Well, they had it under control. And then they didn't.
The folk at the Reserve Bank (RBNZ) had recently been exuding a quiet confidence that they 'had this' when it came to putting the ducks in the row to rein in inflation.
Then along came the nasty shock that was this week's 7.2% CPI inflation figure and the ducks have been knocked flying in all directions.
This poses plenty of problems for the RBNZ.
One of the biggest problems, I think, is that credibility again becomes a live issue for the RBNZ. The public needs to believe that the RBNZ has 'got this' and can effectively drive down inflation.
It is easy to look at the inflation outcome we've just had and say, well have those 325 basis points-worth of rises to the Official Cash Rate (OCR) in the past 12 months done anything?
My short answer would be - probably - but we just might not be able to really see it yet.
And that poses another of those many problems for the RBNZ. It has got to decide whether it has been doing enough and there's just a delayed reaction. Or whether it really hasn't been doing enough. Which is it? The RBNZ surely can't be absolutely certain either way at the moment.
So, does it now really crank up the intensity with a couple of huge OCR hikes - only to possibly see the economy then get blown to bits as the impact of all the rate rises suddenly, belatedly, catches up?
We could be in a situation where the rubber band's already getting wound up and wound up and nothing's apparently happening - but then wind it a bit harder and it just snaps completely.
The RBNZ people would not be human if their confidence has not been knocked by the inflation figures. But they'll have to deal with it.
But public confidence is a different story. It's about belief.
People have to believe that inflation will go down. This is needed in order to prevent expectations of high future inflation being 'baked in' to wage rises and pricing behaviour.
The next CPI inflation release from Stats NZ doesn't come out till January 25, 2023. By the time it does come out New Zealanders will have had six months-worth of an inflation figure with a '7' in front of it. We will be getting accustomed to high inflation.
So, if we are to seek a pay rise, we'll think 7%+. If we are setting future prices for goods we'll think 7%+. It's the dreaded wage and price spiral and I fear we are already in it. And it may be very hard to get out.
What's the RBNZ to do?
Well, it will involve the OCR. We know that.
The final OCR review for this year is on November 23. Suddenly, that's huge.
Remember there won't be another review for three months. The RBNZ needs to have the 'right' setting to carry it through till the back end of February.
There's a couple of key events before the November 23 review.
On Wednesday November 2 we'll have release of the labour market figures for the September quarter. The big things to watch in here will be the unemployment rate and wage rises.
As of the June quarter unemployment was 3.3%. The RBNZ expects that figure to be the same for the September quarter. As of June the annual rise of hourly wages was 7%. The RBNZ is actually expecting a pretty high figure for September - some 8.3%. So, it will take a lot to surprise it.
But...if the unemployment figure goes down and there's every chance it will and if the wage rises are up with or even higher than RBNZ expectations then, trouble.
Those labour market figures will be crucial.
But the other event worth mentioning ahead of the next OCR review is the release on November 8 of the RBNZ's Survey of Expectations. This is a survey closely followed by the RBNZ in which forecasters and business leaders give their views on the expected future levels of inflation.
The most watched measure is the expectation for inflation in two years. This showed a sizeable drop when the last quarter's survey came out, to an expectation of inflation just above the targeted 1% to 3% range (3.07% - down from 3.29% in the previous survey).
The drop in in expectations demonstrated that those surveyed were believing that the RBNZ was getting on top of the inflation issue.
But what's going to happen in the next survey?
Those being surveyed will currently be trying to digest the indigestible 7.2% figure. They will be shocked. It would be very surprising if the faith in the RBNZ to get inflation under control hasn't been shaken.
An upward spike in those inflation expectations would appear inevitable - which would be a very clear message to the RBNZ that the survey respondents don't think the RNZ has 'got it' when it comes to getting rising prices under control.
Market expectations are now for the RBNZ to make a 75 basis point hike to the OCR on November 23. That would take the OCR to 4.25%.
I thought the RBNZ would go for a 75-pointer even before the latest inflation figure raised its ugly head.
A lot will depend on how the labour market figures and then the survey results pan out.
But unless these are particularly encouraging - and I don't think they will be - I actually now think the RBNZ might even bite the bullet and go a full 100 points (to 4.5%) in order to off-balance a market expecting a 75-pointer and to attempt to seize the initiative.
