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ANZ economists say the economy is running so hot the Reserve Bank's 'path of least regret' is morphing into tightening monetary policy sooner 'to head off excesses'

ANZ economists say the economy is running so hot the Reserve Bank's 'path of least regret' is morphing into tightening monetary policy sooner 'to head off excesses'

ANZ economists say with the economy running as hot as it is there's "a real possibility" now that the Reserve Bank will start lifting interest rates as soon as November this year.

In its most recent Monetary Policy Statement (MPS) in May the RBNZ surprised the marketplace by forecasting the beginning of rises in the Official Cash Rate (currently at 0.25%) in the second half of next year.

But subsequent to the release of the MPS, there's been further strong economic data released, including much stronger than expected GDP figures.

In reaction to those GDP figures a week-and-a-half ago, the ANZ economists forecast that the OCR rises would start in February next year.

Now, however, the ANZ economists are suggesting that lift off for interest rates might even be before the end of this year.

"...The fact is that GDP growth of 1.6% in Q1 was far stronger than the RBNZ expected (-0.6%)," the economists say.

"Though the RBNZ doesn’t publish forecasts at Monetary Policy Reviews (with the next due on 14 July), the Q1 GDP data will inevitably lead to an upgrade to their estimate of how stretched the economy is, and an earlier lift-off in their OCR forecast.

"The balance of risks has abruptly and firmly tilted from one potential regret (hiking too soon) to the other (hiking too late).

"The simple fact is, there is now absolutely no reason to have the OCR at such extreme lows, and the sooner it rises, the better – a late scramble would imply more hikes, faster, thereby increasing the odds of a hard landing – for the housing market in particular.

"The RBNZ wanted to run the economy hot; they’ve achieved it, in what’s a mix of strong demand and constrained supply.

"The housing market is dangerously strong, households are spending freely, businesses are employing and investing, inflation is threatening to go well outside the top of the target band, [ANZ Business Outlook] inflation expectations are above the [2%] target band midpoint and rising, costs are soaring, and the labour market is extremely tight.

"Unlike some central banks, the RBNZ isn’t afraid to change its mind when the facts change, and good on them. While downside risks absolutely could still eventuate, the more pertinent risk here and now is that we’ll see a higher OCR before the year is out."

The economists say New Zealand's economy "is running so hot" that the RBNZ’s path of least regret "is morphing into tightening sooner to head off excesses, rather than over-stimulating to avoid slipping into the proverbial economic abyss".

A November 2021 RBNZ hike is "a real possibility now".

The economists say the “good news” is that earlier hikes would likely mean fewer hikes.

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26 Comments

mixed messages,havent they just offered a blueprint to build deal of 1.68%?

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Last in first out NZRB.

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Let me translate bank economist speak....

'the labour market is extremely tight' = employers paying starvation wages and offering no job security cannot recruit all the people they need

'good news is that earlier hikes would likely mean fewer hikes' = good news is that the banks we work for make shed loads of cash when interest rates rise

'housing market is dangerously strong' - we have made billions from a borrowing fueled house price bubble, but it's getting a bit embarrassing now and we are worried that Govt might move to regulate our favourite get rich quick scheme

'households are spending freely' = rich people made giddy by the value of their houses (and rental properties) are spending their money whilst hundreds of thousands of poor people go without the bare necessities

'tightening sooner to head off excesses' = we want to siphon excessive amounts of money from ordinary peoples' pockets to our shareholders

'the economy is running so hot' = at least half a million people are in involuntary unemployment or want to work more

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the last comment is a bit odd- I have a full time job - but no wage increase this year (I work in the public service) meant I needed some extra money to come in to cover increasing expenses. I applied to 2 local restaurants as Front of house staff - landed interviews within 3 days at both places- both wanted me to start immediately working whatever hours I like as they were desperate for staff, so anybody claiming they cant get hours isnt trying.

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That's a new job. What people say when they want more work is with their primary employer

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There are about 30,000 job vacancies in NZ at the moment. There are 135,000 people unemployed, another 230,000 people who want more hours, and another 600,000 working age people who are off radar (not working and not claiming dole). Many of the off radar group would come back into the labour market if the right job came up locally (e.g. supermarket shifts during school hours). There is therefore a clear mismatch between the number of jobs available and the number of people wanting work or more work - at least 10 people for every vacancy and probably more like 20 - 30 when you account for the 'off radar' potential workers.

