Kiwibank chief economist Jarrod Kerr says Reserve Bank Official Cash Rate (OCR) increases would be "reckless and unwarranted" because households and businesses don't need higher interest rates to dampen their demand for goods and services against the backdrop of the Middle East crisis and an oil shock.
In conversation with fellow Kiwibank economist Alexandra Turcu, Kerr notes ANZ, "New Zealand's largest bank, the blue Teletubby," is now forecasting three OCR increases between July and October, lifting the OCR to 3% from 2.25%.
"I just really struggle to see how the Reserve Bank would have seen enough data and assess that data as being highly inflationary in order to to hike as early as July. I mean, we don't even have the second quarter CPI report when they meet in July."
The Reserve Bank has a 1% to 3% inflation target range based on Statistics NZ's Consumers Price Index (CPI). In the December quarter the annual CPI rate was 3.1%. March quarter CPI is due out on April 21. June quarter CPI is due on July 21, 13 days after the Reserve Bank's July 8 Monetary Policy Review.
Kerr also says increasing the OCR in all of the July, September and October monetary policy reviews, as forecast by ANZ, would mean three hikes in the run-up to the November 7 election.
"That's punchy as well. I wouldn't want to be National going into an election where your economy's been hit for basically the last three years, and then you've had interest rates hiked three times into the election," Kerr says.
"A lot of Kiwis don't know that the central bank's independent, or a lot of Kiwis listen to what politicians say around interest rates and think that the politicians set the interest rates. So to have three rate hikes into the election's not going to help National at all. So I don't think they'd be too much of a fan of that."
"Obviously the central bank is independent. Obviously the central bank needs to do what they think they need to do. But I just don't think that they will know precisely what to do this side of the election, which is why we're still sticking to our call that thoughts of rate hikes, like they're in the distance. We've got to figure out what's going on first," says Kerr.
Whilst acknowledging an inflation shock in underway, against the backdrop of high fuel prices, Kerr thinks it's temporary.
"But we're not going to be able to assess that in the next three or four months, in my opinion. We need to see inflation expectations spike. We need to see businesses passing on these costs. And I just don't think that's happening."
Turcu notes the Reserve Bank will also be watching for signs of wage inflation.
"Which, in my opinion at least, we're not going to be seeing that skyrocket anytime soon," says Turcu.
The Kiwibank economists argue that, with the Middle East war not over yet, we don’t know when it will end. And even when it does, things will likely take months to return to normal.
"The real threat that remains, is the risk of a true knockout punch, that would come from a domestic fuel shortage. The heightened uncertainty is causing businesses and households to bunker down. Raising interest rates is tone deaf, and potentially reckless. Both businesses and households are struggling with increased costs, not surging demand."
"Any rise in the costs of essentials will feed into inflation short term, but cost increases will push demand down and put downward pressure on growth. We are likely to see a contraction in economic activity in the current quarter. And we won’t see this played out in the data for months to come. second quarter CPI isn’t out until July, after the Reserve Bank’s decision, and to know if inflation sticks around we really need to see third quarter data at the very least," the Kiwibank economists say.
"In our view, the Reserve Bank’s best course of action is to watch, wait, and weigh up the facts once they have the information in front of them. Households and businesses who’ve already seen their costs rise don’t need a rise in interest rates to dampen their demand – because this is not a demand story, this is not Covid. Raising interest rates risks a repeat of past mistakes, potentially inducing a recession. It could be reckless."
48 Comments
[ Very low quality comment removed. It reflects poorly on the commenter. Please comment respectfully and with something useful to say. Ed. ]
Even the editors are starting to ask for actual substance over noise
Or substance over maniacally pushing an agenda/narrative. If the agenda is just animosity toward banks or property investors one wonders if it should be welcomed here considering this is a website that tries to help readers to make financial decisions. At the very least comments should exhibit a degree of emotional regulation if not mental clarity.
By and large the editorial staff here have been more indulgent than repressive or narrow minded. The percentage of comments deleted has decreased markedly since 1 March 2025. By my observation the calibre of contributions has improved simultaneously. The answer to the question of, let’s say propriety, is simple in itself. Either the editor likes it or lump it.