I think the RBNZ will have dearly wanted to avoid raising the OCR to the sorts of levels now being talked about because it will be only too aware of the havoc that might be caused if mortgages rise much higher.
If we do see an OCR of 5% by early next year then that's got to mean mortgage rates will all be above 7%. And regardless of whether the unemployment rate stays so low or not, some people are going to really struggle with mortgages at that sort of level, when we consider the circa-$1 million-sized mortgages that were taken out to buy homes, particularly in Auckland.
And that would be trouble for a housing market that's been steadily sliding this year.
The RBNZ's got some big problems.
It needs to convince people it can control inflation, thereby controlling inflation expectations.
So, it needs to be assertive enough with interest rate rises to achieve this - without knocking the economy's feet out from under.
This is a critical balancing act that, to be honest, it's looking increasingly unlikely the RBNZ will be able to achieve.
Whichever way you look at it, next year doesn't look like it will be a lot of fun.
64 Comments
If the RBNZ was truely serious about fighting inflation they would have done much more by this time into the game.
Its like what The Prophet said in the Scroll.
It is NOT about High Interest Rates to Fight Inflation. It IS about High Inflation to Justify High Interest Rates. Ponder on this before the Seal is Broken on the Second Scroll.
May he RIP.
Rofl. I think the perspective of RBNZ decision makers is different to most. They see the world from confortable and high up office in welly, they drive there each morning leafy lanes from their new houses with a sea view (economists/banker salaries you see) after dropping the kids at a pvt school.
I doubt they can imagine that the 'inflation' stuff they do for a job might mean someone cant afford to pay for rent let alone a car or food. 'Bloody peasants, always complaining.. why dont they eat some cake'. Let alone strugglimg home and business owners.
If they really 'got it' and knew kids like theirs were rummaging in bins for food.. with worse to come. how could they be so bloody slow to get ahead of this thing.
Yes, it is a sad time. Recessions and the collapse of delusions are like that. We go from wondering why someone else has a bigger house than we do, to thinking "There for the grace of God, go I" as people's lives collapse around us.
Home owners had the elation of the credit bubble and rising leverage and misallocation of capital. The public sector thought they were very clever. The private sector switched from a focus on building profitable productive enterprises to speculating on houses. Everyone talked about house prices. Inequality grew massively and we became a society of haves and have nots. Social discourse polarised.
This is what you get from price control, in all its forms. Price control of interest rates leads inevitably to mis-allocation of capital. The country gets less productive and poorer while everyone thinks that things are fine. The independent businesses get swallowed up by the multinationals with their access to cheap credit. The government gets over-indebted to foreign pension funds. The pension funds leverage up their borrowings.
Recessions are sad times, but there is also an outbreak of sanity too.
The last time I had my foot on the Brake and Accelerator at the same time there was Smoke galore . People could not see in or out. There was screaming and cheering and laughter, even some crying. Then there was an almighty big explosion and people ran for their lives. So yeah - I can see where you are going with this !
Just like they ignored data with transitory inflation, they are not accepting that the need is for shock treatment to get the desired result - has to raise by 1% .. Even if the inflation is not tamed in February, they can held their head high that they atleast tried.
If the RBNZ attempt to undo the damage that they (in conjunction with this govt) have done, this govt will likely look at "restructuring" the RBNZ :)
Well, the wingnuts (National) have already openly stated that Kaumatua Orr is a goneburger if they take the reins of power.
What would be the point of Cindy and Robbo looking to be doing anything?
"People have to believe that inflation will go down"
Quite right. But they don't.
And as long as the RBNZ chases inflation higher with a lagging OCR rise, what else can we expect business of all kind to do except bake that 'known' factor of future rises into today's prices? What will any of us be doing with our price lists today? Not dropping them, that's for sure.
I just don't see how this stops until the OCR is above the CPI numbers and the OCR ceiling is back where it should be - above our CPI heads.
Whichever way you look at it, next year doesn't look like it will be a lot of fun
I can look at many angles and see a lot of fun.
Btw the current housing market is so badly balanced that even this can happen:
People "give up" and downsize/abandon-ship => that might result in a lot of money going back to where it can be spent, driving inflation even more up (think of rents for example). That's pretty fun, not very likely, but possible.