There is also a significant mismatch across job location, shift patterns, job security, skills required, physical attributes etc. So, if you are in a city or town, and you want a few evening shifts working for minimum wage in a restaurant then you can find some casual work. If you are prepared to go and live in a dormitory away from your family and pick fruit or veg for 8 hours a day - again, this is an option. But, if you want a 40 hour a week job that is local to your family, pays living wage, and provides the security of income you need to come off benefits and afford to pay the bills - good luck.

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Underemployment is a major issue, governments and employers are moving away from the traditional 40hr working week. I retired early at 60 and am not counted in the figures, my wife is probably going to have to end her nursing career early and won’t be counted in the unemployed figures or disabled figures as she won’t be eligible for a benefit.

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Unfortunately your wife's case is common. The stats will ignore her as unemployed completely and this is also why there is such a worse financial outcome for women. Socially the rules have a harmful outcome they can stay or be forced to stay in violent or abusive relationships longer and NZ loses the productivity as these women become so demoralised that they are unlikely to do the option plan C that if finding another job does not work then starting a lightweight business for self employment (they are struggling to survive often without supportive income for education or even basic needs as many relationships are not sharing finances). Unfortunately the discrimination of the partner rule disproportionately affects women, particularly disabled women. Hence had a friend who was blind who went on a few dates and her support was cut completely. Apparently WINZ expected the guy to suddenly pay for everything, including her rent and shopping bills, after the forth coffee, movie and a dinner. Bit much for WINZ to expect them to have a financial sharing like a married couple in under a month, even many married couples do not share finances to enable the independence of their partners to be able to have training and careers. By WINZ 's logic disabled women would be better off as prostitutes than expecting disability support and through WINZ rules many women have had to lead that life to get by.

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Here is a stumper for you, try to think it out. What if you cannot work while standing, how does that restaurant waitressing job look. There are hundreds of thousands who can work but cannot work odd no guaranteed hours, or labour work. What do you think they have been doing all this time because applying for jobs has been top of that list and stats show the employers just do not feel like hiring 50 year old engineers or 30 year old skilled techs or even 65 year old admin and care staff because newsflash shirley ageism and discrimination is rife in little old NZ. How nice of you to find a job that works for you. Pity those who get turned away from hundreds of applications for jobs they could do, are trained for but are too old or disabled for employers to like. Many employers said no to wheelchair bound techies even though no extra equipment is needed, all staff already remote to clients overseas or in other regions and good news the wheelchair bound ones come with their own chair and pay for their own office space.

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I suggest been a little bit less rude. We cant all get jobs in the places we would like (I'd like to be a CEO and earn $1M a year- but I need to be a bit more realistic given i dont have the skills for that) It is also fair to say some jobs have become obsolete- ie probably not a lot of future in been a bank teller these days and most milkman left the business in the 80's.

The construction industry is screaming out for engineers and plenty are hiring 50+ yr old engineers. My full time job hires plenty of people over 50 including in admin roles. I'm 46 and waitressing (to cover expenses) - neither restaurant baulked at my age. The restaurant I'm in has mainly 50+ chefs and a number of wait staff in the same age bracket. A friends cafe has a 55 year old chef. Admittedly been disabled does create challenges- but it has always created challenges and there are more people in NZ with disabilities working then there has ever been. Try getting a job 20, 30 or 40 years ago with a disability.

Queenstown, Napier, Wellington, Hamilton, Auckland, Tauranga are all screaming out for staff. The jobs are there.

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Then why are they not hiring NZders and by preferrence applying for migration visas for such skilled roles as barristas and vacuum cleaners. I have seen several nurses turned down for every role due to age and many hundreds of engineers. Most in fact could not find any employers in those cities willing to hire them (in many fields and some were leaving large global brands). It is easier to get jobs with overseas companies than NZ ones and that is the case regardless of ability. In fact not only will American, UK and Aus companies discriminate less they pay 100k more and throw in health insurance regardless of preexisting conditions to boot. The general stats in those fields, and hiring experiences of employees in their 50s in NZ does not match yours but sadly matches most leaving the industries due to ageism. Call it a glass ceiling set by age if that helps you recognize the very real statistical reality. Many NZ Employers are crying out for migrants because employers are not hiring locals or lifting wages but in fact are simply lying. Easy to see in the skilled categories applied for claimed as a shortage. It does not take special training to push a vacuum, work in entry level low skill roles or provide support work yet most large profitable NZ employers think a one week training induction period is beyond their capability.

