Pressure mounts on RBNZ

Economists suggest strong economic data may push the bank to hike interest rates earlier than planned

15th Feb 13, 4:13pm by David Hargreaves

Signs of growing momentum in the New Zealand economy might force the Reserve Bank into hiking interest rates earlier than it has planned, according to BNZ economists.

The Official Cash Rate set by the RBNZ has been at an all-time low of 2.5% since March 2011. The RBNZ itself forecast in its last full Monetary Policy Statement (MPS) on December 6 it expected the 90 day bill rate (a proxy for the OCR) to start rising from the March quarter of 2014 and rise around half a percentage point by early 2015.

But a string of data has suggested the economy may be picking up faster than the central bank has forecast. The RBNZ has forecast GDP growth of 0.4% for the December 2012 quarter, but this projection is now looking low.

The house market is heating up, while just this week we have seen the ANZ-Roy Morgan NZ Consumer Confidence Survey hitting a 32-month high, BNZ - BusinessNZ's Performance of Manufacturing Index rise strongly and retail sales showing their biggest quarterly volume increase in six years. On top of this the Kiwi dollar has been hitting post-float highs against a basket of currencies of our trading partners - with the retail sales statistics helping to fuel this.

BNZ economist Doug Steel said the retail results added yet more support to a decent fourth-quarter GDP figure.

"We expected a big lift in retail today and even got a bit more. Not enough surprise to have us lifting our 0.7% pick for Q4 GDP at this point. But looking through the expenditure side of the national accounts the pressure is building to raise our Q4 GDP estimate.

"Either way, the latest string of data, including today’s retail figures, suggest that the economy is running a bit faster that the RBNZ had anticipated. Recall the Bank had +0.4% factored in for Q4 GDP.

"This is not enough to have the bank moving rates in the near term, but the economic momentum we’re seeing might well be enough to have it moving the projected timing of the first hike back into 2013 from the early 2014 it published in the December Monetary Policy Statement."

Steel said BNZ economists were still picking December 2013 for the first OCR hike. "However, the risks around this view have been steadily shifting from later than that to earlier over the past couple of months."

Westpac senior economist Michael Gordon said financial markets seemed to have belatedly cottoned on to the relatively positive growth of the New Zealand economy. He noted that the two-year swap rate had risen to 3.05%, its highest since March last year.

"Our forecast of 3% [economic] growth this year is hardly spectacular but it compares well with the likes of the US, Europe, and even Australia, which is nearing the peak of its (mining-related) investment boom just as New Zealand’s own (quake-related) investment boom is gearing up," he said.

The retail figure was "broadly in line" with Westpac's forecast of 0.8% growth in Q4 GDP.

"While we haven’t done a detailed breakdown yet, our sense is that strength in consumer spending and construction will be partly offset by a drop in agriculture, as growing conditions have gone from fantastic to just average overall (and pretty poor in some parts of the North Island).

"While growth is shaping up stronger than the Reserve Bank’s forecasts, one of the reasons for that strength is that inflation remains low (although rising food and fuel prices are reducing the odds of a third straight reading of sub-1% inflation).

"Our view remains that the tension between low consumer price inflation and accelerating house prices and credit growth will stay the RBNZ’s hand on interest rates until the end of this year – but from then on, the OCR could rise much further than the market is anticipating."

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26 Comments

by Wolly | 15th Feb 13, 4:29pm 1360898969

Tisk tisk..Shearer et al will not be pleased!

by Matt in Auck | 15th Feb 13, 4:48pm 1360900096

I doubt these recent positive figures are indicative of a strong sustained upswing. If similar positive results are produced in the next round of reporting then I may be of a different view.

by Andrewj | 15th Feb 13, 4:54pm 1360900493

An over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral.

http://www.oftwominds.com/blog.html

by notaneconomist | 16th Feb 13, 11:52am 1360968771

Once again I post the following link on how GDP is affected by increases in imports.

http://www.creditwritedowns.com/2008/10/gdp-deflator.html

by Stephen Hulme | 15th Feb 13, 5:17pm 1360901828

"Our view remains that the tension between low consumer price inflation and accelerating house prices and credit growth will stay the RBNZ’s hand on interest rates until the end of this year – but from then on, the OCR could rise much further than the market is anticipating."

