Westpac economists say they have growing concerns about the Reserve Bank's monetary policy strategy and risk management approach.
In Westpac's Weekly Economic Commentary, chief economist Kelly Eckhold says it will be critical for the RBNZ to be successful bringing inflation to heel expeditiously.
"Any further delay in returning inflation to target raises risks of an even more protracted and bumpy ride," he said.
The RBNZ last week left the Official Cash Rate unchanged on 5.5% and continued to signal that while it's not planning to raise the OCR further, rates will need to stay high for a protracted period in order for inflation to be pushed back into the targeted 1% to 3% inflation range. As of the June quarter, inflation was 6.0% down from a peak of 7.3% last year.
Eckhold said the risks "need to be well managed". In highlighting his growing concerns on the RBNZ's approach he pointed to the fact that since the central bank's December 2022 Monetary Policy Statement, it had indicated a clear strategy of getting the OCR to and keeping it at 5.5% until the September quarter of 2024 before easing.
"This strategy has not been adjusted to reflect some significant changes in the outlook which add inflation pressure – for example the migration cycle and the expansionary 2023-24 budget."
Now, when faced with concerns of more persistent inflation the RBNZ is choosing to extend the on-hold period and are betting that an OCR of 5.5% is sufficiently restrictive to compensate, Eckhold said.
"However, if this judgement is wrong, then New Zealand could be facing a protracted period of strong domestic inflation pressures.
"In turn, that could feedback back into higher inflation expectations, which would make it harder to eventually bring inflation down.
"Given that risk, an alternative strategy would be to raise rates earlier and then ease earlier should negative risks take hold. If there were downside risks to the RBNZ's assessment of the inflation outlook then the RBNZ's approach would be more understandable – but the RBNZ doesn’t currently see the risks this way," Eckhold said.
In any case, inflation is "so elevated" the prospects of an undershoot of the inflation target seem remote, he said.
"...There is a widening of the distribution of future OCR paths emerging. It will be important for the RBNZ to act early should it become clear that the upside risks to inflation become more dominant.
"Let’s both plan for, as well as hope for, a smooth transition."
49 Comments
An extract of my comment on the other article posted this afternoon, but aligns with Eckhold's view:
I look at the US 10 year yield, and it is taking out new highs in the past week, to levels not seen in the post GFC period (2007 when all of this low interest rate madness started - resulting in global asset bubbles).
So there is a real risk of interest rates breaking out even higher again. This isn't a forecast or a probability, but just a risk people should be aware of before loading up with a large amount of debt (it is also possible that rates may not drop in a meaningful way going forward - they may just keep on rising - but this isn't something many people talk about as the assumption is that they will fall like they have every time over the past 40 years that there has been an economic contraction...this time an economic contraction with few goods and services may produce even more inflation as any reduction in rates, sends prices higher)
If the RBNZ doesn't use the OCR to fight inflation then the bond market loses confidence in NZ inflation - ultimately that will hurt borrowers more i.e. the swap/bond market prices in greater inflation uncertainty, higher interest rates and pressure on the exchange rate.
pressure on the exchange rate.
Yeah .. but can't the govt/RBNZ could do some billion number magic in their spreadsheet and save exchange rate like they did last week?
https://www.interest.co.nz/currencies/123431/reserve-bank-gets-extra-50…
I don't think with this much household debt how could we afford to rise rate . At the same time this ponzi has to end somehow. Can the govt give FHBs an assurance like they are doing for category 3 Hawks Bay homes ! That would be fantastic :-)
Concur. China may just be the trigger. But the Euro zone isn't looking that flash either. Commercial property in the US. Housing markets in most of the western world (GFC 2?)
There are so many things that can wrong and trigger a rout. Central bankers are playing with matches in a fireworks factory.
Summary...
Inflation to high
GDP high
Exports low
Imports high
Milk price debt 5 billon and counting
Govt debt high, er, est,
Private debt cluster
Major banks profits invested in Aussie
Housing market falling
Interest rates to 10% gauranteed
Retail crashing
Election promises in the billions ( new debt to come)
In recession already
China on the edge of ☢️
To slow and low for the deposit insurance to help out when it goes PS'd
Residential constuction falling
Plus more....
Nah!... its ok - all's good... the market is showing signs of green shoots... buy buy buy!
With NZD tumbling the chances of inflation dropping is very low, rates at 5.5% are still below average historically and will probably stay same or go higher but won’t be coming any time soon. The difference which is frightening is people now have million dollar mortgages not 200k as it was last time rates were around this level.
Yes - the argument against this is that wages have gone up which is true and I agree with. But they haven't gone up enough to justify the impact of higher discount prices on future cash flows (to allow prices to remain where they currently are relative to incomes).
The NZD down 15% in last year, million dollar mortgage did cost 900 per week now around 1550 per week average take home pay 1100, inflation will stay well above target range,rates will stay the same or higher for quite some time and will not go back down to crazy low levels for the foreseeable future. The wheels have come off only a matter of time before mortgage and loan defaults crash the economy.
Yes I have seen the Future Revelations.
