Damn. Just when the Reserve Bank folk were starting to feel a bit comfortable again.
In their 'do nothing' Official Cash Rate (OCR) decision last week the RBNZ people were exuding the quiet confidence of a group that is getting matters, in this case inflation matters, under control. Not there yet. But with everything in place to get there.
And so there was repetition of the key closing paragraph from the statement the RBNZ had made at the previous interest rate review in May when the OCR had been increased by 25 basis points to the current 5.5%:
The [Monetary Policy] Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment.
The last time I can recall the RBNZ appearing somewhat confident that it was getting inflation in hand was in the September-October period of last year. But then came the release towards the end of October of the September quarter 2022 inflation figures and with the annual rate of inflation dropping only from 7.3% to 7.2% this was a massive, unpleasant, shock.
It's really taken us until now, about nine months later, for the RBNZ to get comfortable again in the inflation fight - and now again its comfort levels will have been markedly diminished.
This time the latest inflation figures have not provided a shock, as such. But they are clearly a disappointment. And another massive head scratcher for the RBNZ.
Yes, 'headline' CPI inflation as of the June quarter falling to 6% from 6.7% is at first flush 'good' news.
But look closer of course and it is only merely not 'bad' news. And we could possibly even argue over that. The fact is, inflation has forced its foot in the door in New Zealand, it has come in, sat down, and is now making itself comfortable.
The fall in the headline inflation rate that we saw in the June quarter was in large part a story of falling petrol prices.
The RBNZ can't do much about petrol prices.
The reason our central bank has massively hiked the OCR all the way from just 0.25% to 5.5% since October 2021, causing current and future mortgage interest rate pain in the process, is to get domestically generated inflation under control. And specifically, it wants to do that quickly before the feared, self-fulfilling, inflation expectations get a firm grip on the country.
So, what of this domestically generated, or to give it its given name, 'non-tradable inflation'?
Well, here's the annual rates of non-tradable inflation, in order and by quarter, since (and including) March 2022: 6.0%, 6.3%, 6.6%, 6.6%, 6.8% and now 6.6% for the June 2023 quarter.
Yes, that's right, it went down in the latest quarter. But the RBNZ forecast it to be 6.3% for the June quarter, while some economists were forecasting just 6.2%.
We really do want and need to see more evidence that the heat is coming out of domestic inflation.
Falling prices from overseas will probably keep pushing the 'headline' inflation rate down in coming quarters.
But until there's more convincing evidence of heat coming out of the domestic economy, we surely can't view the RBNZ's current forecast of getting overall inflation back within its 1% to 3% target range by the second half of next year with any great confidence.
The next labour market figures, for the June quarter, due out on August 2 now loom very large indeed. They will be vital. The RBNZ's forecasting that unemployment will have risen to 3.5% from 3.4% and it's forecasting that annual wage inflation, as per average hourly earnings, will have dropped to 7.6% from 8.2%.
The RBNZ sees unemployment hitting 4.6% by the end of the year. It really needs to see 'slack' coming into the labour market to be convinced that the heat will go out of the economy and price pressures will ease.
If the labour market figures out at the start of next month don't play ball then that will put the RBNZ in a bit of a quandary.
I don't think it's going to change its mind at the next OCR review on August 16 about still being 'on hold' and as I've said previously, I think it has a high barrier to making any more OCR moves before the October 14 election.
ANZ economists have been saying for some time now, they reckon the RBNZ will be forced back into hiking the OCR again in November, when it has its last review of the year.
Certainly I think if those labour market figures out next month don't show some quantifiable signs of easing pressures, then I reckon that November OCR hike call is looking eminently possible.
If that happens we will likely see mortgage rates actually push a bit higher again. At the very least we could expect to see rates higher for longer. And that will keep the cost of living pressure on.
The slowdown in the economy that is currently under way may drag on for longer and the economic dip may deepen.
Look, we may still get inflation down in the kind of timeframe the RBNZ is hoping for.
But we've now had domestically-generated inflation within New Zealand of 6% or more since March of last year. And 6% inflation is not 1% to 3% inflation is it?
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there's still not enough evidence that the RBNZ's strenuous, interest rate hiking, efforts are going to be able to completely tame high prices in the short term
They might if they totally destroyed demand/jobs/businesses.
Much harder trying to finesse a soft landing.
One could even say that most things aren't the result of one input, but instead just single points on a very long thread, being influenced by a wide range of external and internal factors, able to be manipulated, but never mastered by one fell swoop.
Then again "money printer go brrrrr" rolls of the tongue better.
Rather than have a punitive system that makes people give more of their money to scummy banks…
How about… Proactively intervening in parts of the market which are driving inflation - whether through regulation, or through financial investment to increase the number of players and overall productive capacity.
