The Reserve Bank of New Zealand held the official cash rate at 5.5% and indicated it was comfortable with current interest rates despite near-term inflation risks.
RBNZ’s Monetary Policy Committee chose to leave settings unchanged in a consensus decision at its October review, saying interest rates were working as required.
It said while gross domestic product growth in the June quarter was stronger than anticipated, the outlook was still subdued and spending was expected to fall further.
But there was a “near-term risk” that activity and inflation do not slow as much as needed.
“The recent rise in global oil prices could increase domestic costs over coming months, risking headline inflation being higher than expected,” they said.
In the medium-term, a global slowdown in economic demand, particularly from China, could weigh on commodity prices and sap New Zealand’s export revenue.
All 19 analysts surveyed by Bloomberg expected the official cash rate to be left on hold in this review, but traders have been gradually pricing in some chance of another hike.
Back in August, the Reserve Bank signalled a roughly one-in-three chance of another 25 basis point rate increase in the first half of 2024.
Last week, some economists said the October review would be an opportunity for the central bank to give some guidance on how it had interpreted recent economic data.
House prices have begun to recover, net migration has stayed strong, economic growth has been bigger than predicted, and business confidence has improved.
All this sounds like good news for the economy but could fuel inflation.
The monetary policy committee said the rebound in GDP was larger than anticipated, due to population growth and momentum in household spending, but demand was generally easing as expected.
It pointed to weakness in manufacturing and services indices and the NZIER’s quarterly business survey, which both showed easing capacity pressures.
Softer employment numbers
The labour market appears to be losing strength quickly. NZIER’s survey found a net 7% of businesses were finding it easier to hire staff, one of the softest readings in a decade.
Stephen Toplis, BNZ’s head of research, said in an earlier note that the Reserve Bank used some measures from the survey to estimate the maximum level of sustainable employment.
“We have long said the secret to stabilising prices in the medium term is to alleviate the excess demand that had developed in the labour market during the COVID era”.
This data showed demand was disappearing fast and the Reserve Bank needed to trust its current policy settings to finish flowing through to the real economy and kill inflation, he said.
October’s policy review appeared to reach a similar conclusion. The committee agreed that interest rates may need to “remain at a restrictive level for a more sustained period of time”.
“While employment is above its maximum sustainable level, recent indicators show that employment intentions are flat and difficulty in finding labour has reduced”.
One reason the central bank may be happy to hold, despite stronger data, is that global interest rates have been moving higher and pushing NZ mortgages up as well.
Westpac NZ’s economics team said the standard two-year mortgage rate had increased 40bps since the last official cash rate hike back in May. This has helped offset any extra inflation risk.
Political thicket
The Monetary Policy Committee members discussed Treasury’s pre-election update and noted total government spending was still forecast to decline, but by less than previously expected.
“Members noted the material increase in government investment over the medium term, due to infrastructure resilience requirements”.
Some economists have warned fiscal policy is likely to be looser after the election, regardless of which party wins, and the Reserve Bank might hold off policy decisions until November.
Westpac NZ ran the numbers on previous Reserve Bank decisions within three months of an election, and found there was a lower than usual probability of a policy change.
There was a 34% chance the official cash rate would be changed at any given meeting, but only a 9% at a meeting that landed within 90 days of an election.
However, any change to rates that did occur at one of these meetings was much more likely to be an increase than a cut.
42 Comments
Going into 2024, the USs election year and the escalation of the Ukraine War by the Russians come summer. Add to that Saudi and OPEC, Russia will cut oil production again next year driving up the cost of oil. Biden going all out for War because he needs re-election to carry on funding the war. This will also drive up the price of oil.
NZ has forever inflation because we have no oil refinery. We will be stuck in this loop for a very long time or until WWIII kicks off officially.
As I predicted way back the support for the Ukraine war is dwindling. Too many domestic problems in peoples own back yards and billions of dollars getting wasted in chucking shells at one another, the USA should never have got involved from day one. You can see all support getting withdrawn on or before the 2024 US election.
The US thought they could stick it to Russia via the Ukraine. They have and both Russia, Ukraine and the EU are poorer for it. The Republicans postponing a vote by witholding funds from Ukraine is a domestic tussle with the Dems. and aid will be supplied to Ukraine later on with Republicans agreement but likely reduced.
Russia is poorer for it? I don't think so. Western companies exited the Russian market giving both Russian and Chinese companies massive additional market share. Russian industry is flush with military orders, Russian agriculture has had a massive growing season, and Russia has redirected all the oil and gas sales which used to go to Europe to places like India and China instead. Western sources now admit that the western oil price cap has failed as Russia now self insures its oil shipments or goes through Indian or Chinese insurers. And this week Russia has turned off SWIFT for all domestic transactions. All in all, Russian economic sovereignty has benefited greatly over the last year or two.
Of course, the ruble has recently weakened significantly and is now at over 100 to the USD. But Russia is largely banned from transacting in USD anyways and a weak ruble greatly increases the competitiveness of Russian exports.
It exposes us to refiner margins, which did shoot higher around the time NZR shut up shop (they seem to have had a knack for terrible timing in that business). Consumers were already exposed as NZR margins were based on overseas rates, but the country as a whole was insulated.
I'm not an expert on this, but I understand it exposes the country to a little more risk on some fuels which can't be stored for long periods of time, where previously we could store crude and refine later. Someone more knowledgeable might be able to confirm?
Geopolitically, its hugely more risky. Because refined product is an extra and rather important step. If a WW were to break out, guess what everyone will be shooting at first? Yep, oil refineries. Raw crude wouldn't be that hard to obtain, our allies produce it. All refined product though would be guarded rather well and kept back for war purposes.
The length of the supply chain matters too. Currently ours is mostly Arab countries -> Korea/Singapore/Japan -> NZ, through what would be some pretty hostile waters along the whole way in a WW. If we were to side with say US in a war however, they may be OK with sending us crude shipments via their Eastern Seaboard or through the Panama Canal and across the Pacific. But they sure as hell won't be sending us refined product in a hurry.
Next NZ CPI will be probably near 7% with the fuel rebate coming off on 1st July and the 25% spike at the bowser. They should have pulled the trigger with a 25 bps increase today but they flinched due to an election. Next one might have to be 50 bps to chase down the CPI again.
Raising the OCR won't have any effect on the oil cartels decision to increase oil costs and hence increasing the OCR won't reduce petrol/diesel prices and won't reduce the CPI. In fact, raising the OCR will probably now make inflation worse. CPI will go up a bit and go down a bit regardless.
2 days ago kumaras at Countdown Greenlane were $14/Kilo. And the potatoes looked mummified as though they had just been unearthed from Tutankhamun's tomb.
I usually grocery-shop at Pac'n'save but have had to return mince twice lately because it had gone off the very next day despite being kept in the fridge and before the 'best-before' date. And the 'best-before' dates are becoming closer to the 'packing-date' only 3 or 4 days instead of usual 6 or 7. But meat going off well before 'best-before' date.
So, can anybody tell me where can I buy Fresh Mince. This food-price hiking is fast becoming an existential threat.
We did a Countdown shop in our local one a few months back. It cost literally 40% more than shopping at a central Wellington New World and the Countdown was in the suburbs. Their pricing is utterly ridiculous which is probably why the supermarket seems like its in decline. Good for alcohol and some frozens, but the fruit/veggies are almost double the price of most places and poorer quality, the meat section is horrific (understocked, small choice, expensive with lots of shrinkflation), the dairy sections are way too expensive. I guess their $400m rebranding money has to come from somewhere!
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.