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Two weeks ago I said the first lift would be August and I stand by that - if the REINZ and Corelogic numbers show a hot housing market in June and July - then I'll guarantee there will be an August 2021 rate rise and if there is no cooling in Sept and Oct- then it will be followed by a Nov rate rise.

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You beat me to the August predication. The economists are a bit of a joke really, with every week that goes by they pull in the prediction by months. Just a couple of months ago rises were way out there in 2023 and now look where they are.

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Orr's going to do what!? In what world would he surprise everyone... with an OCR hike? The guys all about playing it safe and keeping the party going.

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"there is absolutely no reason to have the OCR at such extreme lows"
Except to keep the stock markets up and stop a reasonable slab of recent buyers from having negative equity.
Which might be why Fed has had them too low since 2002

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Two turns in market now - one was in Feb and another was mid June.
Both front run figures you see for sales etc.
Cycle turns whilst you are thinking linearly.
Have to be ahead of that.
That is why I look at cycles
Delphic.? Muh?

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I don't believe it for a minute.
The only thing that will push the RB to raise rates is if they're forced to by rate raises elsewhere.
'The path of least regret' will always, always be lower rates. It's ultimately a political institution; there's enormous political risk in raising rates, and none in keeping them low.

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Whats the level of "Political Risk" of doing nothing and house prices going up another 30% before they "Do Something" ?

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Forget the political risk, what is the health risk? More a higher level of illness, crime, lack of productivity & social mobility, and lack of new talent & startups. But employers can ignore most of that by hiring from overseas and housing in sheds and hotels as they often have been doing. Shame about the lowering standards of living though. As the worm turns it finds the standards of care come retirement not meeting the needs of the new elderly who grew up to expect social supports and nursing care would be available. Spoke to several nurses and most plan to do their training in NZ then hightail it out to the UK, Aus, US etc. Many engineers and maths mates got work at well known companies overseas for 100k more than NZ wages, paid 500k less for housing and bonus comprehensive insurance is thrown in with the jobs (including preexisting conditions and loss of work due to illness so they would be ok no matter the country). It seems housing is a core need. That people often cannot live or work without somewhere safe to sleep for them and their family. But that need is only recognized in countries other than NZ. Even the nurses we are shipping into NZ have plans to leave as soon as they find a place easier to get housing for them and their family.

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Apparently none, look at the current approval ratings. I’m not saying it’s right, quite the opposite.

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I think you need to understand RBNZ's role and RBNZ works independently to understand how they make decisions. New Zealand is not communist country. The government has no control over the central bank.

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Read the Reserve Bank Act. The RBNZ has some control. RBNZ is not as independent as politicians make it out to be.

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Bring it on. But November is too late - OCR must be raised NOW to 1%, increased progressively to 2.5% at least, and by end of next year at the latest.
This will prevent overheating, contain inflationary pressures, and prevent the need to raise interest rates to a higher level later on.

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I'd suggest the USD/NZD would hit 80c with all the negative implications of that. RBNZ has to keep an eye on what the Fed and ARB are doing. 0.5% within 3 months and possibly 0.75% within 6-9 months is more realistic.

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"The economists say the “good news” is that earlier hikes would likely mean fewer hikes."
I've mentioned the same thing by the end of last year. Yes, it could be "the RBNZ isn’t afraid to change its mind when the facts change", they might have been looking for solid data for that. But last year's housing price hike proved so many forecasts were wrong, our economy wasn't impacted by much, it's clear for most of us that RBNZ has overheated the economy. I seriously don't understand what they are waiting for, the longer they wait, the bigger hike it can be. When the bigger hikes for OCR come, it could be a very hard correction and we might get many years recession like Japan.

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What if I told you, when bank economists say interest rates will go up, it increases demand. I don't think these economists know this themselves.

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