Penny for them, Mr Orr.
Governor Adrian Orr and his Reserve Bank (RBNZ) crew have got a bit of thinking to do between now and the delivery of the next Monetary Policy Review on Wednesday, July 14.
An already difficult juggling act has just been made even more so by the incendiary results from the latest NZIER Quarterly Survey of Business Opinion.
This is a survey the RBNZ pays a lot of attention to.
And it showed a momentous squeeze on both labour and prices.
Based on those results alone the Official Cash Rate the RBNZ sets should already be higher than the emergency 0.25% it's been at since March 2020 at the start of the Covid crisis.
However, it's not that long ago the RBNZ was actually preparing us for negative interest rates. And the central bank's first indication that it would look to start 'normalising' monetary conditions didn't come until the release of its May Monetary Policy Statement.
In that May MPS the RBNZ kept a very neutral, measured, stance in its commentary and let its forward projections of what the OCR might be in future do the talking. These projections showed that somewhat out of the blue the central bank was now looking to raise the OCR for the first time in the second half of 2022.
Since then, however, things have gone a bit crazy. Every piece of economic data has come out way stronger than expected - most notably the blow-everything-out-of-the-water 1.6% quarterly rise in GDP (the RBNZ picked a -0.6% fall). The housing market's remaining remarkably hot. Then there's the QSBO showing both rising prices and a tighter than tight labour market.
The RBNZ these days of course has twin goals of maintaining "a stable general level of prices" over the medium term and supporting maximum sustainable employment.
Up to now the RBNZ has, along with other central banks around the world, maintained the view that the pricing pressures stemming from the Covid-induced supply chain problems will prove temporary. And it's very true to say that in the recent and indeed not so recent past our central bank has struggled to get inflation up to the 2% 'midpoint' of its 1% to 3% targeted inflation range.
The prices are right - up
I think, however, that two things were enormously significant in that QSBO survey. First, the country seems to be very rapidly approaching maximum employment. Second, the survey shows that firms ARE being able to pass on the increased costs they are facing. That's right, they are putting prices up.
Recent history tells us that firms struggle to pass on increased costs to consumers. Well, at the moment, it seems that businesses are able to pass on increased costs to consumers who are possibly intoxicated by a 30% increase in the value of their real estate over the past 12 months - and bored out of their trees at not being able to travel overseas.
What this says is that the first wave of inflation from the supply chain disruptions appears likely to be followed by a second wave as businesses successfully raise prices. And with the labour market now squeezed, meaningful pay rises - for the first time in a long time - might be on the horizon.
In short, this looks like a recipe for something rather more than just passing inflation. And it will call for higher interest rates.
The timing of all this is a bit damned inconvenient for the RBNZ.
The central bank alternates during the year between the release of a full Monetary Policy Statement (last one was May) and what's now termed a 'Monetary Policy Review'. The latter, which is what we've got next week, involves just a one page statement from the Governor, accompanied by a brief summary of the meeting of the RBNZ's Monetary Policy Committee. There's no press conference. They only have a press conference in conjunction with the release of an MPS document.
What this all means is that the RBNZ has shown a definite preference for signalling any major changes in monetary policy in conjunction with the release of an MPS. That way the underlying thinking behind the change can be explained.
Okay, so the big headache for the Governor and team is - do they announce big changes in monetary settings next week? When convention says they've got a one-page statement to do it in and no press conference? Can they? Will they?
A poorly explained change in monetary policy settings could send the financial markets haywire.
Doing nothing is not an option
But equally if the RBNZ tries to sit on its hands with a kind of 'move on, nothing to see here' statement designed to 'hold' things until the next MPS release on August 18 that might cause some ructions as well.
With some economists and market pricing suggesting that the first move in the OCR could come in November, the RBNZ surely needs to at least address this sentiment. Even if it does try to knock it down. But again, it could be a difficult juggling act under the constraints of next week's style of release.
Personally, I wouldn't be at all surprised if we don't see next week's release followed quite quickly by a speech from either the Governor or another senior member of the team outlining more fully the RBNZ's current thinking. Indeed, I had half expected we might get that before next week's Monetary Policy Review, but it's probably a bit late in the piece now.
The fact is, if the RBNZ thinks the market and economists are getting ahead of themselves with predictions of imminent rate rises and potentially persistent inflation, then it probably needs to say so as soon as possible.
If it agrees with the markets and economists then, yes, it should say that as well.
Don't squash it!
I don't envy the task ahead for the RBNZ. On the one hand it doesn't want to jump on the economic recovery and squash it. But on the other it doesn't want to hold off acting for so long that by the time it does, it has to throw the kitchen sink (through OCR hikes), at galloping inflation.
And in the meantime there's still Covid.
Weighing it all up though, I think the biggest worry/risk right now is that the RBNZ does leave it too long. And if it really does have to pump up interest rates quite quickly then some folk who've recently taken on heroic-sized mortgages are going to feel that very quickly. Remember again, it's just on seven years now since anybody experienced a rise in mortgage payments - unless they've specifically decided to increase what they pay.
We've really put all our eggs in one basket with the 30% rise in house prices in the past year. And we are vulnerable.
The RBNZ will know this.
But it has to decide how to handle the issue. Penny for them, Mr Orr.
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