This is starting to look a bit like a high stakes game of chicken.
On one side we have the NZ economy - too hot, labour shortgage-fuelled, households (enriched by ridiculous house prices) defiantly spending, getting wage rises, prices going up. And up.
On the other we have the Reserve Bank. The fun spoiler. Seeking to increase unemployment, to dampen those wage demands, to quell spending. Trying to stop prices going up. And up.
The RBNZ is saying to the economy: 'I can fix you up with my rising Official Cash Rate - watch me hike'.
But just at the moment, the economy is saying back to the RBNZ: 'Is that all you've got? You're dreaming, mate.'
Now, yes, I'm over simplifying, and there are signs that some dampeners are happening in the economy. But it still looks uneven. It is looking like there may be significant enough portions of the population that are sufficiently impervious (at this stage anyway) to the RBNZ's efforts.
I've already touched on this subject. But will do so again. Because I do think the RBNZ is likely to be forced into a position where it either ends up taking the OCR higher than it wanted to - or it is forced to concede some ground against inflation and aim to reduce it over a longer period.
And no, the latter course of action would not be attractive for the RBNZ.
But taking the OCR too high and stopping the economy in its tracks would not be attractive either. For anybody.
I was prompted to write this by the monthly retail spending figures for September.
A 1.4% seasonally-adjusted rise in spending (bearing in mind this includes the impact of price rises) is not astronomically high. But the RBNZ wants to see spending easing.
And right now spending levels look defiantly buoyant.
I'm a big fan of standing on street corners and holding my finger up to test the direction of the breeze. (It takes all sorts). By which, I mean I take on board what I'm seeing around me and sensing - rather than just relying on official economic data.
I think it's important to sense the mood of the people.
And when I was walking around central Auckland last weekend what I saw was a buoyant picture of people happily spending.
Yes, appearances can be maybe misleading and all that. And for the people happily tucking into a restaurant-cooked spread there will have been others at home wondering about paying the mortgage.
But as I say, I think the impact of the OCR rises to date are possibly being so uneven to - in total - not be having enough effect.
The very tight labour market means that workers are being able to leverage getting pay rises in a way not possible in recent years. So, even though annual inflation was 7.3% as of the June quarter, people are getting pay rises that a just about compensating for that.
It's a good thing for the workers. But it's not a good thing for the RBNZ's chances of quelling inflation.
The other thing worth throwing into the mix is just how 'restrictive' the current OCR settings really are at the moment.
The RBNZ has previously indicated it thinks the 'neutral' level for the OCR - the level at which rates are neither stimulatory nor restrictive - is about 2%. But it has also indicated it will be reviewing that, potentially upwards.
With what has happened to inflation globally are we actually now in an environment where the OCR has to be quite a fair bit higher than 2% to be genuinely restrictive, or at least restrictive enough to rein in the economy and inflation?
To reiterate, the RBNZ has to date increased the OCR rapidly from 0.25% just 12 months ago to 3.5% now.
The common expectation is it will increase the OCR by another 50 basis points on November 23, taking it to 4.0% and then we will see where we are at the start of next year.
The RBNZ's last official forecast (made in August) of the end point for this 'hiking cycle' is somewhere between 4.0% and 4.25% by the middle of 2023.
The markets are believing this scenario less and less. As of now, courtesy of some solid rises in wholesale interest rates since the start of the week, the markets are pricing in an OCR of above 4.75% by May of next year. In fact, at time of writing the pricing is coming very close to suggesting an OCR of 5.0%.
That's higher than the current highest forecast among major bank economists of 4.75% made by ANZ's economists.
The RBNZ has historically been a big fan of the 'raised eyebrow' method of communicating what it might do.
It makes oblique comments that don't seemingly of themselves mean much - but when looked at more carefully suggest either a potential course of action the bank will take, or what it wants you to do.
The RBNZ was, when hiking the OCR again last week, very keen for us to know it had considered a 75 basis point rise, rather than just the 50 it ultimately delivered.
By mentioning this thinking, the RBNZ has now implanted the idea of a possible 75 point rise. And I increasingly now think it will do that next time around in November, taking the OCR to 4.25%.
