Reserve Bank (RBNZ) Governor Anna Breman says the country is likely to see higher near-term inflation and weaker economic growth - but she's strongly hinting the RBNZ will 'look through' early inflationary impacts and won't rush to raise interest rates.
The latter comments were likely aimed at financial markets that have pushed up wholesale interest rates, prompting banks to increase mortgage rates. Wholeale rates did fall after the speech was released, with the two-year swap rate, for example, down 5 basis points.
In a speech, Global shockwaves to Kiwi shores: The impact of the Iran conflict on New Zealand, being given on Tuesday afternoon but released early "to ensure that all stakeholders have equitable access to information", Breman acknowledged the uncertainty and hardship that many households and firms are experiencing due to the Middle East crisis.
"There is a risk that global financial stability risks could emerge and affect the cost and availability of funding for New Zealand banks," she said.
"However, recent stress testing suggests that banks are resilient with strong capital and liquidity buffers, and are well-placed to weather severe geopolitical shocks."
Breman was careful not to pre-empt what the RBNZ may say and decide at its next review of the Official Cash Rate (OCR) on April 8, but she did indicate clearly that a short-lived disruption and a temporary increase in petrol prices "can – and should – be looked through from a monetary policy perspective if it is unlikely to have an impact on medium-term inflation outcomes".
"...Tightening monetary policy in response to a short-lived disruption would only dampen growth without materially improving near-term inflation outcomes," she said.
Our annual rate of inflation was 3.1% as of the December quarter - so above the RBNZ's 1% to 3% target range.
The rise in wholesale interest rates has been such that ahead of the Breman speech financial markets were pricing in a 20% chance the RBNZ would increase the OCR - currently at 2.25% - as soon as the April 8 decision. A hike is 50% priced in for the May decision and 100% priced in for the July OCR review.
Breman set out the framework that the Monetary Policy Committee (MPC) will use to assess the appropriate monetary policy response to the effects of the conflict in the Middle East on New Zealand’s economy.
Ensuring that a temporary inflation spike doesn't become enduring
"Getting this judgement right is key to avoiding reacting too early to near-term inflation pressures that monetary policy can do little about – or reacting too late if above-target inflation becomes embedded in the economy,” she said.
"Most importantly, monetary policy can and should ensure that a temporary inflation spike does not turn into enduring inflationary pressures. The Committee will be vigilant to this risk."
Breman said the best contribution that monetary policy can make to the wellbeing of New Zealanders "is to deliver low and stable inflation over the medium term".
She said the RBNZ's primary mandate is to keep future annual inflation between 1% and 3% over the medium term.
"Our target is forward looking, meaning it is the medium-term outlook for inflation that guides our monetary policy decisions."
She said this means balancing higher near-term inflation and potentially higher inflation expectations against a weaker growth outlook.
The duration of the shock matters
"Key to this balance, the duration of the shock is an important factor in considering the appropriate monetary policy response."
Therefore a short-lived disruption and a temporary increase in petrol prices can – and should – be looked through from a monetary policy perspective if it is unlikely to have an impact on medium-term inflation outcomes.
"For this type of disruption, we would likely see higher inflation over the next few quarters, along with squeezed real incomes and demand."
The peak impact of monetary policy on inflation takes about six to nine quarters, which is why tightening monetary policy in response to a short-lived disruption would only dampen growth without materially improving near-term inflation outcomes.
"The picture changes if this disruption is longer lasting; if there are longer-lasting impacts on global productive capacity or domestic demand; or if there is a greater risk of heightened oil and other import prices feeding into higher inflation expectations and inflationary wage- and price-setting behaviour," Breman said.
"If there are effects on medium-term inflation or inflation expectations, the appropriate policy response could be to increase interest rates to prevent these second round effects. We would need tighter monetary policy to make sure inflation expectations remained well-anchored at 2%, and that inflation remains within our target band of 1% to 3% over the medium term."
Message to Govt: Fiscal policy is best placed to provide targeted support
Breman ended her speech with a clear message to the Government.
She said we are entering a time of uncertainty and potential hardship for many households and businesses that are still feeling the effects of high inflation in recent years.
"Fiscal policy, not monetary policy, is best placed to provide targeted support to households who are the most vulnerable to these price increases," she said.
"However, it is important that targeted responses are timely and temporary, to avoid sustained upward pressure to inflation over the medium term."
Breman said the Reserve Bank is well positioned to ensure price stability and financial stability.
"As with all shocks, we will undertake a full assessment of potential impacts for New Zealand’s economic and inflation outlook, and take a forward-looking view in our deliberations," Breman said.
55 Comments
There you go Independent Observer, following up from our discussion yesterday. Our Reserve Bank will not increase interest rates in response to imported inflation from oil prices
Yet.
