The Reserve Bank (RBNZ) is widely expected to be a world leader in tightening monetary policy on Wednesday.
Most local economists expect it to increase the Official Cash Rate (OCR) from 0.25% to 0.50%.
Both inflation and inflation expectations are relatively high. The labour market is tight, unemployment rate low and wage pressure mounting.
But with the Delta variant of COVID-19 one slip-up away from finding its way into New Zealand, and other central banks still a wee way off raising interest rates, some commentators have been calling for (perhaps more so than expecting) the RBNZ to sit tight for a bit longer before raising interest rates.
While this isn’t beyond the realms of possibility, RBNZ observers increasingly see a 50-point hike as a more probable second-most-likely option.
If the RBNZ doesn’t lift the OCR by 25 points, they think there’s a higher chance of it lifting it by 50 points, than keeping it on hold.
Both ANZ chief economist Sharon Zollner and Westpac acting chief economist Michael Gordon noted a 50-point move would be unusual (particularly when it comes to hiking interest rates) but not unprecedented.
However, Zollner wasn’t ruling out the possibly of a larger hike, characterising RBNZ Governor Adrian Orr as more of an “action man” than a “dove” or a “hawk”.
Similarly, Gordon said the Monetary Policy Committee has already shown itself to be an “activist one”.
“You may recall that in August 2019 the RBNZ shocked everyone by cutting the OCR by 50 basis points, when market opinion was strongly in favour of a 25-point move,” Gordon said.
“Setting aside the economic rationale for this, what was most interesting was how the Committee explained its decision, which was essentially: ‘we thought that the OCR needed to be 50 basis points lower, so we did it’.”
Again, Gordon and Zollner are firmly of the view the RBNZ will raise the OCR by 25 points. The economic data suggests New Zealand no longer needs emergency monetary policy settings. But it’s interesting to note how this data is so strong, a 50-point hike is seen to be more likely than no change.
Triple T Consulting managing director Sean Keane said this possibility was concerning traders, so they were hedging the risk of a 50-point move.
Keane believed a 25-point hike would be sufficient.
He noted markets had already done some of the work for the RBNZ, pricing in higher rates, which have fed through to higher mortgage rates.
What’s more, tighter conditions haven’t pushed the New Zealand dollar higher.
Keane was also of the view the RBNZ wouldn’t eventually need to lift the OCR too much to keep inflation in check. Because New Zealanders have so much mortgage debt, the country is very exposed to rate changes, so even a small OCR move will have a relatively big effect.
Furthermore, Keane saw the housing market finally cooling, on the back of tax changes, higher mortgage rates, tougher bank lending restrictions, low immigration and high levels of house building.
“Finally, we would note that over the past 30+ years we have seen New Zealand markets go their own way from time to time, with the local economists and markets ignoring what is happening overseas,” he said.
“The current market feels a lot like some of those past events.
“Yes, New Zealand has some real inflation, and yes there are genuine shortages and price pressures but they are all artificial, and they are all solved by normalisation of the supply chain.
“The rest of the world seems to be more patient with this than the New Zealand market wants to be, but ultimately the global situation will limit what the RBNZ can do.”
57 Comments
Agreed. I would just about faint from shock if Jenee engaged in some balanced reporting for a change. All this talk of 'the Reserve Bank needs to tighten the screws to rein in inflation/discipline the labour force'. Would it occur to her to ask Robert Reid of First Union for an opinion? What about the CTU and Richard Wagstaff? Or Craig Rennie? I doubt it would occur to her to go to the union or worker side of the story. That's because it's solely business that tells us about the economy. How narrow a subject economics has become.
I think they will be considering the amount of increase needed for he OCR in combination with a DTI for investors so they dont have to raise the OCR to 1.5.
If the Auckland median jumps to 1.3 million in October the DTIs will be fast tracked I believe.
If it were me I would do and OCR of 1.0 by Nov in combo with an investor DTI of 5.5
"Yes, New Zealand has some real inflation, and yes there are genuine shortages and price pressures but they are all artificial, and they are all solved by normalisation of the supply chain"
How can you say this? Yes 'some' inflationary pressures are a result of supply issues but if people "feel" wealthier as a result of QE, capital gains or whatever then they will spend and drive prices up. Cheap, easy money is the problem.
And when does the supply chain "normalise"?
My own financial costs show worsening, and our provider have no short term improvement visible.
It will be 12 months before we see any improvement, and current inventories are so low that even once they "normalise", pent up demand will strip supply before it catches up.
I've not seen any indication about future direction from RBNZ. Ordinarily RBNZ signal OCR raises well in advance. They have a lot of room to unwind QE if they wanted to buy a little more time and ensure an orderly transition beginning to the rate raising cycle. If the do a 50bps raise it may be "one and done" so I doubt they'll do that.
Incidentally New Zealand won't be the first to raise, Mexico went ahead of us.
Fitch see increased profitability for banks .
https://www.fitchratings.com/research/banks/new-zealand-rate-hikes-may-…
'What are the chances of 'action man's Orr raising rates by 50 points?'
Jenee, What are the chances that he will even raise by 25points ?
What about LVR That he has indicated personally that will be changed to target Speculative demand. Will he have the balls to raise LVR from 40% to 60% - understand extreme measure but extreme situation requires extreme measure and if as they are crying that want to target speculators without hurting FHB, What better way than raising but will he ?
DTI that he has been wanting since ages and since last year knew that may soon get it so obviously must have done his home work and blue print should be ready by now and may be need some finishing touches, which hopefully must have been done if serious about protecting FHB but question is WILL HE ? or hide behind technicality / discussing ...type of nonsense only to delay and divert ?
His Wednesday announcement has been made such a big thing but will be .........just as planned to divert the attention and delay continuing with his policy of Wait And watch.