Essentially the RBNZ is likely to go for broke in terms of a very short, sharp, rise in interest rates, hoping that the impact from that is sufficient enough to see the heat come out of that labour market, to see spending drop and to see wage and price pressures ease.
A 4.25% OCR before the end of the year is likely to be big test of this approach.
If things don't look like they are coming off the boil during the summer, the RBNZ may be in a bit of a corner when it sits down to work out what it does with the OCR in its first review for 2023 in late February.
It is, however, starting to look as though by February some people (notably those with 2020-21 housing market-sized mortgages) are going to be in real strife - but a significant enough portion of the population will be just ordering another chardonnay.
So, what is the RBNZ to do, in such circumstances? Keep squeezing those in pain in the hope that the pain threshold will eventually reach the others?
Or might it have to get a bit more creative and be looking beyond simply cranking up and cranking up the OCR? Will it need to concede that the battle against inflation is going to have to be conducted in a longer time frame? Bear in mind that currently the RBNZ aims to get inflation back under 3% in only about a year-and-a-half's time. Not long.
Look, it could well be that by the start of next year the labour market is easing sufficiently and pressure is coming out of the economy sufficiently quickly to start getting the inflation down at the sort of pace the RBNZ is looking for.
I'm increasingly doubtful that will be the case, however.
In which case the RBNZ may need to look for Plan B. Has it got one?
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65 Comments
Teachings of the Prophet.
7% Interest Rates This Year, Guaranteed ! Prophecy Confirmed.
30% Crash In Home Prices By December, it's a Certainty. Will Wellington be the Winner ?
The Pendulum Always Swings.
There Is No Such Thing As A Bargain In A Falling Market !
10% Interest Rates Next Year, Guaranteed !
The World will go into the Biggest Financial Crash Ever Recorded.
-80% Crash in Home Prices Will Be Common in NZ.
The earlier they (Rulers) understant that it will get worse before getting normal and get on with their task instead of prolonging taking action to delay the inevitable, better it will be for mankind.
NZ$ touching US$0.50 is a reality now and should ensure that it does not fall to US$0.45.
Power in RBNZ should also know that politicians for power to get votes, next year are again going to go all out with freebies to lure voters, which will again hamper their efforts, so.......
Let us hope the general public is more educated with the current economical climate to see through their own selfish wants and see the bigger picture for what is good for the whole of NZ. Educate those around you, talk to friends and family to spread this understanding of the grave economic markers and government incompetence and let's all band together to vote on policy for whoever has the most 1./ Rational campaigning in letting NZ know we have to suck it up and make hard decisions we may not like in order to best preserve our economy through the coming tides and 2./ Has the most logical plan to weather it.
RBNZ are responsible for the situation, not by just going overboard with printing and distribution of literally free money BUT by their denial, not ready to accept that cannot have ICU situation (Least Regret) when all data as early as December 2020 was suggesting otherwise.
Mr Orr should have known that overdose of medicene is more harmful instead of supporting Transitory Inflation manipulation to suit their narrative.
Now, no more band aid as is the time to operate and if necessary to amputate to save.
The reasoning is straight-forward. It's pretty much all the RBNZ have the ability to do.
Successive governments have abrogated responsibility for managing the economy, so we end up in this perverse state where the RBNZ is having to use blunt fiscal tools to solve a problem caused by reckless monetary policy.
I JUST said the top 1% are losing wealth this year. Look it up if you don't believe me.
All raising interest rates is doing is changing the definition of wealth from having assets to having money. We don't value money, we value assets. That's why all assets are falling right now. The ultra wealthy didn't have money, they had assets. The 'middle class' is hurting because they believed the same thing as the ultra wealthy and tried to emulate them with literally no leverage to back them up.
I could go on and on about the root cause of this but I'd rather just leave it there and say how moronic we all are.
I could go on and on about the root cause of this but I'd rather just leave it there and say how moronic we all are.
Your narrative is solid. But the muddle class is "leveraged" in that they believed the savings is in the house, therefore they are less prepared for a rainy day in terms of cash and liquid assets.