Given their track record, they will do it when its too late in order to maximise pain and duration of the inflationary spike.
Did you also get this excited about agreeing with the central bankers when they said inflation was transitory last time around and refused to raise rates?
I'll admit I'm surprised, but should the diesel price continue to escalate or stay high for months, they will be without choice.
Because... higher interest rates will help relieve the pain inflicted by higher diesel prices ??? NOPE
Because... higher interest rates will bring down inflation which is caused by imported higher diesel cost ??? NOPE
RBNZ has but one lever to pull to manage inflation, and they can only sit on the sidelines for so long. Not that it will be good for NZ if they hike.
You're wasting your time. He's stuck in his own little 6th form economics echo chamber and can't seem to understand that a stimulatory rate environment with supply constraints would make things WORSE.
I've realised Yvil is seeing the issue purely from a 1st order effect perspective and not the second order effect.
Ie the argument is that higher interest rates won't reduce the price of oil. Which is true in the short term, but false in the long term (if aggregate demand is reduced via higher interest rates).
But I'm not even sure if Yvil understands what aggregate demand is and what happens if a price sprial starts (triggered by an energy shock) and how the central bank then need to tame aggregate demand to reduce the price level across the economy.
Yet, Yvil got this disagreement with you about the the RBNZ not rising rates because of oil prices spot on, you did not !
Predicting what the RBNZ was going to say today was childs play - even a monkey could have predicted that.
Congratulations!
Is it going to be correct in 6-12 months time? - that is the real question. Even she said if inflation keeps rising she will raise rates so not sure what you are celebrating.
You're not making yourself any favours by saying that a monkey could have predicted it, yet you did not.
Yeh you’re not wrong on second order effects, but you’re treating it like its already happening - and it aint.
Hiking now aint gonna change the cause, it just leans on a pretty soft economy for something that might only be temporary.
If it sticks and starts feeding through, then sure, deal with the demand.
However jumping in too early on a maybe is how you end up over tightening
Ok so another total BS "transitory" inflation statement, from the inept, Bankers and Real Estate industry owned RBNZ.
We are already out of their prescribed CPI band and it's getting worse and higher. They fiddle, while the poorest get inflation spit-roasted.
This means much higher and much longer in the future CPI and the eventual and late RBNZ responses!
I can only repeat my pist of yesterday:
by Yvil | 23rd Mar 26, 6:05pm
And raising the OCR is going to lower the price of imported oil, how exactly ?
And dropping the OCR for 3 decades to fight off imported deflation fixed that problem, how exactly?
Nobody ever seems to have an answer to this question. Like the elephant in the room that everyone just ignores after its smashed the whole house (economy) up.
It can help via the exchange rate.
But the main thing is that raising prices doesn't become entrenched. Company X raises their prices not because their input costs have increased, but because everyone else seems to be raising their prices. You could argue that shouldn't happen with the current economy, although you could also argue that the RBNZ still have stimulatory settings so it could happen.
"This means much higher and much longer in the future CPI and the eventual and late RBNZ responses!"
The RBNZ response is cognisant of other CBs, not least of which is (currently) the Fed....rightly or wrongly.
Our RBNZ is only meant to worry about inflation at 2%. Almost every other CB needs to worry about economy/employment.
"Our RBNZ is only meant to worry about inflation at 2%."....and financial stability
If banks are going to start falling over due to petrol price rises or small OCR increases they needed to have fixed that well before now!
What causes banks to fall over?
https://www.rbnz.govt.nz/financial-stability/our-approach-to-ensuring-f…
Oil prices has exactly the same impact on the economy as interest rates, it's just that in the 70's they chose to control the cost of money , and omit it from the CPI measure, rather than using the price of energy. Both are inelastic and directly impact other consumption choices. Arguably controlling energy prices would have been more effective as it impacts almost everyone the same way, rather than the cost of money which can benefit savers, yet disadvantage borrowers at the same time whereby having less impact.
So raising interest rates in this environment doesn't really make a lot of sense IMO
Someone gets it, well said,
If the OCR isn’t the right tool, they should have another tool ready to roll. Or their mandate should exclude imported inflation.
My reading of her comments is that they are looking at the medium term and this is transitory. Which is fine as long as they are right this time. But just like last time the market doesn’t agree with them.
Other tools to manage inflation include reduction in fiscal spending and increasing taxation.
But it would appear we are going to do the opposite of what would be recommend.
Keep rates stimulatory, don't reduce fiscal spending (or even increase it to cover tax credits), and give people tax credits, thus increasing aggregate demand in the economy which risks a price spiral from occurring.
As I was saying the other day IO, raising rates won't have any effect on inflation being caused by higher fuel/oil prices. It's better to have a fiscal/govt response.
