The Reserve Bank (RBNZ) wants to keep some pressure on domestic inflation, even as it moves quickly to bring the Official Cash Rate (OCR) closer to a neutral level.
Policymakers have cut the benchmark interest rate by 125 basis points over the past three meetings to 4.25% and are signalling another 50 point cut to 3.75% in February.
The neutral interest rate—which neither stimulates nor restrains growth—is estimated to be between 2.5% to 3.5%, meaning the OCR will remain restrictive until at least April next year
Paul Conway, RBNZ’s chief economist, said this was necessary as domestic inflation was still simmering at 4.9% in the most recent data released and needed to be tamped down.
“We're confident that it's going to keep coming down, because we've got excess capacity in the economy, but … the reason we've got that is because of the OCR track that we published yesterday,” he said in an interview.
“If we were to just go huge and cut the OCR to neutral yesterday, it becomes more likely than not that domestically generated inflation flares back up”.
RBNZ forecasts non-tradable inflation will be 4.7% in the December quarter and drop to 3.2% by the end of next year. It averaged 2.7% in the 10 years prior to the pandemic.
While rates will remain somewhat restrictive for a few more months, Conway said they were falling enough to restart economic growth after two years of stagnation.
“Having interest rates 250 basis points above neutral is quite different to having them 50 or 100 points above neutral,” he said, and lowering interest rates in real terms will affect GDP growth.
“Straight away, you can almost feel it in the streets. When I go out after we've done a 50 [point cut] you can just feel a little buzz. Because, it's affecting people's perceptions and projections of where the economy is going”.
Future growth would be at a “typical New Zealand, mediocre, muddling along, she’ll be right” annual rate of about 2.4%, Conway said, and going faster would require economic reform from the government and a change in Kiwi business culture.
He said now was a good time to be talking about structural reform with the Covid crisis and its economic hangover moving into the rear vision mirror.
“Inflation's in the band. Interest rates are going down, and growth is recovering. So from a cyclical perspective we're in good shape.”
“But I fully acknowledge it's been hard work [for New Zealanders] to get us into this position where inflation is sustainably back at target.”
Conway said the nearly three-month gap until the next policy decision would be useful, as it allows time for a full set of new data releases and to see the effects of earlier decisions.
Shadow boxing
Earlier, at a hearing with Parliament’s Finance and Expenditure Committee, RBNZ policymakers said it wasn’t known how President Trump’s policies would impact inflation.
Deputy Governor Karen Silk said the new administration’s trade policies as well as geopolitical tensions had been discussed by the Monetary Policy Committee.
“It probably has a net inflationary impact at global level and potentially a net negative impact on growth,” she said, however that may not be the case in New Zealand.
“Those that are selling into economies that are imposing tariffs may well seek substitute markets, and so we could see dumping of goods.”
An example of this occurred in 2021, when COVID lockdowns led to a drop in demand for potato chips in Europe, causing one supplier to dump excess frozen fries into the NZ market.
Silk said tariffs in the United States could mean cheaper electric vehicles becoming available here, as an example.
Conway said none of these possible outcomes had been modelled and it was not really possible to predict how these dynamics would play out.
“President-elect Trump, he talks a lot, but what will actually be put in place?" he asked.
"It would be remiss of us to be reacting. We'd be boxing at shadows currently, if we were to incorporate it, I don't even know what it would mean — lower interest rates or higher interest rates?”
Markets and politicians have had a taste of things to come this week, after Trump threatened 25% tariffs against Mexico and Canada on his own social media platform.
Mexican President Claudia Sheinbaum responded on Wednesday with a promise to retaliate with measures that could cost the United States hundreds of thousands of jobs.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
79 Comments
They are underestimating the sickness in the economy, at least publicly. Probably they privately acknowledge it, but are playing smoke and mirrors to manage expectations and to not drum up too much bullishness that might reignite inflation.
I am pretty confident the OCR will drop to 2.5, or even lower, by Spring ‘25.
I am not sure how much success they are going to have though. Seems like the banks are all expecting people to load up on more debt as the interest rates drop next year, restarting the ponzi and propping up the economy. I just can't see it happening though. I think people will repair their savings and pay down debt, rather than taking on more.
So if it isn't private borrowing, it isn't govt spending and overseas is still sucking more out of the economy than putting in, then where is the growth going to come from?
" I just can't see it happening though. I think people will repair their savings and pay down debt, rather than taking on more."
Many will do exactly that, but how many does it take who are willing to gamble on the ponzi continuing to fuel those increased valuations?....probably a lot less than we realise, especially when you consider that there were only approx 120,000 'investors' during the recent surge in values.
https://www.propertyinvestor.co.nz/face-the-facts
The question then is will the banks facilitate them?...and that I think will be a case of them (the banks) being cautious until they see if there is enough momentum for another round.
"Seems like the banks are all expecting people to load up on more debt ..."
The banks create more money through securitization, get to charge more interest on the new money they've created ... And banks are very happy shipping their increased profits to offshore shareholders.
So remind me ... Who is the RBNZ actually working for?