As the Fed/RBA have stated/indicated it takes awhile for Interest Rate rises to feed through into the general economy.
2023 will be the tough year, as this is when people who have being locked in for a year on their mortgages need to refinance.
That will be when it gets scary. I'm currently paying 3.89% out to August next year - but come August what will my new interest rate be - probably North of 7%?
Now we can handle this - but a lot of people right on the breadline will be hammered - so unless something gives/occurs to reverse these Rate rises - watch out for 2023 is my call.
Housemouse, not meaning to be a smartypants here, but have you seen this graph of ANZ OCR forecasts?
They have underestimated future OCR for a long time now. Bigly. This Zollner tweet is almost funny.
https://twitter.com/sharon_zollner/status/1570613777061777409?s=20&t=xi…
Similar situation here. Half our mortgage comes up in January (currently at 2.59%). The cheapest I could renew for now with the same bank is 5.75%.
We are lucky however, in the sense that the mortgage renewal coincides with my wife going back to work, which will more than offset the extra mortgage repayments. We also put a decent deposit down and paid extra in the past, so it won't be too painful - but it will mean some belt-tightening nonetheless.
I agree that 2023 will be the trouble year. I think there is still enough "built up steam" from Covid lockdowns etc that people who do have cash or access to affordable credit are happy to spend up, but next year will be a different story.
Purely anecdotal, but I am already seeing on TradeMe numerous cars on my watchlist not selling and having big price cuts, computer equipment going cheap, and other items like musical instruments for much lower prices.
The strife that David mentions in early 2023 might be mitigated for many (but certainly far from all) by the wage increases that have occurred in 2022.
Those who bought in 2021 should have been stress tested at circa 6.5%. If you are re-mortgaging in early 2023 you should be doing so at a rate of probably around 6%. If you and /or your partner have been able to secure significant salary increases in 2022, then you should be ok, although undoubtedly tightening the belt on discretionary spend.
Banks stress test new mortgages. Under CCCFA rules a full accessment of your ability to meet payments is made on any new lending. (Or major restructure, not a rate reset).
Banks have the right to ask for more security on an existing loan but its rare on a familly home where payments are being made.
The bank wants you to succeed, they will extend terms out, try to move some of the loan to interest only etc etc, however with investment mortgages, its a different story, if you cant afford it you will have to sell it.
There are issues around mortgages on sales off the plan... come settlement things may have changed, and its possible finance could be denied unless extra capital/equity is provided.
Investors who entered after 2017-18 may suffer, people before that are still quids in, of course things change as prices fall... you only needed to borrow 1/2 as much back in 2017. I personally think we see 30% average fall in akl with pockets of 45% for dev sites bad luck etc, worse then this and things could degrade in a non linear fashion
Its best to tell the bank you are between jobs, the employment market is red hot, its likely your next job will pay more then the previous one.
My bank ASB was even prepared to move my mortagege between properties while I was not working, although I was re-employed come settlement.
The RBNZ has historically been a big fan of the 'raised eyebrow' method of communicating what it might do.
It makes oblique comments that don't seemingly of themselves mean much - but when looked at more carefully suggest either a potential course of action the bank will take, or what it wants you to do.
Any individual investors who were watching this "raised eyebrow" and doing what the RBNZ "wanted them to do" over the last 5 years or so will now find themselves standing knee-deep in a gigantic pile of financial dog poop.
The RBNZ has been "raising its eyebrows" for years now and trying to influence people to:
- take on massive amounts of debt
- spend like drunken sailors (the Wealth Effect - party party party - woo hoo! 🥳🍻)
- leverage into the stupidest property bubble on the globe
- get out of term deposits and go "further out on the risk curve" just as the wheels were starting to fall off the entire friggen global financial system.
Best thing to do is to IGNORE whatever those fools at the RBNZ "want" you to do and truely UNDERSTAND that those fools have very little influence on future events anyway.
Surely anyone who listened to Adrian Orrs "lower for longer" shtick should be starting to realize by now that the RBNZ has no idea about what will happen next, and bugger all real influence over anything, including interest rates.
