The Reserve Bank (RBNZ) appears cautiously confident the policy settings it landed on a year ago have been enough to tame the forest fire of inflation.
Monetary policy works with infamously long and variable lags. In New Zealand, it can take up to two years for higher interest rates to take full effect on the real economy.
It has now been two and a half years since the RBNZ started tightening policy and almost a year since it hit pause on the OCR at 5.50%.
That meeting in May 2023 was the first and only time the RBNZ's Monetary Policy Committee has had a split vote, with two of the seven members voting to hold the OCR at 5.25%.
Since then, the policy position has been ‘watch, worry, and wait’.
The Committee faced an anxious 18-month wait for the September quarter of 2024 when the central bank’s mathematical models predicted inflation would fall below 3%.
April’s policy review reads as though the decision makers feel they are entering the final stretch with growing confidence they made the right call.
It’s a cautious confidence though. The statement used one of its only eight sentences to point out central banks around the world were worried about easing policy too soon.
Near-term trouble
The Consumer Price Index data release, due out on April 17, is likely to be higher than forecast due surprisingly strong prices in a handful of luxury goods.
Stats NZ’s new selected price indexes showed big moves in restaurant food, domestic airfares, and overseas accommodation. The latter alone could boost the annual print by 0.4 points.
Stephen Toplis, head of research at BNZ, said this was a “very strong argument” for why the central bank should pay closer attention to core inflation — despite targeting the headline.
RBNZ Governor Adrian Orr made a speech earlier this year in which he emphasised the bank was effectively targeting core inflation and would look through noise when appropriate.
BNZ’s forecast predicts inflation will be 0.8% in the March quarter and 4.2% on an annual basis, considerably higher than the 0.4% and 3.8% the RBNZ is expecting.
It is numbers like these that give some pause for thought. Inflation has been above target for about as long as anyone is willing to tolerate, including the Committee.
Infometrics was sufficiently spooked by the pressure to push its prediction of rate cuts back from the August meeting to November.
“We expect it to be a close-run thing whether inflation gets back within the 1% to 3% pa target band by the end of this year, or whether it takes until early 2025,” Gareth Kiernan said.
Even so, the central bank should have enough confidence to cut rates at the end of the year. Although they may not foreshadow them as doing so would risk undermining market interest rates.
May, may not
The Monetary Policy Committee said the economy had evolved as anticipated since the February meeting. It has also played out roughly as expected in May last year.
Gross Domestic Product is slightly weaker but mostly due to historical revisions. Headline inflation has fallen faster but non-tradable prices have been considerably above forecast.
Unemployment is creeping upwards but remains quite a lot lower than was originally imagined. The labour market is one of the last things to react to higher interest rates.
Despite some variation in the data, the Committee strengthened its language. It described itself as being “confident” inflation would be in the target range “this calendar year”.
The word confident is new in that context. The Committee had previously “noted” that inflation was “still expected” to fall into the target band in the second half of 2024.
Last week, UBS economist Nic Guesnon previewed the April policy review with a warning that it could be financial stability concerns that force earlier rate cuts.
That idea also got a shout out in the record of the meeting, with the Committee warning inflation could decline more rapidly than expected.
“Business and consumer confidence remain particularly weak which could lead to more unemployment and financial stress than expected,” they said.
The RBNZ will give its financial stability assessment next month and it could add some colour to how much pressure monetary policy is putting on the economy.
39 Comments
Given that locked in increases in things like insurance and rates are already putting a high floor under inflation this year, it wouldn't take much of a external surprise to push inflation beyond the 3% mark. How "confident" can the RBNZ be that there won't be an escalation in global conflict, another spike in oil prices, or a downwards correction to our currency value?
These smart-ass posts making out higher rates achieve nothing are getting annoying. Most of the things you mention are indeed reduced by a high OCR, via its effect on exchange rates. What's more, the high OCR is significantly reducing the risk of currency collapse by reining in our disastrous trade deficit - the era of cheap credit saw our deficit explode with "nice to have" imports like new cars, new TVs, fancy holidays etc. A high OCR is noticeably helping to reverse some of that and keep our essential imports affordable. Unfortunately some of the damage has a long tail - large mortgages and large cars both represent ongoing liabilities to our trade balance.
