This week's Monetary Policy Statement from the Reserve Bank felt in many ways like a return to the 'old' days when our central bank got the financial markets to do its bidding with discreetly raised eyebrows and surreptitious taps to the nose.
I had been wondering how the RBNZ was going to cross the divide between what it had been saying about needing to keep very stimulatory conditions - and the dawning reality of a Kiwi economy that has been wholly more resilient than the most optimistic of optimists might have picked.
In the event, the RBNZ didn't really cross the divide at all. We had a Monetary Policy Statement delivered with pretty much all the same cautionary messages. Move on. Nothing to see here.
Look in the back of the document (page 42), however, and there's the gunpowder. Just some numbers. But powerful ones. Under the 'OCR' heading. And showing that whatever the RBNZ might be saying in the front of the document, it is believing it will need an Official Cash Rate of 1.75% by the middle of 2024. (The Monetary Policy Statement is here.)
Or, more to the point, it's telling the market, that's what it believes.
Go for it
Effectively it handed the ball to the market and said: "Here, run with this." And the market didn't need any further cues, quickly pushing up wholesale interest rates and the value of the Kiwi dollar. The MPS might have run to 50 pages of text and graphs, but it was those few numbers on page 42 that were the beginning and ending of it all.
Without the RBNZ really saying anything untoward, those OCR numbers have created an expectation in the marketplace that things are now going to be moving up.
Before the OCR was introduced some 22 years ago now, the RBNZ needed to, in effect 'guide' the market with that raised eyebrow language referred to earlier. If it wanted interest rates higher it had to indicate that, if it wanted them lower, it had to indicate that.
By using the OCR 'forward track' in the MPS the way it has this week, the RBNZ has very much returned to that more subtle style of operating. I think it will have been delighted with the response from the market to the MPS this week. It hasn't said it is going to start tightening monetary policy. It didn't need to say it.
The market will now run with it. It has free licence. It will now do the RBNZ's work for it, without the central bank having to say or do anything for now. Observe that while the RBNZ has projected a first OCR hike in the second half of 2021, the market has already now decided it will be in May next year.
As ANZ chief economist Sharon Zollner and senior strategist David Croy observed, I think very nicely, in their review of the MPS: "The market is likely to extrapolate the recent pattern of revisions, testing bringing forward hiking expectations on every strong piece of data over coming months."
Dead right, I think. So, yes, any positive 'shocks' with economic data in coming months will be met with expectations of those OCR hikes being brought forward. So, wholesale interest rates will keep rising and so, likely, will the Kiwi dollar.
How much of this upward pressure might find its way into retail interest rates then?
I think for sure that some upward pressure will find its way into the bank rates you and I are offered - and probably sooner rather than later.
That means you can probably expect to see some term deposit rates (probably the longer dated ones) starting to creep up.
Well, that will be the interesting one.
But I reckon if wholesale rates keep pushing up then we will see that too - particularly again I might suspect with the longer term fixed rates.
The rises won't be huge, not till we see an OCR rise, but they will be symbolic enough. Rates are on their way up.
How high or fast might rates rise though?
I think most people would have been very surprised at the magnitude of OCR rises suggested by the RBNZ projections.
I was astonished.
The worrying thing from my perspective is that these projections are based on the central bank's view that the current inflationary pressures we are seeing will abate by the end of this year.
There's this key qualifier from the RBNZ in the MPS document:
The current pressure on supply chains is assumed to result in a temporary change in prices that at least partially reverses as conditions normalise. However, there is some risk that the change in prices is more persistent and leads to ongoing inflationary pressure. Consistent with the Remit, the MPC would be expected to respond to ongoing inflationary pressure if it were perceived as being inconsistent with the inflation target.
Okay, so in other words the RBNZ reckons an OCR of 1.75% will be necessary by the middle of 2024 if inflation subsides.
So, in other words that OCR track from the RBNZ is actually something of a 'best case scenario'. As long as inflation behaves the OCR will ONLY need to be 1.75% by mid-2024!
But what if inflation doesn't behave? I'm certainly not convinced that the global inflation pressures we are seeing at the moment will be temporary.
If they ain't then the supposition is that an OCR of rather higher than 1.75% would be needed by mid-2024. And that could be a shock.
Now, just start thinking about that in terms of some of the whacking great mortgages that people have been signing up for recently.
I recently had a play around with interest.co.nz's mortgage calculator and the results didn't look too flash in terms of what a difference relatively small increases in mortgage rates will make.
So, it's game on, people.
The financial markets are on notice. They will now do the RBNZ's bidding.
The only way is up. Strap yourselves in.