"...Tightening monetary policy in response to a short-lived disruption would only dampen growth without materially improving near-term inflation outcomes,"
"Getting this judgement right is key to avoiding reacting too early to near-term inflation pressures that monetary policy can do little about – or reacting too late if above-target inflation becomes embedded in the economy,”
"The peak impact of monetary policy on inflation takes about six to nine quarters, which is why tightening monetary policy in response to a short-lived disruption would only dampen growth without materially improving near-term inflation outcomes."
"Fiscal policy, not monetary policy, is best placed to provide targeted support to households who are the most vulnerable to these price increases," she said.
"However, it is important that targeted responses are timely and temporary, to avoid sustained upward pressure to inflation over the medium term."
No it is not!! Increasing fiscal spending while you are importing inflation, only creates more inflation!! It makes the situation worse, not better. If you have a supply problem, giving people more money using fiscal spending (thus increasing demand) doesn't solve a thing.
Just because you agree with a central banker doesn't mean you are 'correct'. All they are doing is trying to protect the banks - not the living standards or value of the currency.
ie - they don't care about you or me, they are acting in the interests of the banking system. So I don't understand why people seem to want to agree with them so much, when they don't give a damn about you and what is best for you and the value of your hard earned income. What they are doing is going to (like the last 'transitory inflation' saga) ruin the purchasing power of your income by allowing inflation to rip through the economy. This isn't good news for anyone here.
You're not giving people more money though thereby increasing demand. You're looking at this from an academic view rather than a practical one. If fuel prices are effectively capped then no one has more money in their pockets to spend. Government debt would increase with a reduced tax intake but that's better than the debt going into the private sector right? As you (and Steve Keen) say it's private sector debt that cripples economies. If fuel prices are capped then that will go a long way to stop/reduce inflation. As Breman says and like I was saying the other day, increasing the OCR won't have any effect on this inflationary spike. By the time it does the damage is already done. This isn't like covid where credit became cheaper and demand went up and everyone went balls out to spend. This is all from a supply side problem.
You seem to wish the RBNZ make another mistake like you argue they have in the past. It's not a smart justification.
You haven't yet answered Yves or my question either, how will increasing the OCR reduce inflation from this oil/fuel price increase? And how soon do you expect it to have any effect?
Just so we don't waste too much of each others time - do you understand the concept of aggregate demand and how inflation functions with respect to supply and demand?
If not, then I realise I'm wasting my time discussing these issues with you - as its like you're missing a key concept that clarifies the situation. Like you want to talk about mathematics but don't know your times tables. Arguing that 2x2 = 3 and can't see anything else.
I fully agree with you that in the short term, raising rates doesn't reduce the price of oil. But that isn't the issue - but its the only issue you and Yvil seem to see. Its first order effect thinking, and not second.
The second order effect is what occurs in a few months time from now if energy prices don't come down and what we need to be concerned about (price spiral across the economy - not just in energy prices).
Tools available to reduce inflation include:
1. Raising rates to decrease aggregate demand in the economy (reduce demand for a given supply across the economy by reducing discretionary spending of mortgage holders/businesses with debt)
2. Reduce fiscal spending, again to reduce aggregate demand (less $$, same amount of goods/services).
3. Increase taxation - so that people have less money to spend (thus reducing the supply/demand imbalance).
Fiscal spending is only a good idea when you hit a deflationary recession (eg 2008, 2020). When you are already outside the mandated 1-3% band with inflation already tracking upwards (all of last year), then keeping rates steady, increasing fiscal spending and giving people tax breaks is the perfect recipe for price spiral to rip through the economy this year. And yet it seems to be the option we are taking.
It's BECAUSE we understand the second order of effects that we're saying what we are, much like JFoe further below. If we raised the OCR and nothing else then second order effects you like to talk about will certainly happen. The OCR won't stop that happening. Raising the OCR into an inflationary spiral due to quickly increasing oil costs would wreck the economy. I get you'd like to see that happen so you can finally be "proven right" regarding high private debt but it's not the correct way to sort this. Neither is giving out tax credits like the govt has just said. Yes, that will be stimulatory and will have an inflationary effect. If fuel prices were capped then there's no stimulatory effect as it's the same level we've been sitting at. The price spiral you're worried about will be dampened down before it becomes an issue.
"The price spiral you're worried about will be dampened down before it becomes an issue"
Lets start praying.
You are right if it is short lived. And it probably will be. But a bit of a gamble...
Higher oil prices are in addition to the out of band inflation that was already present right?
Fool me once or something like that...
Saving money is a suckers game. Borrow, borrow, borrow. THe PTB will look after you by subsidising the financial industry with savers assets.
If you want to know why it (essentially) dosnt work then spend 10 or so minutes with this.
Succinct and observable....the pup was sold decades ago.
As expected the RB will not be making any knee-jerk OCR adjustments. Sorry term deposit holders.