Well said. A collapse in the confidence of our currency (or any whiff of us becoming a nation that can’t pay its bills) would utterly dwarf the pain being felt right now. We literally can’t afford not to beat ourselves into shape, the mad part is how out of shape we got to begin with (and why).
I don't think I suggested that at all, I simply pointed out that the high OCR is having some useful impacts. There are too many glib comments recently that are seizing on the (correct) observation that some aspects of inflation aren't helped or are even made worse by a higher OCR. Which is fine, but those comments are invariably lazy one-sided takes that ignore the massive benefits that a high OCR is having in terms of protecting our currency, preventing asset inflation and reducing growth of wealth inequality.
It's hard to escape the suspicion that these biased takes are coming from people who want the asset inflation and growth in wealth inequality to resume.
I just can't understand the apocalyptic wailing and gnashing of teeth we saw in the comments thread at the announcement yesterday. Inflation is tracking down faster than expected. We will be in the target range by years end. Unemployment is still very low and below long term averages. As, things stand, we are in for a soft landing. Is there something I am not seeing?
I think most people (including myself) see the local economy tracking much worse than the RBNZ has been predicting. Unemployment is going to start tracking up quite quickly now, but how long do those redundancies take to track through to the official information. Same goes for GDP, CPI, etc.
Totally agree, operating in the environment gives you a different perspective than data driven decisions based on old data and predictions. Hence why they operate on a pendulum making decisions from their ivory tower and completely disconnected from what's happening in the market. Engineering a recession is cruel and archaic
Agree. There’s a load of ‘built in’ activity which is currently masking how dire the regions are faring in their own right. Think cyclone funds, overhangs of shovel ready projects and half completed developments starting in the midst of a housing crisis and money scramble. My confidence in a soft landing is pretty low, expect it could be a long and bumpy landing…
This is how we "construct" the unemployment statistics in New Zealand.
Approximately fifteen thousand (15,000) households take part in Household Labour Force survey every three months. Every person aged 15 years or over living in a selected house needs to take part. If you move away from a selected house, you will be replaced by the new occupants of the selected house. Houses are selected into the survey for two years. Our face-to-face interview generally takes less than 10 minutes for each person. After that, we will contact you by phone to get a brief update on your employment situation. This call will take a few minutes and will be once every three months for up to two years. We do this to get an up-to-date and accurate picture of employment in New Zealand.Once a year we will ask you some additional questions about your income. This will take about five minutes for most people.
In the last year alone we have imported 245,000 new migrants. Most of them of working age. How many of them do you thing made it into households participating in the Labour Force survey ?
So move along. Nothing to see here.
It's a primitive way of measuring in a world where we have the tech solutions to accurately measure such things.
Yet the top-of-pile bureaucrats making out like bandits. They wouldn't last 5 mins in the private sector, unless they had some parasitical lobbying or institutional power position like Hellen Clark seems to thrive in collecting.
I have no idea if you've described the methodology correctly, but from what you've said the sampling is done by dwellings, not by people. In which case those immigrants would have exactly the same chance of being included as anyone else. So I'm not sure what your point is.
I can only translate what I read into English. I am not a statistician. Just concerned that with the way NZ population is rapidly changing we could miss a few things. Two problems of note. People excluded from the survey. Those residing in non-private dwellings (eg people in hotels, motels, hostels, military camp) and those residing in non-permanent dwellings (eg people in tents or caravans not permanently sited). The emergency housing policy of the last few year years could have clashed a bit with that.
Also Each quarter 1875 of the households in the sample are rotated out and replaced by a new set of households. Words on a website are just that. How is the data collection in the field actually going. What are the real world chances of one of the new migrants actually making it into the survey?
People on Jobseeker Benefit in NZ Dec 2019 147000 in December 2023 189000. But we have historically low % unemployment.
if inflation outturn is higher on 17th than reserve bank forecast they should all fall on their swords.