This narrative about needing a higher unemployment rate makes no sense in my view. Wage cost inflation is at 4.3%, it's actually a factor helping suppress inflation.
We need to reduce per capita consumption because our productivity is declining. Our population is aging, businesses did not hold on to high productivity staff during the Covid-19 pandemic and government expenditure is substantially out of kilter with taxation levels.
re ... "This narrative about needing a higher unemployment rate makes no sense in my view. "
100%. This is a FALSE narrative.
It makes me sick and disgusted when it is parroted by people who should know better!
How about the narrative changes so that the "owners" reduce their profits (i.e. prices) instead?
Why has no one thought of this?
Oh yeah .... Right. Profits for the 1% before people that make up other 99%.
Sharpen the guillotines people. We'll need them real soon.
(If you don't have guillotine to sharpen. Stay tuned. IPO coming soon. [very, very evil grin])
It is worth looking at the 'domestically generated' inflation and asking the obvious question - will high interest rates or lower demand help, hinder, or make no difference?
Biggest contributor this quarter (and most quarters) is rent. Rent typically runs at 3.5% per year, but this quarter thanks to a booming Auckland market (7%+ yoy) it is over 4%. Interest rates are putting upwards pressure on rents through higher landlord costs and the new arrivals need somewhere to live. Conclusion: RBNZ making things worse.
Next up is 'ready to eat food' and 'restaurant meals'. These are driven by the cost of food, rates, electricity, and insurance. RBNZ can't do anything about the latter three, but they are making domestic production of food much more expensive (food producers rely heavily on credit). Conclusion: RBNZ making things worse.
Our old favourite 'the price of getting a house built' is next. Higher interest rates are squeezing the residential construction sector, which relies heavily on credit. Capacity is falling and building prices are going *up*. Again, RBNZ making it worse.
Also weighing heavy on domestic inflation are dwelling insurance, car insurance, electricity, local govt rates and 'milk cheese and eggs'. We pay the global price for milk, cheese and aggs plus a healthy wholesale / retail markup. The other cost drivers have sod all to do with interest rates.
As you can probably tell, I have zero confidence that higher rates and lower demand will tame the prices that are pushing on our (allegedly) domestic inflation. In fact inflation would subside more quickly if RBNZ dropped rates and Govt intervened to suppress margins (or fix our broken electricity and insurance markets).
RBNZ continually misdiagnose inflation as a high consumer demand phenomenon. They are wrong and it is costing us. We seem determined to be the only country in the world to engineer a deep recession with our ideological, 'punish the mortgagors for their debts, and the workers for their precarity' approach.
"Inflation would subside more quickly if RBNZ dropped rates"
No it wouldn't. It would roar. But we'd opt to do as we always do, classify it as Capital Gains and not Inflation - and that, of course, is seen as good.
There will be no way out of this, no matter what solution any of us recommend, until the current driver of our economy - Speculation on Asset Prices backed by evermore Private Debt - has been driven into the smallest corner of our economy. Until that happens, expect a much higher OCR as the 'bad' RBNZ keeps losing ground.
(NB: Part of the problem is that the RBNZ fixes interest rates at all. Floating the currency yet keeping interest rates controlled makes little sense. The "But interest rates settings controls the Exchange Rate" argument is futility writ large in an economy of our miniscule size. Even the second-largest economy on the planet doesn't do that. They control both)
There will be no way out of this, no matter what solution any of us recommend, until the current driver of our economy - Speculation on Asset Prices backed by evermore Private Debt - has been driven into the smallest corner of our economy.
You're probably mostly talking about property, but the problem with your view is that's an intrinsic part of investment, you expect some form of future payoff for what you put into an asset. And preferably, retained value in something.
You can get rid of the debt, but the overall inclination is still there, and with a less elastic supply of money, less opportunity for new entrants/mobility.
I think you're confusing consumer prices with house prices. House prices would (unchecked) obviously go up if rates were cut. So, what do we do, crash the economy and throw tens of thousands of people out of work because our tax and policy settings incentivise property investment? We are stuck in a corner here - but we don't have to curl up and die - we could change LTV ratios, control bank credit for second homes (100% deposit) etc.
It's bonkers that our primary mechanism of slowing inflation is to raise interest rates --> reduce business activity --> reduce demand. It's a wildly inaccurate mechanism, like trying to give a pedicure with a line-trimmer.
But it doesn't follow from that that low interest rates are good and high interest rates are bad (or inflationary). The mechanism I saw happening in practice under the super-low-rates regime was that 'unearned gains from access to capital' was replaced by 'unearned gains from access to collateral'. It almost guarantees a bubble because liquidity is free. And when you have a bubble and high liquidity, how can you not have more demand from those people who see their nominal wealth skyrocketing? And when that demand has not been matched by any increase in real productive activity, how can it not be inflationary?
