RBNZ's McDermott warns of low inflation figure likely in September quarter; says inflation likely to be at bottom end of 1-3% target range in December quarter; repeats September OCR comment that "further policy easing will be required"

RBNZ's McDermott warns of low inflation figure likely in September quarter; says inflation likely to be at bottom end of 1-3% target range in December quarter; repeats September OCR comment that "further policy easing will be required"
John McDermott, Assistant Governor, RBNZ

By Bernard Hickey

Reserve Bank Assistant Governor John McDermott has warned of a low inflation figure for the September quarter next week and has repeated the bank's September 22 guidance on the Official Cash Rate that a further reduction would be required for the Reserve Bank to reach its inflation targets.

McDermott told the Bay of Plenty Employers and Manufacturers Association in a speech this afternoon that September quarter inflation figures due next Thursday were expected to be low, but that annual inflation would rebound to the bottom of the Reserve Bank's  1-3% target range in the December quarter.

“The Bank’s goal remains to keep future annual CPI inflation outcomes between 1 percent and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint," McDermott said.

“As described in the September OCR review, monetary policy will continue to be accommodative. Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," he said.

The New Zealand dollar dropped around 20 basis points to 70.77 USc immediately after the speech was released, and had fallen earlier in the day from as high as 71.4 USc. It has fallen from as high as 73.5 USc over the last three weeks on growing expectations of a US interest rate hike as soon as December, and on doubts that central banks will be able or will want to be able to keep interest rates at near 0% or even negative levels for much longer.

McDermott said there were several reasons for low inflation, both domestically and globally.

"In New Zealand, tradables inflation, which accounts for almost half of the CPI regimen, has been negative for the past four years. Much of the weakness in inflation can be attributed to global developments that have been reflected in the high New Zealand dollar and low inflation in our import prices," he said.

"Strong net immigration and increased labour market participation have also boosted the supply potential of the economy, meaning that New Zealand has been able to grow at a robust pace without generating significant inflation.”

McDermott said there also appeared to have been changes in how inflation is generated in New Zealand

"The drivers and composition of net immigration influence the degree of associated inflationary pressure for any given migration flow, and inflation expectations appear to now place more weight on past inflation outcomes than they did prior to the global financial crisis," he said.

(Updated with more details, market reaction)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

How much of credit growth is going to be captured by the CPI when existing land and houses are not in there?

CPI 101 again....

"The CPI stands for a Consumer Price Index. As in the price of things that are consumed (at a particular moment in time). Real estate prices are not the price of something consumed because they contain the value of current housing consumption but also the capitalized value of future housing consumption. As such, including house prices would make the CPI a mixture of consumption at different times, and therefore unsuitable for comparing the price of consumption bundles at distinct times. Instead, they use a purer measure of the price of housing consumption: rents."

C'mon people move on... Just because you baby boomers aren't getting the big interest returns on your term deposits don't try screwing home owners by trying to conflate house prices with consumption.

Houses prices are in bubble territory

“In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit.”

What's this got to do with CPI?....

If the Auckland Property market is a Ponzi scheme then like all such schemes the last person to join will be burned. Given they would be a greedy fool based on your quote above ("men who bought property at prices they knew perfectly well were fictitious") then what's the problem. This still doesn't explain why everyone is calling for an OCR rise when CPI is so low. Greedy depositors looking for bigger returns is the obvious answer for calls for OCR rises when CPI is low.

I am no boomer. In fact I've been screwed over by them. I simply want the interest rates to go up so I can buy a house cheaper. Housing is my single largest cost by far. But it's only a consumer index, not a "family setup price index".

Don't hold your breath. "From the nation's founding until about 1950, interest rates were on a clear downward trend. This makes sense: As society gets richer, there's more money available to lend, and so the price to borrow money naturally goes down. From this perspective, the high interest rates of the 1970s, '80s, and '90s look like an aberration driven by the unusually high inflation of that era. And today's low rates look more like the resumption of a 200-year trend toward ever-lower borrowing costs."

HG, it is not quite as simple as that. The CPI does cherry pick items ( and one can argue over whether that is connived or not). The result is that the ruined developers of 35 doomed apartment blocks ( no sympathy there) can report increased building costs of 20% per annum and DHB's have to contend with 70% inflation over the last 10 years - but banksters can scream for free money due to 0% inflation.

Whats wrong with low inflation these targets are now irrelevant furthermore previous cuts haven't made the slightest difference why persist.

Whats wrong with low inflation these targets are now irrelevant furthermore previous cuts haven't made the slightest difference why persist.

Its time to call a spade a spade and stop the pretending ..............

Our problem is deflation .............. i'll spell it for you...... D E F L A T I O N

Our economic landscape never going to be as it was before

Our household grocery bill for example is 4 % lower than in 2015 ( at between $300 and $400 per week we have spent $1,000 less on food this year compared with 2014/ 2015) , and my fuel account has gone down 25% since 2014 a saving of also around $1,000.