The bond market will decide interest rates. The banks + swap markets will decide mortgage rates. The RBNZ will just sit there and make lots of noise, and go along for the ride, like a boil on a dog's bum.
If they drag their feet with OCR raises now (as Australia has done) then inflation will just get more entrenched and eventually the currency markets will box their ears, and the swap markets, bond markets and banks will ignore them and push rates up anyway.
If anyone feels the need to look to some higher financial power for guidance, they should look to the Federal Reserve, not the impotent fools at our tiny little reserve bank.
RBNZ is rising OCR, which has to but to get the desired effect, it needs a shocker, when the expectation was 0.5% should have gobe up by 1% or 0.75% to dampen the sentiment instead of rising slowly every month.
In ovember should go high as will than have three months (Much needed) to gauge the sentiment but will Mr Orr will ????
Yes - the banks, the people, the businesses have all factored in another 0.5 rise this year and another one next year... mortgages are refixed or covered with higher wages. And yet qw spend and spend. At least the housing bubble is gradually unwinding, never mind the poorest 10% that cant afford food or rent.
I'm picking .75 for three reasons - firstly the last .50 rise was accompanied by a statement that they were considering .75 - clearly communicating intent (i.e. softening us up). Secondly inflation is still burning hot. And thirdly, after this next rate review it's a wait and see until next year, so slamming in a larger rise fires a warning shot over the bows of consumers ahead of the summer.
OCR increase of 0.75% before Xmas should help with messaging - and the bargain hunting after xmas
There is still lots of money out there being spent - Ring up a tinny (boat not house) supplier and the wait list is still 12 months despite the serious price increases they are charging - and the boats keep getting bigger and flasher
Plan B needs to include more QT of the LSAP, i.e. a much faster reversal of the excessive quantitative easing programme of 2020 and 2021.
I am fascinated by the media focus on the OCR and the lack of focus on the need for the quantitative tightening plan to be brought forward.
KeithW
DELAY, it's all-out delay and few seem to understand this point.
Delay between the RB raising the OCR and mortgages coming to their term, people re-fixing and then, after a few months realising how much less money is left on lattes. Yes people know the squeeze is coming, but many only adjust their spending when they are really forced to. As I have stated before the squeeze on spending from the increasing OCR is only going to start being felt in 2023
Delay between the rising OCR and the CPI stopping rising. Remember the CPI is being measured year-on-year, meaning that any inflation from the last 9 months and there's plenty, is also included in the latest CPI figure. In conclusion it will take even longer for the CPI to stop rising and it will only do so meaningful when the 2022 first quarter CPI rise drops out, in other words when the 2023 first quarter CPI will be released, which will be in… May 2023 !!! So it's pointless expecting a meaningful drop in CPI before May 2023.
In conclusion, because of the delay explained above, the OCR is going to get raised far too high (most likely 5%), NZ will be in recession in Q1 2023 but this will only be reported in the GDP in June 2023 (we're so slow in NZ) by then CPI will be lower but not yet in the target range of 1-3%, the RB will think "we're heading in the right direction", the next set of data will be Q2 GDP deeply negative reported in September 2023 and Q2 inflation confirming its continued drop towards 1-3% reported in August 2023 and then, the RB will panic and drop the OCR back down aggressively.
So expect a much lower OCR by end of 2023 after a likely peak of 5% earlier in the year.
Many experts and economists are worried that fed (reserve banks) are over doing but reserve bank itself are worried that they have not done and are not doing enough, so OCR at 5% is a certainty
https://www.bloomberg.com/news/articles/2022-10-12/fed-officials-commit…
We are now entering the period where rents will be going up (due to the rent freeze from March to Sept in 2020 meaning that landlords had to wait until Oct to put up rents, and are now stuck with 12 monthly review periods from that date). In January the petrol tax goes back. Food prices will escalate further as the 2022 harvests come in with their much higher cost base. Electricity rates are going up. I'm betting the February inflation report will be a humdinger.
