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Roger J Kerr sees the NZ dollar sustaining its upward momentum. He also wants to see the RBNZ's remit extended to encourage proactivity in tackling the non-tradable inflation drivers

Currencies / opinion
Roger J Kerr sees the NZ dollar sustaining its upward momentum. He also wants to see the RBNZ's remit extended to encourage proactivity in tackling the non-tradable inflation drivers
Red tape
Source: 123rf.com. Copyright: lightwise

Summary of key points: -

  • NZ dollar sustaining its upward momentum
  • RBNZ “Remit” review needs to be broader in scope

NZ dollar sustaining its upward momentum

The NZD has sustained its recovery against the US dollar over the last three week, albeit not without some wobbles. The NZD/USD exchange rate traded to a high of 0.6575 on 3 June, however it has since corrected back to 0.6515. Daily movements are being determined by the fortunes of US equity markets, that in turn seem to be driven by investor sentiment/expectations as to whether the Federal Reserve will need to do more monetary policy tightening to rein-in inflation (negative for equities and the NZD), or that they have done enough as evidence emerges that US inflation has already peaked (positive for equities and the NZD). Whether US inflation has peaked, or not, is therefore directly transferred through to the value of the US dollar. The US dollar index has stopped increasing over recent weeks and is now stabilising between 101 and 103 after reaching a 105 high in mid-May. The FX markets are now sitting on the fence in respect to whether US inflation has peaked. The markets are now not prepared to push the US dollar higher still, however they do not, as yet, have the economic evidence to aggressively sell it either. It will require emerging US economic data to be weaker than forecast to convince the US dollar bulls to unwind their long USD positions and become sellers.  

It was expected in some quarters that the May Non-farm Payrolls employment data (released last Friday 3rd June) could have been the first glimmer of weaker than expected US economic data. However, as it transpired, the increase of 390,000 new jobs was above the prior forecasts of 325,000. The next focus for the markets is the US CPI inflation data for May being released Friday 10th June. A monthly inflation increase below the +0.70% expected would reduce the annual rate of inflation to below its current 8.30% level. Would that be sufficient to convince the currency markets that US inflation has peaked? Time will tell. However, lead-indicators such as plummeting consumer confidence measures suggest that the dominating retail/services part of the US economy must soon lose some momentum.

The NZD and AUD exchange rates are positioned to react positively to a likely 0.50% hike in Australian interest rates on Tuesday 7th June when the Reserve Bank of Australia (“RBA”) make their interest rate decision. The Australian dollar has already recovered 50% of its April/May sell-off from 0.7600 to 0.6800 against the USD. At 0.7200 the AUD/USD spot rate has now broken up through its 30-day moving average line and a close above 0.7250 will see it above its 90-day moving average (refer chart below). A more strident RBA on Tuesday should result in further AUD gains and generate confirmation of its positive technical/chart directional picture, on top of Australia’s very positive economic story. Where the AUD/USD rate goes, the NZD/USD rate will diligently follow, and that direction is clearly upwards.   

 

RBNZ “Remit” review needs to be broader in scope

Over the next nine months the RBNZ are conducting the five-yearly review of their “Remit” for managing monetary policy (it used to be called the PTA – Policy Targets Agreement). The Remit dictates the rules of engagement and the dual objectives of the RBNZ’s Monetary Policy Committee to maintain low and stable inflation between 1%-3% and “supporting maximum sustainable employment”. Predictably, the review will take submissions and consider changes to objectives around the 1%-3% inflation limit, measuring what sustainable employment is, contemplating distributional outcomes and the omni-present climate change impacts. However, the author’s view is that the review’s scope should be broadened to incorporate some more basic and fundamental questions about inflation and its impact on our communities.

New Zealanders should see the RBNZ as their independent guardian and watchdog, who preserves our consumer purchasing power and the value of our savings through maintaining low and stable inflation.

To achieve that objective for the benefit of all, their inflation control “modus operandi” needs to be expanded to encapsulate “top of the cliff” pro-activity, not “bottom of the cliff” reactivity.

Currently the RBNZ raise and lower interest rates to restrain/stimulate the economy to lower/increase inflation to guide it between the 1%-3% limits. It is all very reactive to current and forecast economic conditions and inflationary/price-setting behaviour in the economy.

Instead, they should have the remit and objective to cut-off inflationary behaviour at its source in a much more risk-preventative, proactive way.

In the private sector, the most efficient way to ensure low and stable inflation from the source is to have unfettered, dog-eat-dog, free-market competition in the economy. In the 30 plus years of dissecting the regular RBNZ Monetary Policy Statements, the number of times I have read the word “competition” in the documents would be less than 10. The RBNZ needs to be working with the Commerce Commission and Government to ensure that we reduce monopolistic price-setting behaviour that will always increase inflation or keep it higher than where it should be.

As the history of the consistently high (3% to 4% pa) domestic “non-tradable” inflation tells us, the public sector has been out of control with their price-setting behaviour for a very long time. It is easy to blame the Local Government Councils or Government departments for always increasing their rates and user-pays’ prices. However, the real culprits are the politicians who ladle ever-increasing legislative and regulatory requirements/costs on to these bodies (and the economy) with no regard to who ultimately pays for it.