They have a job to do and have consistently screwed it up since at least 2020. How long would you keep your job if you failed to deliver so miserably.
and its not like we dont have the required skill set available to replace them
The US CPI read from this morning show's why it's foolhardy for the RBNZ to start patting themselves on the back just yet. NZ$ to US$ already down 1.3% this morning.
Anecdotally petrol/diesel has been rising steadily lately, any other global shock (Ukraine/Middle East) could impact our currency further and affect the tradables CPI component. We know how fuel costs flow into the cost of almost all imported/tradable goods.
We also have the April 1st 2024 power price increases (line charges) which is estimated to increase electricity prices by approximately 5% to 8%, and the continued surge in rate/insurance prices to factor in (the non-tradables component is very sticky), and very insensitive to demand.
High 3s in the 4th quarter would be a good outcome.
Stats NZ’s new selected price indexes showed big moves in restaurant food, domestic airfares, and overseas accommodation. The latter alone could boost the annual print by 0.4 points.
One would hope far fewer people are enjoying the pleasure of 'overseas accommodation' in these tough times.
Will the inflation number take account of this fact? i.e. that far less is being spent on 'overseas accommodation'? Or will its inflation contribution still be weighted as if we're all spending on overseas accommodation like drunken sailors?
I am not convinced that stats has a very good handle on our international or BOP investment position at all -there was a very big fudge factor in the numbers they recently released
Even if you accept their numbers NZ indebtedness position worsened by apprx $10 billion over the december quarter so not a great result - I think March will be worse
With the RBNZ and government creating a Recession with plenty of unemployment - I'd be pretty 'confident' inflation will be in range soon too!
The problem then becomes the NZD while the USA government continues to spend and they have 3% growth while we have negative growth!
The RBNZ must be looking back and wishing they'd have acted differently. Now they're caught in a massive pickle.
Or find a time machine and go back to 2021 to give everyone 30 year 3% fixed mortgages. Many Americans refused the Covid vaccine. But they took the mortgage vaccine with both arms. Imagine the state of the US economy if they doubled everyone's existing mortgage rate over 2 years. We are not America.
Yep US is losing control of inflation, but we are looking at stagflation. Energy costs underpin it all and we import a big chunk of that.
Wish those in power would think a bit harder about what they need to do to reduce the price of energy. It is not difficult.
Education and Energy, thats all it is about.
OMG...who wants to use 'public transport'?..... Nobody.
People like to get in their car and get where they want to go, not spend hours hanging around bus stops. Which can be dangerous. How do you get your shopping, groceries, and frozen goods home on the bus? They're either broken down or in the case of Auckland trains, cancelled half the time. Or sitting next to someone with a bad case of BO after a day's work.
People are commuting daily from Warkworth, Wellsford and even further north because of Auckland property prices....how do you do that on the bus?
NZ has heaps of oil...we need to start exploiting it.
It's time for us to grow up, though, or economics will force it on us without us preparing.
Subsidising personal car (and road transport donor) travel everywhere is not cheap, as highlighted above.
The answer to your "how do you" questions is found in how we did it before we drove long distances to get those things, i.e. local businesses grow in strength. And as personal car travel becomes less affordable for us to subsidise to the extent we do, fewer people will commute daily from Warkworth, Wellsford or further North.
We should cease preventing people from intensifying around existing public transport arteries as we have been, for one. Then let them choose.
And, invest in public transport not just personal car / trucking donor transport. And as Melbourne's city architect once noted (for example), for every additional million population they enable to intensify around existing train routes rather than sprawl at the edge, they'd save around $110 billion.
The RBNZ announced it's intention to cripple the economy with a Recession on the 5th October 2021.
See: https://www.interest.co.nz/charts/interest-rates/ocr
Other major central banks took a more pragmatic approach and started raising later ... some much later.
See: https://www.macrobusiness.com.au/2023/07/reserve-bank-smashes-housing-m… Note the grey NZ line.
Oddly (actually not) it seems the other central banks will be dropping about the same time - and perhaps at the same time we will.
Somehow your comment doesn't align with the facts. But you'll respond with 'sticky inflation' from the late risers. We'll see.
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