"GDP growth was running at 5.6% before Orr put the brakes on. "
Did you mean the money supply was growing at that rate? Then yes. The banks were creating it hand over fist, while the recipients were throwing it around just as fast. Not one of MPC's finest moments under Orr. (Come to think of it ... Do they have any under Orr? Finest moments, that is. Maybe getting DTIs in? Can't think of much else...)
The most disappointing thing is they can pull other levers but just rely on this one. 30% of the country employees are employed by SME's, to help them out they could raise the GST threshold for SME's, reduce company tax etc etc....but seems like the easy option is always the OCR.
I'm just reiterating The Maori Party's stance. Take it up with them.
Its funny how everyone on the Left supports things like the Hikoi that wants special rights for Maori, but if anyone else mentions those special rights they are immediately branded racists. So tell me, they are either special or they are not - which is it?
The answer will simply determine the pace of the exodus to join the 170,000 Maori already living in Australia. Whoever the last ones to leave are, they can turn out the lights (thats if the power blackouts dont turn them off first).
Whilst I do think KW’s original comment is not relevant to the discussion thread, his second comment, again whilst not relevant to the immediate discussion, I can’t say what he has said is not factual.
Hard leftist race relations policies don’t tend to have positive effects on the economy as a whole.
K.W.: "Its funny how everyone on the Left supports things like the Hikoi that wants special rights for Maori..."
It not about being on the 'Left'.
Even 'the Right' knows we must honor our contractual commitments!
I've no problem with renegotiating the Treaty. (I see no need to, though.)
But what that prat Seymour is doing is not renegotiating - it is dumbing down our contractual commitments so that ignorant fools - by shear weight of numbers - get their way.
Maybe....in Wellington at least tenants are definitely in a renters market. Can't see rent raises being passed on successfully considering the supply/demand balance for tenants.
Too many tenants don't realize they can contest rent raises as well. Have a few friends who have done that recently (i.e. Landlords blinked first in the "don't raise rent or I'll move" game).
Whilst my rates haven’t increased as much this year compared to many others, the increase was well above inflation and the 3 percent pay increase.
I wish councils would return to the concept of building and maintaining infrastructure instead of what has happened for the past 20-30 years.
why does a small region need to double the size of its library for 2/3 the cost of fixing our storm water problems. The library is now finished. Now they are thinking about how to fix the storm water. Priorities totally backwards.
house insurance is a major issue. Mind went from 200-250 this year. After of course increasing from $20 something in 2008.
Yea I’m aware of all the natural disasters and that, but you can’t tell me that if one player didn’t control 90% of the market that our insurance levies wouldn’t be a lot less.
So...inflation pressures are a risk and RBNZ sees house price inflation of 7% next year. Which conveniently doesn't count as inflation. (By conveniently I mean politically convenient for NZ landowners and foreign banks, of course).
#BuyBitcoin #CentralBankingIsCentralPlanning #NoMoreUnearnedWinners&UndeservingLosers
#FiatNeedsCompetition
This is pretty silly stuff from the RBNZ. Consider ...
- Who benefits from high interest rates? Of course, your first thought will be 'savers'. But who are they? Those kiwis with TDs? Nope. They're a small % when compared to where the bank's lending actually comes from. Most 'deposits' & bank capital come from big financial institutions overseas. So let's shovel even more interest money offshore, ay? Further, the banks create new money for lending so the banks are clearly benefitting! Once again, as most banks are owned offshore, even more money heads offshore in the form of profits.
- Where is a sizable amount of those non-tradeable inflationary pressures coming from? Yup. High interest rates! They drive up the real cost of living. I.e. Not the RBNZ's measure of inflation - the CPI - that tries (unsuccessfully) to strip out the effects of interest rate costs, but the actual cost of living we actually see and feel in the HLPI. People are still doing it tough .... Because of high interest rates! And when workers are doing it tough ... They demand higher wages.
- Are they really serious about inflation? No. They are not. A significant amount of NZ's credit growth comes in the form private lending on mortgages. The RBNZ is okay with house prices rising beyond the rate of inflation. A WTF moment if ever there was one. But the problem is more serious. Kiwis treat their houses as ATMs. I.e. they borrow more when house prices are rising. And all that new money is circulation is inflationary when productivity doesn't rise with it (which it seldom does, and even then it lags by 6-12 months or more!)
So what should the RBNZ be doing if they were serious about inflation, financial stability and productivity?
- Drop the OCR - fast - to neutral
- Damp down credit growth in the most unproductive area of 'investment' in NZ by restricting DTIs & LVRs to the same sensible levels other OECD countries have ... especially for 'investors' buying existing houses. (Buying new ones is okay. That capital frees up the builder's investment - a real investment as new stuff was created - so the builder can move on and create more stuff.)
Why won't they do this? Put bluntly - the RBNZ is beholden to NZ's offshore owned banking cartel.
What's even more infuriating is that we saw that this could be done by virtue of not doing it when Covid hit. We dropped the OCR but also dropped the LVRs and kicked off a housing boom, and then paradoxically didn't tighten until it was clear inflation was rising and then tried to blame the Ukraine invasion for it, even though we had exceded the PTA window before Vlad rolled across the border.