To illustrate this major inflation problem, which the RBNZ appears oblivious to, I analysed one cost-line in our six largest Local Government Councils over the three years to 30 June 2021. To understand why local government rates have increased by 4% to 7% every year for the last decade, you must analyse what cost increases have occurred that requires them to recoup these through higher rates/charges on property owners and indirectly on renters. Local Government rates are a relatively minor 3.5% weighting in the CPI inflation index; however Council charges also impact construction costs which makes up most of the consistently high domestic inflation. Local Government cost blow-outs is just one example of public sector excess that sees New Zealand downing itself in a sea of red-tape that keeps domestic inflation high.

The Councils’ cost-line chosen was personnel/staff costs: -

Wellington City Council – Personnel costs increased by 22% ($20 million) to $106 million over the three years (June 2019 to June 2021). The population within the Council’s boundaries was static at 210,000. Wellington may have had some challenges with earthquake-prone buildings, but that $7 million per year additional staff cost is close to 70 extra people per year at a salary of $100,000 each. What do all these additional people do? Council provided services such as rubbish collection, water, sewerage and local roads would all have been at the same level over the three years.  

Auckland Council – Personnel costs increased by 11% ($97 million) to $1,716 million over the three years. The population increased by 3.7% to 1,715,500.  

Christchurch City Council – Personnel costs were well under control in the garden city, static at $203 million per year over the three years. Population was also static at 390,000.

Dunedin City Council – Personnel costs increased by 15% ($9 million) to $66 million over the three years. Population was static at 132,000.

Hamilton City Council – Personnel costs increased 18% ($14 million) to $91 million over the three years. Hamilton’s population increased by 6% to 178,500, so some justification for additional staff.

Tauranga City Council – Personnel costs increased by 27% ($17 million) to $80 million over the three years. Again some justification for more Council staff as their population increased by 9% to 155,000.

All these Councils (except Christchurch) have either chosen to or been forced to hire additional staff to undertake additional legislative and regulatory requirements (e.g. highly contestable RMA processes) imposed on them. Ever increasing rates bills are the result. Increased rates may be justified if there were increased Council services on the other side, but that does not appear to be the case.

It is time someone stopped this bureaucratic nonsense that is hurting household finances and well-being throughout New Zealand. Perhaps, at this October’s local government elections we will see a change where ratepayers vote to say, “no more”.

If the RBNZ are our true guardians of inflation, they would be strongly advocating that the politicians have to meet a strict “non-inflationary test” on every piece of legislation/regulation they pass. How else do you control this excessive and unfathomable price-setting behaviour?

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Source: CoinDesk


*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.

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27 Comments

I do fear in our quest for assurances the west have developed a rather bloated framework of checks and balances, of dubious return.

Take building a house; to satisfy health and safety, zoning, environment and construction requirements, you easy end up doubling the cost of generating a habitable dwelling. And double or triple the time to get it built.

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After the Grenfell Tower fire in London that killed 72 people someone read the building code and it was over 800 pages and specified the height of letterboxes but didn't mention not using flammable cladding.

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Problem is, so much regulation is added to try to protect ratepayers and taxpayers from shoddy practice in the industry, rather than making the industry accountable for what it delivers. Changing that would enable less regulation.

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Ah, the old "red tape" argument. Last refuge of the neoliberal 

In the private sector, the most efficient way to ensure low and stable inflation from the source is to have unfettered, dog-eat-dog, free-market competition in the economy. 

Is this a joke? 

Show me an industry where "red tape" was slashed and I'll show you an example of monopoly development, risky behaviour, substandard services and products and ultimately the "consumer" losing out

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Works both ways, we see here monopolies exploiting regulation to the point where it's very difficult for new entrants to compete. 

The rules get devised to clamp down on outlier behaviour but everyone has to pay the price.

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Our local Pak'n'Sav took over a decade to get permission to be built - objections by rival supermarkets.  A dispute about road congestion - no idea why it couldn't be resolved one way or another in a week.

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Monopolies use red tape to their advantage too. 

Suppose a monopoly wants to vertically integrate into it's supply chain. In a small country (like NZ) it looks bad if all of a sudden a dominant market player (especially a foreign company) dumps hundreds of it's suppliers to start its own competing supply chain brand or business.

So what does it do.... It up's the emphasis on compliance and red tape within its existing supply chain and creates an array of hoops for it's current supply network to jump through.

The dominant company's goal is to wear down suppliers and have them drop off through attrition and or not meeting the "hoops" requirements as they keep being raised.

After a period of time 1-2 years of this meat grinder tactic, the dominant company finally re-jig's their now smaller network with less of a PR problem.

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Duplicate 

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?

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Well telecoms and radio come to mind as services that are way better now the govt doesnt control and slashed the compliance costs and rules

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In NZ, banking and fibre broadband services are good examples of what he is talking about.  Healthy competition causes these businesses to be as efficient as possible. Having worked in them, there are often endless restructures and redundancies.

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"Show me... " That's sort of the problem — the red tape keeps lengthening.