To me, it seems destruction of nominal asset values (housing and shares in particular) would be the best outcome. Reduce demand that has not come from actual productive activity. I don't see a more equitable option. But that seems to be regarded with horror even by lefties - who suddenly become advocates of trickle-down economics - because it would result in some job losses.
Yea the question is how do we get there and how many people are actually on board with the idea.
A lot of “tax me and I’m leaving this country!” But unfortunately ya can’t take the house with ya.
100% equity requirement would be a game changer but not something the population would vote for.
In 10 - 20 years I don’t think this country will have the population to support the current ideologies, so maybe change will happen then
Stupid as stupid does comes to mind.
it's the elephant in the room that for a few decades that we've ignored.
And in the previous hundred years or so - house prices in general would rise at or around the general rate of inflation.
And since 1990, when we started targeting 2% inflation and land wasn't included in that measure, land/house prices have exploded far above the general rate of inflation!
It crazy stuff. In that time, central banks have become the fireman and arsonist of many of the economic problems we face. Chasing their own tales, and wondering why they can never find stability but only produce booms and busts.
You are focusing too much on costs and not the supply of money. Increasing interest rates dries up credit and the supply of money, when people have less to spend companies (and landlords) find it much harder to increase prices. It may not happen overnight but it will happen.
I can guarantee you that if the RBNZ dropped the OCR back to 0.25% tomorrow inflation would become much worse.
Well said, my friend! It is impossible to overstate just how terrible NZ's monetary policy is.
re ... "RBNZ continually misdiagnose inflation as a high consumer demand phenomenon. They are wrong and it is costing us."
Key word? misdiagnose!
The fools at the RBNZ seem to be locked back in the 70s, 80s. 90s where most people had mortgages and most people were at working age.
News flash RBNZ! Those days are well gone.
The OCR was a silly tool 20+ years ago and is patently silly - and destructive - now.
(Have I mentioned that the MPC and the RBNZ governor should be sacked and replaces?)
A timely reminder (for those that leveraged up in property or anything else) that everything that goes up must (eventually) come down. the higher something goes.... the further it will fall.
Houses, tulips, bitcoin... history is our teacher. Not speeches from politicians and reserve banks.
For those that are investing for their family... it is wise to learn from history and those that succeed in the long term (e.g. Mr Buffet...) as they definitely dont leverage up and invest in any single asset class.
Inflation is far from sorted - domestically or internationally. Putins blockade of ukraine wheat will drive food prices up again, as the economy starts to rise again fossil fuels will sort issues, ukraine war (and global conflicts) have a long way to play out, locally we have huge issues with economic imbalances... its probably more likely than not that nz mortgage rates will go up a lot further than now to affect employment rates - and house prices thus likely have a long way further to fall
That said - opportunity knocks... uncontrolled AI is finally delivering lots of wins, property class asset price falls means investment is flowing elsewhere, efficiency and marketing spend is growing rapidly.
As always - as one bubble deflates others inflate - happy days!
re ... "I do think the only way inflation will come under control will be for unemployment to rise".
Sadly - you have fallen victim to the neo-liberal con. (This happens when 'bank economists' are the only economists ever quoted.)
I.e. you have been fooled into believing this. (It's repetitively repeated propaganda so don't feel bad.)
Try another thought ... What say the "owners" reduce their demand for profits?
(i.e. they accept that their margins are lower for a while. Where is it written into law they have to make 7% or more each year?)
Inflation won't be declining much anytime soon because the Labour Government can't stop spending. Some of the boondoggles they've spent your money on are beyond belief.
$250m on the moronic gun buyback, $50m+ on Pike River, $51m on the abandoned Harbour Bridge Cycleway, $50m+ on 3 Waters, 15,000 extra bureaucrats, the Light Rail fail, the TVNZ/RNZ merger, and the abandoned Income insurance Scheme.
Boring!
https://www.oecd.org/newsroom/consumer-prices-oecd-updated-6-june-2023…,(Figures%201%20and%203).
Well the alternative is National who intend on pulling the hand brake on spending, we’d be more likely to have a deflationary recession if they made any meaningful cuts now. But they’ve backed their spending cuts with cuts to PAYE. So we’re in the same deficit but fewer employed, so we can each have a few pennies a week.
Also, targeting benefits for property investors, which is all well and good, but in a recession where the government is trying to pull money out of the system and cut that deficit down, how likely are banks to lend? We’ll see those low rates again but high risk as there are fewer buyers. Construction will still grind to a halt.
And not to not to mention, many people will be trying to cash up and leave, taking large sums of money out of the country and leaving us with what? The same old houses we already had.