Justice for Gecko! While I don't often agree with Mr G...I do always find him entertaining.
That being said, I didn't see this comment so maybe the big fella deserved a red card...??
Thanks SSC.
- Let full sunlight decide, I say.
I, with Gecko speak, said Kerr loves kiwis racking up monstrously impossible Debt. Many cannot not financially surface, after taking on such debts.
(I have had friends hoodwinked by wicked Bankers, who advanced massively large loans. They then lost homes and all their savings, in the past)
Obvious Exhibits, A: Many WellyFHBs/AuckFHBs. B: Zachs. ?
- take care of your financial and mental health. (Not joking). Banks are not your friends.
- Remember for J Kerr, His once fat bonus, depends on it much more and more and more Debt. Some of which, will default disastrously, in the next 12 months. Its a ship shattering iceberg.
- can the Interest team dig deep, on this widespread coverup? (massively stressed loan books, not openly advised to the market) - by exposed banks.
Its a story we expose to light now, or when the truth of the scale, of the real stressed/defaulting home loans, is too big to hide any longer.....
It would be interesting to see the impact if developers sold the overhang at prices FHBers could afford to buy, ie the $1 reserve auctions on 850k selling at 580k
I personally think a massive risk to the NZ Property market is what happens next to the Aussie market.
Confidence could be shaken here.
Anyways Kerr has always been the most dovish bank economist, Zollner is calling for 75bps, and -2% prices this year. Kerr doesn't have much of a record in predictions market. Mark Smith at ASB is good , watch his calls. Cam Bagrie is at the front of the pack.
It is hard to argue that...Mr Kerr has a vested interest so highlighting a potential bias in his opinion isn't a shocking statement...feels like your comment may have been sent to the same bunker as most of the warriors 50-50 tries (excluding Saturday)!!
Well said Gecko. Bankers really are not your friends, nor are they a friend of the country or farmers. The only thing they are interested in is their profits, and the size of the bonus they get from it.
I've had essentially the same conversation with a few farmers when I was made aware their bank manager was working with them to restructure their debts. It was interesting that when asked it was revealed that all the risk was in the farmers hands, most of the gains went to the bank and over time the debt virtually never reduced.
With the current Fonterra payout, the smart farmers will pay off what debt they can, the others.....?
‘In our view, the Reserve Bank’s best course of action is to watch, wait, and weigh up the facts once they have the information in front of them’
Doesnt make any sense as wholesale rates will rise regardless of whether the RBNZ hike or not - so it’s his bank who by regulation of the RBNZ who have to manage interest rate risk and have to raise mortgage rates as wholesale rates rise.
So by the time the RBNZ do anything, the horse will have already bolted and Kerrs bank customers will be suffering from higher rates that they pass ok to their customers, regardless of what the RBNZ do between now and July.
Yeh fair point on wholesale rates pushing things up anyway
But that still just means higher borrowing costs = people spending less
Which is kinda what Kerr’s getting at, just from a different angle
So question is whether that actually drives ongoing inflation, or just slows everything down a bit
The economy is at stall speed, slowing things down here will cause it to fall out of the sky.
Yeh thats the trade-off pretty much
If things are already at stall speed, higher borrowing costs are more likely to slow demand than keep inflation going
So question is whether this ends up as sticky inflation...or just a squeeze that tips things over
Either way I think the RBNZ will feel better with the OCR at Neutral around 3% then where it is now, I support Sharron at ANZ more the Kerr at KB on whats going to happen, especially combined with market pricing, RBNZ will loose credibility if they do not move soon, they have only a single mandate.
Yep true, they might move for credibility
But if things are already slowing, pushing rates up just feels like hitting the brakes harder
Hard to see that doing much for inflation from here vs just slowing things further
Personally I think he OCR needs to be revised as it is an outdated tool that was most effective when introduced and the percentage of the population with mortgages and all starting families were at an all time high. The demographic has changed since, as has preferences for homeownership and childbearing, therefore the methodology of tackling inflation needs reassessment.
I_O if they hiked 50bps tomorrow then they're still behind swaps so it wouldn't move the chain on retail rates much?