You beauty -rising currency, rising interest rates - what a top combo - may it last forever for those who can only trade markets as the indebtedness of the nation has made it impossible to buy a profitable busineses due to the out of control cost plus plus approach to input costs and stupidly high, uneconomic capital values.

by Kate | 15th Feb 13, 8:09pm 1360912190

And of course - who is responsible for the accelerating credit growth?

by steven | 15th Feb 13, 8:56pm 1360914967

society as a whole...cant really blame Greenspan say, though he certianly shares a decent % with some others, but really its self-inflicted.

regartds

by notaneconomist | 16th Feb 13, 9:53am 1360961630

Kate - Well the people who wanted big Government and no real democracy have to stand up and take the blame.

Who writes the Legislation? People fool themselves that we live in a real democracy and don't take the time to consider what the effects of legislation will be.

by Stephen Hulme | 16th Feb 13, 10:15am 1360962925

We will all pay irrespective of who is culpable- it's not a pretty picture.

by Kate | 16th Feb 13, 5:52pm 1360990328

Point is - the banks and other lending institutions are responsible for accellerating credit growth - after all they are the ones doing the lending.

Meanwhile where they lend to persons who are not credit worthy - well, the government assistance will pay for that which should never have been lent in the first place. Take this example - the husband has a fulltime job - yet the family still needs a state house and the WFF tax credit. And they are making "loan repayments";

http://www.stuff.co.nz/national/health/8306750/Poverty-strikes-at-home-children-first-victims

Why should such a family have qualified for any type of credit given they are a ward of the state? Should someone in a state house qualify for credit? No. Should someone receiving WFF tax credits qualify for credit? No. All the government needs to do is pass a law which prohibits any form of lending to anyone receiving any form of social welfare benefit from the state - including those on super. That way, government money is not used to repay these private sector creditors, because the loans are never made.

In the old days - they never would have been made in the first place.

by Stephen Hulme | 16th Feb 13, 9:55pm 1361004939

Public disclosure tells me banks are OK with companies in receipt of a significant # of government and local authority contracts along with a director of note.

Read the last page but one of Mainzeal's December 2012 promotion magazine Mainsite and tell me otherwise.

by Kate | 16th Feb 13, 10:33pm 1361007203

And the real injustice of it - the banks won't have required Mainzeal's executive and directors to put up personal guarantees with respect to any of their lending to Mainzeal - yet I wonder how many unsecured sub-contractor's will have their houses on the line?

by kane02 | 17th Feb 13, 10:06am 1361048769

Amazingly Kate most large corporates the world over don't expect directors to put up PGs. That's why shares are unsecured. The directors of failed corporates still lose incomes, have wives and families to go home to as well, and the mortgage to pay, along with the distinction of being head of a corporate failure. No one goes about trying to wipe out a company. Business is tough and mainzeal is not the first company to fail - and sure as hell won't be the last. my assessment of the last 4-5 years is that the vast majority of failures have had some help by the state. Furthermore those that have survived invariably are either propped up directly, or indirectly by the state too. This discrimation, has now become mainstream, and in my view is a direct threat to our way of life. out of curiosity have you ever been in a fight with the state where your livelihood depends on it? Take it from me there is only ever one winner, and the other party invariably ends up broke, incapacitated, or dead.

by Stephen Hulme | 17th Feb 13, 10:37am 1361050649

It's time to stop local government/government picking winners (as Kate has noted before) with the commercial advantage of legal recourse to rate/tax payer debt guarantees.

It's not the citizen's responsibilty when a privileged cohort amongst us determines the validity of projects that have no private commercial merit, but are seen to be associated with the "greater good" and employment of preferred middle class professionals.

Rob Stock has penned an illuminating piece in Stuff on the subject of debt fueled LG project growth.

by Andrewj | 17th Feb 13, 11:31am 1361053860

We just need spending caps on both Local and National government.

They can spend any amount of money. In California fuel tax worksout at 9c a liter, what do you pay in NZ and where the hell does all that money go, including diesel taxes, because it sure as hell is not being spent around us.