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Another excellent article by Roger Kerr.  It is concerning that the current government in Wellington does not even believe in a free market, only in the expansion of the state at cost to private business and taxpayers.  If re-elected and the Greens hold power with Labour next time, New Zealand will in two years time after the election become like Zimbabwe and Venezuela, imposing capital controls as anyone with money will be trying desperately to move it overseas as the exchange rate collapses.. 

My local body rates increased 350% in Nelson over the last 13 years, but this was not due to the imposition of new regulation from central government.  That was a minor part of the expenditure.  Primarily it was wasteful spending on non-essential "nice-to-haves" to satisfy certain lobby groupa.  Meantime, essential infrastructure was often allowed to decay.

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It has been the same outcome all over New Zealand. and three waters is only going to amplify things

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There hasn't been "free market" for a long time. Authoritarian NIMBY controls prevent people building on their own land in many areas, while monetary and welfare policy props up yields and prices. And the sprawl forced by NIMBYism is far more expensive to maintain, driving up rates costs.

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All this adds to the unattractiveness of NZ as a destination to live. The rise of countries, such as Portugal, Spain, Malaysia, and many others actively encouraging immigration and having good climates, sensible cost of living, sensible pace of living, good health care and easy access to reasonably priced travel options, is not only attracting 50+ retirees anymore. I believe more and more younger people 20 - 35, whom haven't yet been snagged by the "debt trap", or choose to cut their loses will flock to these types of destinations.

I believe the "rat race" is less attractive to these younger generations, and they may be fatigued from the mouse wheel culture we live in and have observed it's consequences and have decided "no thanks".

It could almost be described as "up cycle fatigue" or "boom fatigue" from the continuous "up cycle" our financial and government entities have endeavoured to nurture and maintain these past 14 years or so.

This culture of never fail has manifested itself into a "herd fear" of anything bad, every headline is a "crises", "one in a hundred year", "never seen before", etc, event. The result is the general population is shell shocked, battle wary.

When people feel like this they want to escape to a quite place, a slower pace.

Because of the availability of all this information these days, I believe we will experience types of "flash emigration" from countries like US, UK, NZ, Aus, particularly in the millennial age group.

We have whole countries in the stage just before burnout where in the individuals case, he / she is furiously juggling to maintain the "equilibrium", but unfortunately as most of us know, if you have to act furiously to maintain a balance the balance is not sustainable.

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There are reports of Malaysian building workers arriving on tourist visas and working without paying income taxes. Are there similar stories in Malaysia of Kiwi's working on tourist visas?

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I think most kiwis know better than to break the law in Asian countries. Their justice systems aren't as lenient as ours.

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... they cut your nuts out & use them as ping pong balls in Singapore if you chew gum in public ...

Reckon we should send our police commissioner Cuddles Coster up there  , to rebuild his spine ?

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If you are going to make statements about anecdotes as fact, perhaps quote those stories and references.

Otherwise, they are little more than viral anecdotes with minimal basis in fact.

They become "Clark Gayford and the babysitter" style rumours.

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I just enjoyed the article.

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What Roger's article highlights is the unacceptably high cost of a deliberately dysfunctional bureaucracy  designed to add cost & effort - to slow down or to stop - developments in all sectors of society by the we know best de-facto elite coming out of our universities in droves. In doing so they are adding huge costs to pretty much everything, as the exorbitant prices of their new technologies becomes apparent, but so also does their fragilities & limitations as well. Add regulations, rinse & repeat.

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Well done i whole heartedly agree

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Are you suggesting that having a truly independent building product review panel not funded by market players, and having councils accept products approved by those panels, will increase competition and choice in the market?

I'm offended by such an idea. 

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In terms of the issue around red-tape and inflation from public/government services. I'm on the side of Ronald Reagan when he said that 'government is not the solution to our problems, government is the problem'. 

It appears that our public sector/councils etc have become self licking icecream cones....they make more rules and regulations in order to justify their own existence, yet they provide no productivity to the economy that improves the quality of the livelihood for those they are supposed to serve. The sooner we can start reducing the size of the public purse and allow the people to make the right choices, the sooner we can get back on track towards a more balanced and efficient society. 

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... well ... in Christchurch they have a " climate change emergency " ( or so they say ) , so this is the number one priority  , saving us from the ravages of the weather  ... and employing a few more consultants and working groups to investigate it ... the stench from Bromley & the  footy stadium will have to wait ...

This is an emergency  ... we know it's true ,  because Greta had a hissy fit & said so  ....

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We are 6 months into consent processes now for a new house, with no end in sight! Apparently approving these things is supposed to only take 1 month... Next thing the council wants is some sort of dirt management plan for when we shift about 30m3 of dirt on our own land. We have to provide it in order to get resource consent, but we already (somehow) have building consent...

As we have some private organisation handling the resource consent, they claim it's nothing to worry about and will have one out in a couple of weeks, though its usually only requested for major subdivisions. They are working pretty fast, but once it goes to the council, it will take them another 2 months to review... meanwhile our builder is increasingly twiddling his thumbs with disappearing cash flow.

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