It is, however, starting to look as though by February some people (notably those with 2020-21 housing market-sized mortgages) are going to be in real strife - but a significant enough portion of the population will be just ordering another chardonnay.
And, therein lies the challenge. Over the coming year, mortgagors will send more and more of their money to the banks, savers will save more, households will face rocketing insurance bills, house price and equity falls will make people more cautious with their money, and, if all of that wasn't enough, Govt will be disinvesting from the economy (taxing back more than it spends). The rest of us might carry on enjoying life regardless, but we will be drinking our chardonnay at the beachfront bar, unaware of the tidal wave rising behind us until it sweeps us up.
Im thinking an OCR of about 4.25 % is about as far as we can go without inflicting some serious pain . Im picking the Fed will have to sit around 4.25 , Im thinking they will be happy to sit there as well ,its not as high as they would like to go but it will enable the markets to steady whilst still sitting in their range projections . I think ANZ's 4.75 forecast is unrealistic as such a rate will cause too much collateral damage . It is true that the OCR can help reduce inflation but there does come a point where it can cause too much distress, Im guessing 4.5% is the distress level. I could be wrong but lets see how it pans out ... last big hike coming from the Fed in my mind....they might even split it 50/50 . Otherwise expect chaos to reign if they push big past 4.25%. We should make the final leap and be done with it (75bps). Hefty import taxes(documentation fee..lol) could be the next weapon required. We need to encourage/support local production.
What do you expect from a bunch of deluded "experts"? Read Hayek. As Von Mises put it, it does not help to reverse back over someone after they have been run over.
The RBNZ are, I think, a decent hard working bunch, but they are given an impossible job based on the fashionable "government is wonderful" groupthink of our time. Their assumptions are nonsense and their apparent power is a temporary illusion.
What is happening is that, after decades of indulging in fantasy policy, reality is re-asserting its supremacy.
Government policy has to been to run deficits on the current account as this allows them to spend freely, which in their deluded world is a good thing. They have done this by enacting policy that encouraged us all to compete to overborrow for the privilege of living in a slightly fancier shed. Foreign bankers have obliged and have provided the funds to enable our milking.
We do not, in the main, actually own our houses, we rent the money to give the illusion of ownership, or we rent the house and the owner rents the money.
The destruction this system causes is extreme. All productive enterprise becomes less profitable and has meant we are no longer able to make anything for ourselves, so a once self reliant and independent nation has become a servile state reliant on others to provide our every need apart from food, which the current crop of air heads want to put a stop to.
In a well functioning civilised country the price of goods reflects its scarcity or otherwise, this draws people and capital to where it is most needed, with entrepreneurs devoting their chaotic experimental methods to find ways to profit from the production of scarce goods. The solution to high prices is high prices. It is an evolutionary homeostatic process, constantly seeking improvement.
In our soppy system, the most productive and capable people are drawn to speculative activities NOT productive ones. It is a fixed, non evolving, over specialised bureaucratic system running toward the nearest cliff.
https://themarket.ch/interview/russell-napier-the-world-will-experience…
The current government is increasing inflation at every opportunity. Perhaps the reserve bank should have powers to intervene in ill conceived government policy that is massively inflationary.
1) Diesel is now substantially more expensive than 98, think trucks, builders, farms, freight generally. This is absurd. Of course inflation is going to skyrocket;
2) Continuously trying to lead the world in expensive world leading environmental nonsense at the expense of one of our core sources of revenue, farming.
What the current government is doing is exactly the opposite of what they should. When will the idealism make way for realism? The radical thinking that has taken over this country is destroying it. our direct competitors will be laughing their way to more of our market share as we continue to add self imposed costs to our competitive advantages. This is what happens when idealism makes way for sensible economic management.
Unfortunately we have to wait until October next year to get rid of this crazy leadership. By that time the damage will be done. I wonder how many labour voters that thought their lot would improve feel it has under labour.... (excluding the wealthy socialist idealists of course). The amount of continuous legislative change by central and local government is absolutely crazy...If they just stopped meddling at every opportunity we, the people that live here and pay tax, would be much better off.
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