Our Auckland rates came down ( we were paying too much ) , and we have kept our power bill under control .

Our telephony and broadband costs have not fallen but we now have unlimited data for the same price

The aggregate demand for goods and services in all economies is falling

All commodities for example are under downward price pressure .

Technology is fast dumbing -down or taking control of services ( think Accounting software packages and cloud storage )

Retail is being hammered by online sales .

Hell even Taxi's cant get away with charging $100 for a ride into town from the Airport anymore

In tandem with this we have massive over-capacity and under-utilization most industrialized economies , so even if demand did increase , there is so much over-capacity its going to take ages to get right .

Sounds like human progress to me.

Ahh, yes.
That is exactly what John McDermott is saying here -deflation.
In fact, it is exactly what all RBNZ releases have 'spelled out' over the past few years.

As long as the population is growing and we don't have purely elastic supply and demand, we are always going to have some form of inflation - negative or positive.
If your proposition was correct in that we have deflation because of technology saturation, it must also follow that it is only temporary.

Very good point Boatman, so is DEFLATION bad in your view ? and why or why not ?


That's the one, decrease OCR further, lower interest rates will then add fuel to the housing market inferno, driving peoples' biggest cost up even further, and luckily most of this won't be measured in the CPI. Then, as people are poorer with higher housing costs, deflation will increase, as people can't afford to buy things any more. Great work RBNZ, a viscious circle for NZers.

Good, my shares and house price will become even more inflated; not that the RBNZ would care, as it's not real CPI inflation and deserves to be ignored totally.

"...inflation figures due next Thursday were expected to be low, but that annual inflation would rebound to the bottom of the Reserve Bank's 1-3% target range in the December quarter." Really? We expect to get from sub 0.4% to 1% in two quarter, a rate the economy hasn't got to since the start of '14? Given their near perfect recent record of overestimating inflation they've not learned much about exercising caution with forecasts.

Should we deduce the next OCR cut must be a more than 25bps given the diminishing returns on previous cuts?

Put simply, current market conditions are associated with small potential returns and enormous latent risks across nearly every asset class. The combination of extreme valuations, weak prospective returns, and emerging risk-aversion suggests that market losses could unfold abruptly, creating an interconnected Rube Goldberg chain of consequences because of the steep leverage that investors and corporations have taken on in recent years. The image that comes to mind is that of speculators scrounging around on their hands and knees to pull a few pennies from the catch of a mousetrap whose hammer is tied to the lid of a box of angry bees and a switch that drops an anvil. Even if there are rewards in the short-run, the situation isn’t likely to end well.

AJ.... u might be interested in this :


Stanley Druckenmillar...
Basically he is saying.... It is a very, very risky time to be taking on risk, with investing

Thats a bit of a wakeup call.

A second source of myopic policies is now coming from China. In response to the global financial crisis, China embarked on a $4 trillion stimulus program. However, because they had engaged in massive infrastructure investment the previous 10 years, and that was the primary stimulus pipe they chose; this only aggravated the overcapacity in the investment side of their economy. Not surprisingly, this only provided a short term pop in nominal growth. While we were worried about bank assets to GDP in 2012, incredibly, credit has increased by 70% of GDP in the 4 years since then. Just to put this in perspective, this means that since 2012 the Chinese banking sector has allowed credit to grow by the amount of the entire Brazilian GDP per year! Picture the entire Brazilian production in new houses and infrastructure. Incredibly, all this credit growth has been accompanied by a fall in nominal GDP growth from 15% to 5%. This is an extremely toxic cocktail for companies that have borrowed at 10% expecting 15% sales growth. Our strong suspicion therefore is that a large part of this growth is just credit flowing to otherwise insolvent borrowers. How else to explain the lack of NPL problem in heavy industries hit by lower prices and sales growth?

As a result, unlike the pre-stimulus period, when it took $1.50 to generate a $1.00 of GDP, it now takes $7. This is extremely rare and dangerous. The most recent historical analogue was the U.S. in the mid- 2000’s when the debt needed to generate a $ of GDP increased from $1.50 to $6 during the subprime mania. Two years ago, we had hope the Chinese were ready to accept a slowdown in exchange for reform. Unfortunately, with the encouragement of the G-7, they have opted for another investment focused fiscal stimulus which may buy them some time but will exacerbate their problem. They do not need more debt and more houses.

Just as we become very dependent on them.


McDermott in his private addresses to corporates & the like appropriately stresses the need to set expectations correctly. But then in public he makes statements like this which aren't helpful and become self reinforcing when read by corporates and individuals.

RBNZ needs a change. They are trying to do the right thing and have some problems of their own making from Government - but they need a change in approach.

“As described in the September OCR review, monetary policy will continue to be accommodative. Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," he said.

