It started out as a juggling act and is now becoming a high wire performance routine.
The Reserve Bank (RBNZ) is being forced into increasingly strenuous efforts to get inflation under control.
And our central bank is now getting to the point where it is needing to look at taking the Official Cash Rate to much loftier levels than it would have hoped.
The bigger the OCR number the more the risks to the economy. And for the RBNZ the inflation-controlling attempt is now that high wire walk as it seeks to achieve the increasingly-difficult-looking task of balancing the need to get inflation down while not wrecking the economy.
It's clear that at the start of this OCR-hiking cycle, in October 2021, the RBNZ had high hopes of quickly knocking the stuffing out of inflation. The intent was that the OCR would not have to be raised too far.
Remember 'considered steps'? That was the RBNZ's code for saying it wouldn't hike the OCR by any bigger increments than 25 basis points at a time. Well, five 50-point hikes later, we know what happened to that.
And now the odds-on favourite pick with the economists for the next OCR hike on November 23 is a 75-point jump. Phew.
I will have much more to say about the specifics of the OCR review closer to the time, but there's plenty of fascinating background to have a look through in the meantime.
Since October 2021 the OCR has been hiked by 325 basis points, taking it from the historic low of 0.25% to a current 3.5%.
That is a HUGE amount of tightening of monetary policy in a very short space of time. But just as huge is the problem that the RBNZ now has.
All that tightening - and it's not yet obvious that the inflation genie has been pushed back into the bottle. It's not obvious at all.
The shock 7.2% CPI inflation figure as of the end of the September quarter has massively knocked confidence that the RBNZ's efforts dampening inflation. The dreaded 'inflation expectations' are awake and roaming.
The results of the RBNZ's latest Survey of Expectations make a significant dent in the central bank's credibility when it comes to the inflation targeting. The survey respondents have clearly been shaken by that shock 7.2% inflation figure.
Adding to the RBNZ's misery were the latest labour market figures, which are even hotter than they looked at first glance.
The unemployment figure, which stayed at 3.3%, would have been well under 3% if it hadn't been for a massive rise in the 'participation rate'.
Wage rises, if we look at the private sector hourly rates, came in at 8.6%, which was hotter than the RBNZ had picked (8.3%) - and the RBNZ's pick was the hottest one there was on the market.
The labour market really has become the ultimate double-edged sword. On the one hand the full employment means mortgage holders should be able to keep paying, even as their monthly repayments get more stratospheric.
On the other hand people are getting pay rises that are helping to combat inflation. We are now even seeing double digit pay rises.
The fact that people are now increasingly seeing high inflation as potentially long-running means that they will continue to seek commensurate pay rises. Their employers will continue to seek price rises that pay for the wage rises.
If people can continue to meet higher costs, and continue to spend money, then the RBNZ may not see the slowdown it wants for longer than it hopes. Indeed, I'm sure it had expected to see some signs of slowdown by now. Really what we've seen is the opposite.
All of which then comes back to the OCR and how high it might need to go.
This is where it really gets tough for the RBNZ. Without real outward signs that the monetary policy tightening so far is 'working' the question becomes does it keep pushing the OCR up and up, or does it 'pause' and assume at some point that it has the OCR high enough to, over time, do the trick?
I think the RBNZ would be very leery about pushing the OCR much higher than 5%. I've always thought that if we see mortgage rates across the board at over 7%, we are in real trouble. The RBNZ's latest Financial Stability Report seems, albeit in dry language, to suggest that too.
At the moment we have a situation where the central bank, having hoped to raise the OCR a little, but not too much, is now faced with possibly needing to raise it 'too high'.
Would it take that risk?
Clearly the RBNZ hoped to knock inflation quickly so those darned 'inflation expectations' didn't start getting away.
Well, they have got away and the RBNZ, it seems to me, really needs to change tack.
A quick knockout now seems unachievable. This might have to be a slow grind.
As said above, I'm not sure the RBNZ wants to push the OCR much above 5%.
So, if it gets to 5% and still doesn't seem to be getting enough traction, what then?
Well, as I say, it might have to be a slow grind.
I admit to flip-flopping on this one.
I had for a long time seen the prospect that the OCR rises would not end up being extreme and that in fact a tanking economy would force the RBNZ to backtrack as early as next year. The economy is thus far showing elephant-like strength.
While some economists are still picking the OCR to start falling by the end of next year, I have to say I now extremely doubt that, unless signs do start to emerge pretty soon that the economy is turning. And when I say pretty soon, I mean over the next month or two. No real sign yet.
What I think becomes more likely is that the RBNZ is going to be forced to park the OCR above 4% for some time in, as I say, a slow grind exercise. But of course this approach will mean that some level of inflated inflation expectations do get built into the public's psyche.
So that will extend the 'grind'.
Without a quick 'knockout' of inflation, what we may get then is that the slow grind only slowly forces the economy into a downturn. I mean, it must happen eventually with ongoing higher interest rates. It's a question of how long it takes.
Central banks around the globe have been hoping that any recession that stems from knocking inflation out quickly will be short and sharp.
But with a slow grind approach instead, the worry is we might end up with a downturn that is pretty drawn out and miserable, like we saw in New Zealand in the early 1990s.
I don't make predictions, so I'm not predicting that. But I would say the risks of a drawn out downturn are increasing by the day as our economy continues to confound the RBNZ's best efforts.
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