These times were seen and written before, in the 20/30s of the last century.
Sorry and repent, we have saved the foreboding Scrolls and the tales they tell are worrisome.
Money will rise and fall and men will seek simple basics of bread, instead of riches.
With NZD tumbling the chances of inflation dropping is very low, rates at 5.5% are still below average historically and will probably stay same or go higher but won’t be coming any time soon. The difference which is frightening is people now have million dollar mortgages not 200k as it was last time rates were around this level.
Bingo
Of course it is an economist’s view and is detached from the real world. His suggestion is naive and will only bring volatility from which banks will profit. Businesses i.e. the engine of economy can live with moderately higher rates so long as the lending rates are not jumping all over the place. With volatility any medium term planning goes out the window and if you can’t plan for things in the medium term, you lay off staff and cut back on capex, his ideas are completely counterproductive and a recipe for disaster
Low and stable inflation is what we want, with the situation we’re in, it doesn’t matter if it takes a quarter or two longer, but the price of bringing inflation down in a hurry are massive
"In discussing their Remit objectives, the Committee noted inflation is still expected to decline within the target band by the second half of 2024"
So they're thinking more like another year outside the mandated band yet.
https://www.rbnz.govt.nz/hub/news/2023/08/official-cash-rate-remains-at…
It seems Mr Eckhold's sole view on inflation is narrow-minded:
inflation is "so elevated" the prospects of an undershoot of the inflation target seem remote
Any further delay in returning inflation to target raises risks
1) there are other problems to consider apart from inflation, such as recessions, business failures and redundancies, which are on their way.
2) inflation is not going to return to "target", these targets will have to be raised by central banks (many don't understand this yet).
It may have worked that way when the majority of the population had mortgages, the class system and incomes were more equal and therefore everyone shared the pain relatively equally.
It would appear now that some are expected to suffer more than others, and it's not those at the top pushing the policies that created the mess.
Which would suggest it's the system that's broken and by extension, humanity...
It's not that long ago that those good people were performing 'essential' services, yet they'll be the first to be thrown under the bus.
It's funny... In other countries many will riot/protest over social injustice but what do we do here...
Just been in our health system. Plenty of HCA, Orderly jobs and Nurses are required. Problem solved.
No one wants to see productive jobs lost, yet far too many are tied to a completely destructive, socially corrosive and ultimately doomed to fail Housing Ponzi.
- those left holding these tattered bags may recover financially, maybe, in the 2030/40s. IT WILL BE BIG.
The Scrolls have long warned the wicked souls, those who have schemed and plundered and played god with the lives of the multitudes, at the money tables.
Most eschewed the advice, prayed to the money tables Icons in vain, so shall be torn and battered by the torrents.
Hike OCR now. Orr it Will be Later.
Anyone else noticed the blame game between the bank's and RBNZ the last wee while?
Each one attempting to divert attention from one's own actions?
Between this and the recent CBA/ASB article are the bank's trying to encourage interest rate rises for their own benefit?
A wee insight into the current thinking inside westpac. I have been thinking for a few months now that we might see a run on some of our smaller banks before this is over. If you look closely it's already happening in Japan, China & some parts of Europe & elsewhere. There seems to be a lot of talk of bank mergers as well. Mmmm.
Given all the other factors depressing the NZ economy - I wonder why Westpac is so desperate for interests rates to rise further? I'm still maintaining my view that NZ's economy will be showing serious signs of stress by Christmas.
Mind you, if NACT get in, which is looking likely, and they make the tax cuts they've talked about (but still not announced formally which makes me very suspicious), then Westpac may be right. I'd hate to be a central banker trying to control inflation when a newly elected government starts throwing lollies around.
I wonder if there’s a big chunk of marginal debt teetering and the banks want it shoved so they can shorten up their losses. They know these debt holders are screwed and every month that goes by the more money the bank never gets back??? There will be a reason they want a short sharp (possibly bigger) mess not a long drawn out one.
This Government has been throwing lollies around for 6 years, with massive amount of wasteful spending on ideologically driven initiatives, and on thousands of more bureaucrats, with no result whatsoever to show for it. More money in the system with no productivity improvement = inflation.
The responsibility for the current situation is to be shared equally by the Labour Government and the RBNZ muppets, both completely incompetent when it comes to a balanced management of the overall economy.
A very similar outlook to my own. Very hard to see inflation coming down to sub 3% anytime soon. An OCR of 5.5% just isn't high enough when we have had sustained inflation of over 6% for almost 2 years.
So we have experienced 24 months of inflation over 6%. Yet we have only had 5 months of an OCR above 5%.
I'm no economist (I'm not wrong anywhere near as much as their forecasts) but I suggest that we are still closer to the beginning, of high OCR levels, than the end.
I'm still amazed at the amount of people that willfully ignore all other historical market crashes/home bubble crashes. And the only reason they give for their view is "NZ diffrn't" or "NZ sPeCiAL"
In reality, I suspect the only way NZ is different, is how many people have been sucked into the "home values increase 100% every 10 years guaranteed".
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