How many times do the victims of interest rate suppression have to endure this often repeated, but evidence less mantra of central bank ideological duty?

From the US to Europe to Asia and back again, asset prices soar while basic economic needs like jobs and incomes are left far behind; looking more like depression than a historic boom period. Central banks, almost exactly four full years after the official end to the Great Recession, are still implementing emergency monetary measures to get the global economy just moving slightly forward. It is a blatant contradiction that is seeping through into the larger consensus the more this price vs. true value disconnect grows. Read more

overlay the chart of the OCR rate and USD/NZD chart, interesting

Sssssshhhh. Only us MMT'ers know and understand why that is. Just keeping trading forex accordingly and let Wheeler makes us more money.


So laughable. C'mon people. What does it take to realize the RBNZ is just ignoring the very place there has been MASSIVE inflation?.... and they know it. Only one conclusion can be drawn.
This is a time of blatant central bank corruption & insanity to protect the most insidious housing bubbles of the century.

Where is the massive inflation?
In the tradeables? In the non-tradables?

In what way is the RBNZ corrupt?
If so, best practice corruption is to go unnoticed. You think consistently missing targets is the best way to keep under the radar?
What a stupid thing to suggest. This is NZ, not Zimbabwe.

Corruption, though?

One could point to renumeration differentials as a possible indication.

The annual salary of the Chairman of the Board of Governors of the Federal Reserve System is USD 199,700. Read more

The annual salary of the Governor of the RBNZ is quoted between NZD 660,000 to 669,999. Read more (page 44 of 108)

There is no evidence that paying say $400,000 produces better candidates or work performance over paying $200,000. Some highly paid people perform better than others but it's not predictable and you are just as likely to select a dud at any salary. Offering $200,000 produces more than enough likely candidates who are just as likely to be good as when you offer $500,000

I am more concerned that regulators could be paid enough to look away.

A glaring example of central bank corruption was exposed just recently.

As perhaps another in a very long line of indications as to what is unholy and wrong about today in banking and finance, over the weekend it was reported in the Financial Times that Deutsche Bank had received an improper accommodation on its “stress test.” In what can only be described as a clear example of cheating, DB’s capital position was boosted by the inclusion of $4 billion in proceeds from the sale of HuaXia, its Chinese lender subsidiary. The sale had been agreed upon in December 2015 but had not closed by year end (and is still to this day being held up, meaning that the ECB included capital that almost a year later still hasn’t actually been received). Read more

Yea, I don't think that entirely supports your argument.
This does not incriminate the ECB.
Deutsche Bank declared the expected cashflow and for all intents and purposes it was to be realised in the correct period. Such transactions would be on the books of all major private banks, just not of the same scope.


But the Financial Times has learnt that Deutsche’s result was boosted by a special concession agreed by its supervisor, the European Central Bank.

What was the nature of the concession, though?
It is pretty dodgy if the ECB willingly conceded that the cash flow was not going to be realised in the period.

No evidence?
Isn't the market evidence enough?
Surely in a capitalist context if you could get an employee with undifferentiated skills to do the work of someone else, for half as much, you would employ them...

I genuinely cannot think of any situation where Joe and Jane were completely undifferentiated in their skill set and an employing organisation (of the scope to offer $500k salaries) genuinely commits to employing the person with a two-fold higher salary.

Another good point.
The Central Banks are not but one person, though...The corruption would need to be endemic, from the top down. It's just as crazy a notion as the radfem perspective that a worldwide patriarchal conspiracy exists.


Low rates are required to keep people borrowing as the economy gets worse or price levels appear ridiculous.

I have been offered a 0.3% pay rise I need deflation a 1% inflation rate is a pay cut for me. Bring on deflation and bring it on fast.

The reason for inflation being low is external and nothing to do with our OCR. RBNZ is deliberately fueling the asset bubbles in New Zealand. They see Auckland wavering and are deciding to stoke it up again.

I really think lowering the OCR is a big mistake, it has no effect on Inflation anymore, it is the wrong tool to use. What it does do is deplete the funds for our future superannuation, rob the working class and exarbecerates property & share prices. (I own several properties). The biggest problem is that central banks will NOT be able to raise rates later on because it will plunge the highly leveraged governments and investors into oblivion. So we must keep our rates where they are before we too get close to "zero". Forget about inflation target, keep the OCR where it is, NZ is actually doing better than most other countries around the world

A 2% rise is actually what is proposed, on all rental investment loans.

This rise will be taken out of all investors proceeds on a yearly basis.

A rise is just the markets way of paying back the tax free loans given to investors in housing by the Banks Deposit givers and the Taxpayers displeasure.

This fee will be called "A Saving Grace Gambit"..,,so do not be negative.

This reverse trend will off set and take a rise out of all investors. The rise will take place after the American Elections.

This may Trump all rises previously given.