There are many more possible scenarios more likely to happen, like just an epic crush of the housing market.
What I mean is that the parameters ar so numerous that we are close to chaos theory.
ergo:
FUN
Practically speaking, good economists and finance guys rarely have a bent for politics. Likewise many other fields.
This problem infests the National party also, if you're actually a financial ninja, you're unlikely going to want the pay cut to cop shit. You'll be a lawyer or some independently wealthy type who's a bit bored.
Good thing most of these ministers are really just collating things offered by people with actual backgrounds in these fields, and not totally autonomous.
Yeah, agree. But it's interesting we tend to want an economic technocrat, in some ways. Might be better to have politicians who are more representative of what many generations of New Zealanders need than a disciple of any particular economic tomfoolery (e.g. the "wealth effect").
Hayek warned us about rule by experts - it leads to fascism or communism, or in our case the currently fashionable communo-fascism of the EU, WEF and its puppets, including our very own Dear Deluded Leader. Combining Brave New World and George Orwell, as my son put it. The deluded belief that these ideas would work if only they were done right (ie if the person believing it was in charge) didn't die, it just metamorphosed. It is just a weird form of narcissitic arrogance.
I say this because I am human too, and have travelled a little down those roads. Trouble is what you actually get if you are in charge, is 15 impossible problems to solve, each exposing your personal weaknesses. It is why prime ministers age so much when in office.
With half my mortgage coming off fixed term next July, my spreadsheets will be in action tonight to answer the question - pay down for another 9 months at the existing low rate then wear the 7%+ rates from next year, or break early and fix higher for longer?
I wonder how many people with $700,000 mortgages are going to be making similar calculations before the next round of hikes?
*I am not a financial advisor*
I'd pay down as much as you can, then if for whatever reason you need to drop back, you have a decent buffer to adjust your payments and absorb the higher interest.
Up to 12 months ago, I presumed interest rates would head back down in the next 12-24 months, but I don't think inflation is going anywhere anytime soon now, so perhaps rates will actually end up trending up some more over time.
Then again everything's governed by these seemingly arbitrary authorities like the RBNZ and Government, so literally anything might happen.
We are way behind the curve, they are talking home mortgage rates in the USA of 10%. The OCR needs to be higher than inflation not lower than inflation or at least until it has the desired effect. Fun times over the next six months. There is still the idea in my mind that they are deliberately trying to crash the current financial system so they can introduce a CBDC that will suddenly "Save us all".
That was actually a very good post Carlos67. You are going in a very good direction with your thinking and observations
If you study the history of money, you will be aware that fiat money has a limited shelf life. Now, many people think that CBDCs are just another digital representation of the existing fiat money system. I think that it's prudent to think that CBDCs will be part of some kind of monetary reset. Already people are talking about some kind of Plaza Accord moment.
Everything has been going up for 6 months! (Not house lately)
So the RB blinked big time last OCR review. They should have raised OCR by 100 last time.
They've missed it. Inflation is here for years. The OCR can't beat the inflation figure without destruction occuring to the economy. They have to wait for the global economy to increase its productivity. We're along for the ride.
Actually we should have already had a couple of 100bps hikes. The problem is that the RBNZ pretty much told us at the start of the year it was going to be 50's for the whole year and that also includes November. Really it was an advanced signal for you to break and fix your mortgage for 3 to 5 years at least. Rates could go to the moon next year.
This is what happens when the RBNZ tries to tell the Public they are serious about fighting inflation. Public Reaction.
I would like to see the anticipated effect of 100bps. My concern is that the demise of the FLP may precipitate a much greater increase in the cost of borrowing on the high street. This would massively weaponise the effect of a solid 100bps rise.
I would prefer to see a scheduled RBNZ meeting mid December. I would want a 75bps in November, let the FLP dry up and then consider a further 25 or even 50 bps based on the behaviour of the banks.
Why force a Hail Mary OCR strategy when a more step wise considered approach is eminently do-able. Dare I say it but the optics of behaving in a flexible manner to suit the changing situation may also play out favourably in the eye of the public.
That would be the logical approach CITM.. i suspect that we will see another 50bps and the usual wording.