Yes you can use the exchange rate to manage imported inflation pressure but if that's at the cost of the local economy grinding to a halt then it's not worth it. People who are losing jobs generally aren't going to go out and buy a house if the rates drop.
Yes. Bank deposits are cash or near cash that the banks are required to refund either on-demand or on maturity. A term deposit is an example. This is just one source of funding. Banks also 'securitize' existing assets (and future ones). A mortgage is a classic example, e.g. over a bit of property. But banks also securitize all sorts of other things, e.g. businesses, shares, debt (yes debt!), future revenues, etc. etc. If I turn up to bank with $100 million of triple A rated government debt, the banks will lend money to me based on that security.
Chris,
A couple of things. I know someone with SolarZero and looked at their bill for last March. Another retired couple with a similar sized home and they paid over $70 more than us. I live at the Mount and was with Trustpower, so continue to get a $500 annual payment. Funnily enough, the other reason was that I don't trust companies like Blackrock.
Well the good news is that the taxpayer funded them. So you paid for it anyway.
The Government has $115 million at risk from the collapse of SolarZero.
Finance Minister Nicola Willis said she was seeking urgent advice on the SolarZero situation. She had no further comment.
NZ Green Investment Finance - a “green investment bank” created by the previous Government to fund environmentally-friendly businesses - made a $145m debt facility available to SolarZero, as well as facilitating $220m in credit lines from international private lenders First Sentier Investors, Natixis Investment Managers and Société Générale.
They were recently sold to Blackrock and are now in liquidation as the model couldn’t be made to turn a profit so there that.
I’ve also seen on reddit that the stocking point for owners is that fact that you are lock into a contract for 20 years. So if you want to sell your house it’s upto you to try and convince the new owner to tack over the lease or be stuck with massive penalties. for that sole reason I personally steered well clear from any such contracts.
I've poured over the latest RBNZ forecasts. It is abundantly clear that they are expecting the economy to return to 'normal' simply by dropping rates and encouraging banks to pump mortgage lending into the economy (as kiwis return to bidding up the price of houses).
The only reason RBNZ are not expecting unemployment to spike by as much as they previously forecast is because (a) they are expecting the working age population to grow by much less as migration moderates and kiwis up and leave and (b) they are lower labour force participation rates (people giving up).
Every other forward indicator of jobs growth (eg business investment, govt spending etc) is forecast to be basically stagnant. This forecast is basically RBNZ saying to Govt that the country is entering a slumber from which it will only wake if something strucural changes. And, what are Govt proposing? Corporate babble and fiscal restraint.
"...And, what are Govt proposing? Corporate babble and fiscal restraint. "
...and PPPs 'for Africa'.
https://www.rnz.co.nz/national/programmes/morningreport/audio/201896628…
Concur.
This made me chuckle ... "This forecast is basically RBNZ saying to Govt that the country is entering a slumber from which it will only wake if something structural changes." ... Government simply isn't bright enough to join the dots in any such way. And I don't think the RBNZ is either. ;-)
I always think that whenever economists mention 'structural change' they mean cutting wages costs rather than new investment in energy infrastructure, R & D etc. To me structure change = austerity under a conservative govt so I'd rather they did nothing in that area.
I can see the farmgate price of milk moving up, interest rate costs decreasing and an unknown (potentially positive for NZ) Trump factor at play in the economy in 2025.
So you never know, there could be some positive news ahead.
Yeah. All too often 'structural change' is used by charlatans to mean b.s. like 'trickle down', austerity, etc. That's not change. That's more old fashioned thinking to reward the status quo.
But to my economic way of thinking, it is like yours ... we need investment in energy infrastructure, R & D, changing the tax system to reward 'work' rather than 'ownership', price smoothing mechanisms to mitigate energy shocks, far cheaper core services (especially in banking), balanced trade, etc., etc.
Or put another way, the current structure sucks as it rewards rentier behaviors. Ergo, we need a massive change in the current structure, i.e. real 'structural change'.
Anyone doubting that the RB was just trying to control inflation by disciplining workers:
We're confident that it's going to keep coming down, because we've got excess capacity in the economy, but … the reason we've got that is because of the OCR track
When they say excess capacity they mean unemployed people that their interest rate hikes pushed out of the labour market.
"Paul Conway, RBNZ’s chief economist, said this was necessary as domestic inflation was still simmering at 4.9% in the most recent data released and needed to be tamped down."
It's consumption and overall spending power the RB ends up killing by keeping rates higher for longer. The price setters who are fueling domestic inflation don't care where interest rates are set. They can just keep raising prices regardless.
This was a journalistic failure, Dan.
'Future growth would be at a “typical New Zealand, mediocre, muddling along, she’ll be right” annual rate of about 2.4%, Conway said, and going faster would require economic reform from the government and a change in Kiwi business culture.
Yes, he might have said that. But you have had information put in front of you, which belies that, and it's your job to challenge, not regurgitate the utterances of priests and witch-doctors.
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