Your statement is self contradictory.
If there's plenty of food on the selves, prices would be stable even if demand notches up. Therefore, I put to you that it is the prices on the food in the selves that are driving food inflation up- which supports the point on my original post.
Thus, the raising of OCR which decreases household disposable income further exacerbate malnutrition, poverty and economic malaise.
"..........Therefore, I put to you that it is the prices on the food in the selves that are driving food inflation up". Really!
So you understand that supermarkets aren't there to offer the lowest imaginable prices to support a healthy and happy society and only increase prices if directly related to supply? They are about 'profit'. If there is huge demand for something they will cash in and raise prices.
I agree. If they raise just 50 BPs by xmas then when I refinance end of the year I will be paying more than $40 more per week on my mortgage. As I have said before, I would need to trim my discretionary spending.
Having said that, many people are mortgage free or have quite small mortgages, so the impact might still be quite moderated.
Plus some people will be renewing mortgages this year, and will get a rate lower than their existing one (if they are coming off a fixed two year for example)
Whatever the Reserve Bank decides to do on Wednesday, they can hardly afford another policy error. If they were to raise by 50bps and then have to drop it again soon after, their credibility is going to take a big hit. They've already gone back on OCR forward guidance once in recent times. Bond markets will punish unpredictability, and I'm just wondering whether they might decide to "Orr on the side of caution" here with a wait-and-see approach.
Inflation is high because of the sudden shock waves with global supply chains because of manufacturing and resourced based economies were put at a complete stand still due to COVID. In addition, the restrictions of people movement in/out of countries has created a huge shortage of labour and talent in the market. All these directly contribute and is the main cause of price inflation. High demand, low supply, low productivity.
It has nothing to do with property prices. If you talk to any tradies, their biggest issues are 1) not enough workers, and 2) not enough supply to do their jobs.
You all can blame low interest rates and house prices all you want. These are facts and the housing prices was simply a by-product of the real issues at hand; all managed by an incompetent bank & government who lack the basic knowledge of how an economy works.
Well, the housing market is well-and-truly financialized.
Those with equity in property have access to Bank Funding [newly printed money].
Those with jobs DO NOT have access to Bank Funding [newly printed money].
Yet those with jobs and/or access to government subsidies are the ones paying the investor's mortgage(s)/interest-payments.
The RBNZ is not only diluting the purchasing power of the NZD by increasing the money supply, they're restricting access to the newly-printed-money to investors [landed gentry].
Though this is an over simplification of the situation and money creation, it's pretty much true on both fronts.
Maybe restrict investors (in existing properties) to ONLY borrowing money already in existence. Stop letting the RBNZ print BAND NEW MONEY and handing it directly to speculators.
Let them borrow money, BUT ONLY Money already in existence.
Well, if Orr hacks too hard at the roots of the Mighty Tane, it's gonna fall across the necks of all a them overextended FHB's and assorted others. They've been sheltering under its low-interest branches for a while now.
Perhaps a haruspex or astrologer might help him out here. It's a simple proposition: get me outta this Corner I've painted meself into......
I don't think he will. Speaking as someone who has previously been scathing about RBNZ (central bank) stimulunacy destroying my then risk-averse savings, I of course took on more risk and am now as damaged by rising interest rates as I was by falling interest rates (I'm on negative in bonds), but that's the nature of totally distorted financial markets, but I think our economy is not as strong as it might seem, we're in for stagflation which Orr can't do anything about, and learning last week that even over the last 12 months there were over 50 farmers in debt remediation with their banks, and that being up to over 100 now, plus all these new fully leveraged house owners - we're the long white land of debt - I don't think he will raise this time, and if he does he's reckless (within the boundaries of an institution that has seen the most reckless monetary policy visited on the West, ever). All central banks, particularly FED, are backed into a corner of their own making, and getting out of it probably collapses our economies. They should all be taken to debtors court.
Also, this government is doing everything they can to destroy the wealth affect from housing, and their lunatic policies will snowball. Once the wealth affect is gone, the consumer is dead, there's no immigration to sustain us while we keep these Covid settings, Orr may well be factoring in a Delta contagion, plus China is pulling back from taking our farm produce. I think we've got really hard times ahead where all the mistakes of monetary, fiscal and tax policy will birth their particular monsters.
You shouldn't complain about the gov't destroying the wealth effect from housing while also criticising our debt load. That wealth effect property owners is their confidence that they can get a pile of money when they want from a FHB (or other investor), and that money will be borrowed.
I agree with most of what you say though. Raising rates to any meaningful extent *will* crater the economy. Not raising rates will see inflation rise rapidly, especially if other CBs do. This is why I maintain that there *won't* be a rise this week.
No point in discussing as Orr has its own agenda which he his pursuing along with Jacinda otherwise situation leading to this warning could have been avoided :
https://www.nzherald.co.nz/business/rise-in-million-dollar-mortgages-pr…
Its been decades of the property ponzi cake, this last year has just been the icing, i really dont care any more about their fiddling about with the decorating.
"All the sweet, green icing flowing down
Someone left the cake out in the rain
I don't think that I can take it
'Cause it took so long to bake it
And I'll never have that recipe again
Oh no!"
I am going with the Zero. Especially with the Christmas and the Wedding coming and the Vaccination stalling and Aussie getting worse. Inflation is the least concerning issue right now. Banks are drum rolling that scare. RBNZ should know that. Action man will go Passive this time, methinks.
A 50-point hike would be most prudent at this stage.
NZ has a rent crisis that will escalate over next few years unless house prices come down to more affordable levels. This is best achieved through higher interest rates.
NZ is running out of motel space for emergency accommodation. Not a good look for our tourism sector when NZ starts opening up its borders.
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