But, it would surely dent an already beaten up sentiment...and stall things further on that alone, so is it worth it...demand destruction in retail, hospitality, construction will start to be felt soon with so much money being syphoned out of wallets and into fuel tanks, will second round inflation seep into wage inflation? Will businesses be able to pay more?
I don't know...thats probably why I am not the governor...time will tell what was the right call eh
Yeh totally, thats pretty much it huh
Like a lot of moving parts, but most of it still comes back to costs rising and folks pulling back
If that starts flowing through properly, hard to see demand holding up enough to keep inflation running hot
More likely just ends up slowing things across the board
Outbreak of common sense. Debt servicing costs for businesses are about the same as fuel costs - and equally systemic. Increases in either are likely to push on prices. Anyone arguing for higher rates is usefully self-identifying as a believer in the inflation expectations nonsense.
So what do you say to savers having to suck up their deposits being eaten alive?
NZ households have $1.5 trillion in financial assets (net) - the highest in the OECD as a % of GDP. We can only protect that wealth in real terms by increasing the liabilities of other New Zealanders and businesses. Let's not do that.
So you're saying "take one for the team"? I would have thought the very action of saving was disinflationary? Saving is doing borrowers a favour, not the other way around. By making savings a mugs game blowing bubbles and driving savers to risky investing becomes standard practice. Save for your retirement everyone, but your million dollar nest egg won't buy you a bus ticket to the doctor.
Protecting real value of cash savings relies on around twice the interest added being paid by borrowers. The 'deflationary' impact of savings is nonsense here - if RBNZ raise rates into a stalled economy they will add more price pressure and destroy more productive capacity.
Outbreak of common sense. Debt servicing costs for businesses are about the same as fuel costs - and equally systemic. Increases in either are likely to push on prices. Anyone arguing for higher rates is usefully self-identifying as a believer in the inflation expectations nonsense.
While I agree with this 100%, I think that it misses the reality that the endless cycle of the price of debt has its trade-offs: devaluing the savings of the masses and devaluing their labor.
I don't know what the answer is. Deflation obviously would have made this more bearable, but the economy is pumped up with ridiculous land prices and the ruling elite will fight tooth and nail to protect the status quo.
Re inflation expectations, when firms believe prices will rise 3% over the next year, they tend to set their own prices with that 3% in mind, especially since they cannot continuously adjust prices. I believe this is wrong-headed too. But probably for different reasons. For ex, when I can sell 100 units at $1, but only 85 units at $1.03. Price elasticity is important for firms.
I wonder what the RBNZ currently consider the neutral rate to be. AFAIK we are below neutral so they are stimulating the economy. Perhaps that’s not particularly sensible when inflation is picking up.
Real interest costs per capita remain elevated. Anyone who thinks rates are stimulatory needs their head checking.
I personally don’t think current rates are stimulatory, but I feel like the RBNZ do.
They are, but too many Kiwis are donkey deep paying interest on property loans to have anything left to stimulate the economy.
That misallocation of private investment is not RBNZs problem, until it is.
100% IT.
-------------------------------
Since the inappropriate comment cancelling of mine and loving on Bankers (past and current bankers' words and narratives) that worryingly now, appears to reign more supreme here ? - Gecko has to speak via others?
I would really, respectfully like to know, what I said, that was?:
A. Incorrect?
B. Defamatory?
Via my training, there was neither.
If so, was it my style/humour that was disliked? Or does someone at Interest, possibly have a particular association with Mr Kerr?
- Sunlight please?
-------------------------------------------------
How does one respectfully dispute, a comment canceling, of a paying customer here?
Would really like to know.
I have had a few comments deleted.
https://youtu.be/2H5uWRjFsGc Chumbawamba - Tubthumping
As a side note, if you are old enough there was a guy who used to comment on zerohedge, he had a routine that looked for new posts and was always first comment poster with "I am Chumbawamba"
Your comment was deleted because it was of very low quality, below the standards we expect. It was also 'personal', playing the man, not the ball. That sort of sophomoric smearing is not welcome. You need to make a proper argument. Just because you disagree with someone else's opinion, it isn't a reason to go full-insult.