The probem is ex Mps get chosen for their contacts, not their competence.

herss an interesting article on the death of a hero,

http://medialens.org/index.php/alerts/alert-archive/alerts-2013/714-dea…

by steven | 17th Feb 13, 2:17pm 1361063852

Spending caps in effect means austerity, which is a very austrian view and which is shown to be a failure. The short (keynesian) answer is Govn has to step in and keep money flowing when private industry / consumers doesnt...the problem really is its borrowed money and not previously cached.

So in the good times to control booms and inflation Govn tax should be in exess in order to save and even rise, in the busts those funds are drawn down....

Otherwise what we are looking at is classic "starve the beast tactics from the right wingers" who wait for it, are largely to blame for this current debt mountian....though their so called free markets, which are not.

regards

by Andrewj | 17th Feb 13, 2:53pm 1361066012

steven, Im confused. You think we should borrow more even though its not backed by production?

Like it or not we never saved for a rainy day, and many of my friends are at their wits end, paying rates over 30k pa.

In the last year councils have taken over 9k of me on my 250 acres. Im lucky to be in a good low debt council or they would be higher.

If you want to borrow to stimulate the economy, is the non productive sector the best way to do it? Because i could expand my vineyard by 10x and create 3 million dollars of new wine exports and six full time jobs, I just cannot do it under this cost structure.

Like it or not government revenues will fall, taxes will go up and so will government borrowing, while services contract. If we are going to borrow lets do it well.

Im in contraction on my small farm, its producing less than ever as I react to the high cost structure by doing less, to incure less cost. I now have very little risk of losing money but my production is halved.

Im in the States for bit so if you need anything sent out get my address off Bernard.

by Andrewj | 17th Feb 13, 3:06pm 1361066817

" it is not debt that we are hooked on but rather socialist

redistributionist consumption economics that give rise to debt and no

corresponding human or physical assets by which economic growth can

repay the debt."

by steven | 17th Feb 13, 1:58pm 1361062683

Yep, guy I know was telling me they come into DSE on a regular basis and buy TVs etc

regards

by Stephen Hulme | 17th Feb 13, 2:57pm 1361066249

And these overpaid recipients of government largesse don't ?

A Crown Treaty negotiator has pocketed $1.5 million, another more than $1m and several others large six-figure sums as the Government ramps up the settlement process.

NZ First leader Winston Peters has slammed the "colossal" payments as unjustified and accused Treaty Negotiations Minister Chris Finlayson of giving huge contracts to his "favoured mates".

by Mike B | 15th Feb 13, 11:15pm 1360923346

"and retail sales showing their biggest quarterly volume increase in six years"

Has this figure been adjusted for population variations?

Are the same amount of people spending more money per head or more people spending less money per head?

by Matt in Auck | 15th Feb 13, 11:41pm 1360924867

I've just read the retail sales release, as usual the devil is in the detail rather than the headline stats and hype...the jump in volumes was driven to a large extent by building, hardware, garden supplies in canterbury, I suspect the majority of retail is flattish / slightly rising off a weak base

by Wolly | 16th Feb 13, 9:23am 1360959820

Back room chatter is all about timing the ocr move to support the govt in late 014. It is highly like the banks have decided to allow Wheeler to move it up earlier, with an aim to hold thru all of next year.

by Andrewj | 16th Feb 13, 12:33pm 1360971222

“Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?”

http://www.bloomberg.com/news/2013-02-15/wal-mart-executives-sweat-slow…

by Happy123 | 18th Feb 13, 9:54am 1361134462

Our OCR, and subsequently interest rates, won't be going anywhere while the rest of the world is having currency wars. Higher rates, and so a higher dollar, is politically untenable. Exporters don't want the extra pressure and home owners don't want higher mortgage payments, both these groups make up the vast majority of the voting population. The only real downside to low interest rates is house price inflation and, for better or worse, most of the voting population like this too.

OCR on hold until our major trading partners make a move or stop printing money.

by steven | 18th Feb 13, 10:15am 1361135710

I agree, this is the symptom of course (currency wars), the real reason is buggered economies held down with debt and high energy costs. However I think there are enough cases where CBs have raised rates at the slightest sign of any possible inflation and that then has made the day a lot worse. So dont rule out blind dogma/stupidity...

regards