Current leadership of NZ is getting way out of their depth. Running a country/economy iand getting reelected was easy in a long running global boom. In hindsight even their pandemic response was pretty average to poor (shut borders, print money, drop OCR to the floor and hand cash out and spend,spend).
Now we have wars, massive global inflation and a massive debt hangover to sort (mostly of their making). They seem to just be ignoring it Nd hoping it sorts itself out (not looking likely)
Fed should be happy that atleast someone feels that they have some credibility, hence at stake otherwise they lost the plot long time back with their manipulated narrative of TRANSITORY INFLATION.
If they seriously believed in it and were not manipulating than their inteligence and expertise is at stake as all data and happening were suggesting otherwise.
Yes, now it is - if and how they ( RBNZ) can redeem themself and justify their existence.
We have a spending problem, not an interest rate problem. You can keep increasing the interest rate until a certian point in which you realize that doing the same thing over and over again, and expecting a different result is the definition of insanity.
Maybe the gov't should reconsider their approach and instead cut back on their spending needlessly on things they've went overboard with. That's the solution. But of course, it's always easier to spend money than to save it. That's why you have a political science major running the Finance of this country LOL
Enjoy everyone.
-7
Nah we have a borrowing problem, apparently the people couldn't save enough for retirement or their lifestyles, so they borrowed like drug addicts for their next hit of created wealth.
Are the government a reflection of the people or the people a reflection of their government? All parties have lost their way and no-one seems to know what the true purpose of government is anymore, if they ever did. Democracy is vote buying and the voters are appeased believing they have a say and that their voice counts. Haha, foolish.
Real house price growth over the past 40 years. New Zealand really is special.
https://twitter.com/WallStreetSilv/status/1582556167682723840?s=20&t=Vp…
Government borrowing and money printing drive inflation, these are the 2 ways money is added to the system.
The rbnz can only truly fight inflation by making government bonds too expensive for the government to continue the huge deficit spending binge.
Unfortunately the productive economy will suffer first.
They haven't had credibility for the past 20 years. Financial stability? If financial shocks and house prices are a risk to the economy then that horse bolted a long time ago.
Debt leveraged economic growth, debt leveraged wealth creation and a debt based monetary system was never going to end well.
If inflation is too much money and we've been "making money" hand over first for 2 decades, where's all the money?
Should be exciting times ahead, particularly when the entitled ones don't get their inflation adjusted pay rises when unemployment starts picking up steam. This is a giant credit bubble and it has only just started deflating.
There will be strikes, maybe even riots, yes, even here, not just in France. Anger. Despair. Sadness.
For the record they never had it under control. The gap between the OCR and CPI grew to a negative 5.9% in March 2022 while they were busy doing 0.25% hikes from 0.25% to 1.00%. Only then did they understand that this was not transitory inflation. They, like other CBs, found the closest global event to blame their slow action on (the Russian invasion of Ukraine) and then stepped up the interest rate increases. They cannot afford to show panic (ie inter meeting hike - that won't happen, or start increasing the pace - 75bps or 100bps hikes) otherwise markets will understand the RBNZ does not believe inflation is going to turn around. Perhaps inflation won't turn around anytime soon but the economy certainly will.
Paul Adolph Volcker Jr. clubbed inflation to death like a baby seal, taking rates to record highs, now we have 300 trillion of debt plus quadrillions of derivatives perporting to help hedge that debt...... very high rates (perhaps required to stop inflation) are going to bring the entire mess down.... imagine if 8% rates are actually needed, the entire pension industry heavily invested at near ZIRP levels are gone baby gone.... This tin can is up against the wall.... I think the Fed know they cannot stop inflation but have to look like they are trying and hope the economy tanks so they can BACK OFF, doubt thats going to stop resource driven supply side inflation. A decent 30% equities crash should occur before fed gets to even 6% (still possibly not high enough to stop inflation)
First, the Federal Reserve told us there was no inflation.
Then, they told us not to worry when inflation became undeniable because it was only “transitory.”
Then, when it became apparent that it was not merely transitory, they told us not to worry because inflation is actually a good thing.
Then, when it became obvious that inflation was not good, they told us not to worry because they had it under control.
SPOILER ALERT: They are no where near having inflation under control and neither are the RBNZ, who are merely along for the ride.....
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