially create confidence yet again by giving everyone cheap credit to speculate on the price of assets again? (and oddly highly speculative behaviour towards assets was a cause of the 1920's boom that lead to the 1930s depression...)

At some point our chickens are going to come home to roost for this irrational behavoiur....and it can't be now that people will claim 'why didn't somebody warn me'.