You don't understand Mike - even if the RBNZ choose not to move, they don't control the wholesale market. TD's will go up because swap rates go up.
Swaps might drop today based upon this talk from Breman trying to jaw-bone the market (and Trump as well with his 'we're negotiating' tweets to try and drop oil prices), but if Hormuz doesn't open up again in the near future, swaps will continue to rise and then to cover their interest rate risk, retail banks will be forced to continue to raise mortgage rates and TDs inline with movements in wholesale rates.
So the OCR could stay where it is and TDs could keep rising to 6, 7, 8% in the coming months.....
So like the opposite of what you suggest in your comment.
Swaps move the fixed market to a much lesser degree than the narrative of the RB.
Have you considered the likelihood that these fuel price rises have a similar effect to hiking interest rates 100 basis points? If so, then why are you calling for big rate hikes?
I expected they would say this too. But I'm not convinced that CPI is falling back to 2% in the medium term, and at some stage they are going to have to acknowledge that with a rate hike.
Next time at the supermarket till I wonder if I can tell them to "look through" the extra $50 they want me to pay. While I'm at it I might try that at the pump, and when I pay the rates, and the electricity bill.
Please Guv, just Look Through!
Can the council look through the latest rates increase? Asking for a Wellington friend
Some here may interpret my (corrrect) call to NOT raise interest rates as me being a "debt laden cheerleader for low interest rates". That's actually not the case. I can simply clearly see that higher interest rates won't do a thing to bring down the cost of higher imported oil prices. For the record, I also think that inflation is not coming back down below 3% any time soon, and that there is nothing the RB or any Government (left or right) can do about it. We are just stuck between a rock and a hard place.
If the OCR does nothing to inflation, may as well set it back to 0.25% and get the party started.
Inflation was back to 2.2%, then they started cutting the OCR to help the economy. If they stuck to their mandate it probably would work.
Good point Jimbo. There's no doubt that NZ needs to take it's medicine despite what the RB Governor says. I expect 1-yr retail interest rates to be sitting around 6% this time next year. It might take a full year of that dose (or perhaps slightly higher) to achieve the desired result.
So, here we are watching an oil / fuel price shock start to propagate through our price structure - we can expect to see it show up in the cost of transport, packaging, food, then wages, then rents etc etc. It's starting now, and we're talking about how we tackle it with interest rates and tailored subsidies that will do precisely nothing to stop that propagation.
The smart move is to smooth the shock with subsidies (tax credits) to importers to ensure that price shocks are partially suppressed... those credits could then be used to pay future taxes. Hell, you could let importers make a bit of interest on the credits if you want to be creative.
The smarter move would have been to have that tool designed and set up before this occurred. Its not like this is the first time fuel prices have ever shot up. The fact they don't have an alternative tool ready implies they think the OCR is capable.
Completely agree, I've been suggesting we do exactly that for several years.
"The smart move is to smooth the shock with subsidies (tax credits) to importers to ensure that price shocks are partially suppressed.."
I have a bridge for sale
"we're talking about how we tackle it (inflation) with interest rates and tailored subsidies that will do precisely nothing to stop that propagation."
Well said JF.
RBNZ cred is in the crapper!
DO THEY LEARN NOTHING????.
The RBBZ speak "transitory again" and the market calls it total bullshiester!
Bond rates are ROCKETING up again now, as everyone knows the RBNZ lost all control on inflation, by keep stimulatory settings, at the last meeting!
CPI well over 4% soon......
They might get lucky if this Hormuz situation clears itself up quickly - ie the next few weeks and oil prices drop. In that sense, doing what they are doing will in retrospect be the correct decision. But its a huge gamble.
They are playing with fire in my opinion and they could get seriously burnt - gambling that the price of oil will drop based upon an extremely uncertain geoplitical situation. If this takes 3-6 months to sort out (or longer), then the longer they delay raising rates, the worse this is going to get for everyone. And the more stupid they will look in retrospect - even worse than the recent 'transitory inflation' debacle.
If I were them I'd be doing a precautionary 50bp hike at the next meeting - which could always be reversed if the oil price starts to reduce earlier than expected. But if they wait another few months by not hiking at the next review - wholesale rates and inflation could be completely off to the races and they will be chasing inflation for the next 12 - 24 months - just as they were in 2022 - 2023.
"CPI well over 4% soon....."
Indeed Gecko, but rising the OCR would make no difference.
Also, we have to differentiate what we'd like to happen, from what is most likely to happen. Focusing on the latter is more financially rewarding
Pretty dangerous territory. How are they going to know what’s transitory once oil prices feed into the remainder of the CPI basket of goods?
And will the relevent authorities be monitoring if prices of both fuel and other goods will decrease accordingly or will they sit on their hands and allow opportunistic profiteering like 2022-2023
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