If you wish to dispute a deletion decision (we do very few of these), you should email me or Gareth Vaughan..
Being a "paying customer" has no bearing on these decisions. You can withdraw your Support at any time; it is your decision entirely.
Ok thanks.
Forgive me, but the fact that kiwis are 'deep paying interest on property loans', is why the OCR is not stimulatory. The current OCR is high enough to add $20 billion of interest to mortgages per year ($53m per day). That's one-ninth of total gross wages! That interest moves in broadly equal measure as profits for the banks and top-ups for plucky savers. It's a HUGE drag on the economy. Now add a current account deficit of another $20bn per year and skyrocketing amounts of money flowing offshore to buy fuel. We are truly stuffed.
The issue is that the RBNZ has been too slow. Too slow to increase the OCR which caused them to go too high, then too slow to decrease it. Now they need to increase it again but they never got it back to a stimulus level so they will do so with the economy in a shambles.
And here we are again, they are waiting and watching while everyone can see the CPI is not going to be 2% any time soon, they should be hiking now.
Rbnz moving rates up and down will make virtually no difference to inflation - a hike will add more price pressure than it removes.
Its pretty simple - our big industries reduce supply in response to lower demand, while holding margin. Higher debt servicing costs are passed through to prices. It's clear in the data.
its a blunt tool 1/3 donky deep 1/3 just in donkey, 1/3 left donkey... the last crowd if boomers are hard to control especially if they had multiple donkeys, ocr has little impact on them , perhaps adds to their income if it goes higher
Agreed. Most of NZs productive output is being capture and exported to Aussies bank owners. That we have allowed this to happen it back to back to back poor decisions and leadership from Govt.
#vestedinterests.
Perhaps the thinking can be related to the drowning man. That is, If he’s 6ft and in 7ft of water what’s the difference in raising it to 8ft. Can’t let the good folk forget who’s in charge can we.
I can feel a little song by Aussie Crawl coming on...
Possible Reckless, unless this is about Gecko's post then "its the boys light up...."
https://www.afr.com/policy/economy/rba-warns-of-high-inflation-low-grow…
“[It] is the central banker’s nightmare... inflation up, activity down. Judging the balance between those two is, I guess, how we earn our money.”
Hauser said the RBA would continue to raise rates if it assesses the risk of high inflation to be more important than the hit to economic growth.
“[Inflation risks] might still be on the upside [in the medium term], in which case we’re going to have to respond. But we do also need to take account of the possibility that activity slows.”
The RBA raised rates at its meetings in February and March this year due to the resurgence of inflation in Australia, which was at 3.7 per cent in February – above the central bank’s 2 per cent to 3 per cent target range.
National took a whole bunch of credit for interest rates coming down (playing on the ignorance of average kiws), it would be hilarious to watch them try distance themselves from hikes.
Also, inflation is out of band, and will be heading in the wrong direction, a CPI increase is the only logical step. Jarrod seems to think the only thing CPI affects is demand, not Forex etc....
That said, I'm pretty sure the RBNZ will chicken out of hikes before the election.
Yeh agree, I think they’ll hold for now with some "tough" talk thrown in
RBA will continue to hike, AUDNZD will go higher unless RBNZ hikes, imported inflation on top of oil fuel inflation,
As Gecko said the other day
Clowns to the left of me, Jokers to the right
I doubt we will se a 50 lift, that smells of panic, but 3 x 25 will be ok. I am not sure the RBNZ cares about the property market here, in fact it would probably see private debt redirected into something that was more productive.
I really think they should have hiked 0.25 at the last review. The more they wait the more they will need to panic and the higher rates will go. surely no one believes CPI is going to drop back to 2% any time soon with the current settings
I think they should have done .25 last time. Suppliers are putting up pricing left and right and anything that moves in NZ is subject to $3.89 diesel. Inflation is by far the biggest damaging force in NZ. All this on the back of utilities and Councils all but ignoring the Govt's call to keep a lid on cost increases. The Govt bill to cap rates increases cant come soon enough. Perish the though that Councils start managing and staffing appropriate to budgets and core needs.
That said, with all the stuff happening offshore and election coming... who would want their job currently?
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