Both major parties are unimaginable.
Anyway, per capita GDP is down, even with the deficit. Those cuts you mentioned won’t be enough to bring down inflation. The next big influence is energy and transport.
Is it? I find this question interesting.
Raising rates, I'd assume, would displace spending. More income going on interest costs, necessitating less going elsewhere. That's the theory. It assumes that the money going into extra interest payments is not recycled back into demand for actual goods and services. I'd be interested to know if there's any way of actually measuring that. If the money is 'eaten' by the rate rise, that's a plausible mechanism for deflation. If it is, in practice, recycled (through extra bank profit, perhaps?) then maybe not.
As for the argument that it causes inflation by increasing costs, I guess that would depend on the current margins of the industry in question and the state of competition. I can see why it shouldn't cause inflation, in a theoretical frictionless monopoly-free market, but of course reality is very different, so maybe it is. I'd like to see some real empirical judgments on this.
And yet central banks were cutting rates the last 20 years wondering why they couldn't generate any inflation!
(because they were decreasing interest expense costs for business and households each time they dropped cash rates - and reduce the input costs to produce goods and services in the economy = less pressure on CPI)
(and in the process of doing this they have created very dangerous debt/asset bubbles by allowing too much debt to be extended at low OCR settings - so the problem isn't raising rates now - it was dropping rates GFC - 2021)
The balance between out of control inflation and a 1930's style deflationary bust/depression is extremely difficult to maintain - and it gets harder to control every time central banks intervene to prevent free markets from correcting financial/economic imbalances.
E.g. the quantity of debt and economy has relative to its productivity/GDP/incomes.
You can only fool the system for so long. Eventually we have to pay the bill for the distortions in the markets we've created post GFC - now.
re .. "and it gets harder to control every time central banks intervene to prevent free markets from correcting financial/economic imbalances."
ROTFLMAO ... Seriously? ... "to prevent free markets from correcting financial/economic imbalances" ... Wow! Just Wow!
Boardrooms all over the world know that they can rely on central banks to save them - and their shareholders - every time.
It "gets harder to control every time" not because central banks intervene but because they HAVE TOO.
(As an aside - this is a problem in NZ too - but since covid, the RBNZ has caused almost all the issues with pre-historic monetary policy that simply beggars belief!)
There's 120 people sitting in parliament earning more than 4x median income.. we could start there. And the pensions and perks given to those who've done the task before as well.
How many years have they awarded themselves pay rises for, thus far? It's pretty obvious that the popularity contest we call a general election doesn't attract the brightest and best, just the sycophants who can tow a party line. So there's no need to pay 'competitive' rates for these.
Bring them back in line with teachers, police, nurses, etc..
Shouldn't we look more at the quarterly inflation figures more than the annual one? Surely it matters more what happened in the previous 3 months rather than the 9 before that?
- Quarterly inflation rate was 1.1 percent (Annualised at 4.4%)
- Quarterly non-tradeable inflation rate was 1.3 percent (Annualised at 5.2%)
- Quarterly tradeable inflation rate was 0.8 percent (Annualised at 3.2%)
Things are tracking much closer to the 1-3% target than the 6% figure appears.
"such as the RUC back on, fuel tax, public transport" - they will come out in the next CPI release.
"that ignores seasonal changes" - stats.nz should be able to factor that in. Do they publish an seasonally adjusted annualised inflation rate based off the latest quarter? If not then why not, it would be a much more useful piece of information.
If inflation dropped 0.7% the last quarter, then we're looking at another 18 months for it to hit the 3% mark, if things remain as they are. Given what has happened over the last year and a half, do we really expect RBNZ not to tinker with the OCR some more? Certainly the banks are reacting to other changes in the markets, or so they say, but what would the next year look like to regular folk on the street?
We are going to see increased layoffs, but I suspect those will be at the lower end of the pay grade. The workers rather than managers and executives. But it's the workers who already have very little discretionary spending. Kicking them out on the street isn't going to reduce domestic inflation. The managers and executives will still be spending large on the pay rises they received from increasing profits by reducing wage costs when they fired those workers.
And how are things going to change for the better if few MP's live a lower middle class life or belong to the working poor? How can we expect them to make the right decision when they can't connect with the voters they are supposed to represent? Labour, National, ACT, Greens, Maori, NZ First... They are all as worthless as each other.
"When the only tool you have is a hammer ... Everything looks like a nail."
I can't think of a better way to sum up the MPC and the RBNZ's ineptitude.
Will they keep bashing the nail until the surface around the nail is destroyed irreparably?
Of course they will! They know no better. When you start paying people half a million dollars a year they suddenly become both stupid and lazy ... Like every CEO EVER !!!!! The RBNZ governor is no different.
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