By Gareth Vaughan
The Reserve Bank recently increased the Official Cash Rate by a record 75 basis points as it tries to engineer a recession to fight the highest inflation in more than 30 years. But is bashing the economy into submission with its big, blunt monetary policy tool the best approach?
To probe this and more I spoke with David McLeish, Head of Fixed Income at Fisher Funds Management, in the latest episode of our Of Interest podcast.
McLeish argues that monetary policy is largely focused on demand issues when supply issues are behind most of the current inflationary pressures. He also says he's quite optimistic about the alleviation of these inflationary pressures, arguing there are lots of reasons he can already point to as evidence monetary policy has done its job.
McLeish also explains why he's skeptical about whether inflation expectations set inflation, talks about the role of government fiscal policy in the current economic environment, the difficulty of setting interest rates by looking in the rear vision mirror for an economy that's six, 12, or 18 months into the future, the distorted labour market, and much more.
20 Comments
Perhaps using the OCR to fight the 'highest Inflation figure in 30 years' is not the real objective? It's the catalyst for a fundamental, structural change to our economy, and 'Inflation Fighting' is a useful by-product.
If the RBNZ let the Debt fed, speculation-reared cat out of the Monetary bag this one last time, it will tear them to pieces. Because, now, it's frightened, and can see what will happen if it doesn't escape. I'm not advocating throwing the sack in the economic river, just keeping the knot at the top really tightly tied.
Yes to all that.
And what is real for many right now with Aus and US shares, as if the fraudulent FIF regime wasn't bad enough on the latter, having now the highest interest rates in the OECD hence this monster NZD appreciation, losses are relentless on the damned currency.
Plus if this carries on - and why is this NZD strength against AUD?? - our exporters, ie, red meat and dairy - will be getting into trouble. It's not so much the fact the NZD is appreciating off lows, it's how quickly it's moving up.
From 12 years of monetary stimulunacy to the opposite right now, our bipolar RBNZ needs to sack everyone sitting, starting with Orr.
They're destroying NZ.
Plus if this carries on - and why is this NZD strength against AUD?? - our exporters, ie, red meat and dairy - will be getting into trouble. It's not so much the fact the NZD is appreciating off lows, it's how quickly it's moving up.
Incidentally, I was shown some data related to shelf prices of cheddar cheese / mozarella for food service in ASEAN nations this week. Some huge price increases in the past month - up to 50% from European producers and the Anchor brand up 20-25%. It's quite difficult for buyers to pass on those costs at present so we might expect purchase volume to decrease. Let's face it. Dairy is something that ASEAN consumers can more or less pass up.
From BIS: How abundant are reserves? Evidence from the wholesale payment system
From Snider: Recession Is the Most Obvious Answer To All the Inversion
As I type, the eurodollar futures curve is exactly 200 bps inverted, solidly Holy Crap territory. US Treasuries aren’t far behind in terms of historical upset, while an unprecedented inversion in the market for Germany’s government debt gets more unprecedented by the day, week, and month.
In purely technical terms, all these together are betting heavily on lower interest rates all over the world in the not-too-distant future. As they’ve come to be this distorted and ugly, formerly aggressive central bankers who’ve been hiking rates as fast as they can are suddenly coming around to that possibility, too.
Good listen as ever Gareth. Monetary policy has 'done its job' at arresting our stupid housing boom. There are more targeted ways to deflate a housing bubble though - and anyone who thinks that the OCR hikes are doing anything about prices (or wages) doesn't understand market forces. The data on import prices came out yesterday (for year ending Sept 22) - a nearly 30% increase. That's not a typo. Our stats folk grossly underestimate the flow through impact of import prices on domestic prices, whilst our economists grossly overestimate the impact that reduced demand will have on those prices. It's a recipe for mismanagement.
Demand is falling. One indication is shipping rates. Just back as far as July 22. The price to ship a 40' container from main ports of China to Main ports of Australia East Coast was US 6700. The same container to main ports in NZ USD 8700. Now in December in what should be peak season for imports. The rate for the same container to Australia East Coast is USD 900 and in to NZ USD 5000. This reflects the increased capacity and competition for shipping into Australia. But still positive for inflation fighting for both economies. Shipping rates on various world trade lanes have fallen by similar levels over the same time period. Trans Tasman for both importers and exporters is still very difficult in terms of cost and reliability. This is also reflective of the lack of competition.
I have a lot of time for your views, many of which I share.
However you talk here about the significance of imported inflation, which I agree with. Hiking the OCR has no impact on this supply-side factor, other than….. helping keep the NZD strong. Which is a not insignificant benefit.
Of course highly arguable whether that potentially moderate benefit is worth all the costs…
If it was just the over-priced housing market they wanted to target, it would simply be a case of introducing a DTI of 4 or 5. But Orr has commented many times the specific targeting of house prices is not his job. DTIs on housing would of course do nothing to change the oil price, fertiliser prices and food inflation. For now it has to be the big stick of the OCR, but they should have DTIs ready to go when they decide to ease interest rates.
"Cost inflation is a phenomenon as old as money it’s self, although many left leaning critics delude themselves into associating it solely with modern capitalism.
It arises from the growth in the quantity of money and credit exceeding productive out put. As the money supply grows in relation to productivity so, too, does inflation.
In the final analysis governments have control over the money supply. Government policy and, most of all, government spending, are solely responsible for the increase in inflation." ....... Bob Jones in 1977
This is a little more complex than just the supply shock that David Mcleish talks about.
( cost inflation running thru the whole economy , is a much "slower burning thing".. so to speak , than the Supply issues that David discusses).
Wage/price.....cost/price....
My feeling is that cost increases thruout all parts and levels of our economy are not just a consequence of the Global supply chain shocks.
Our inflation has been a long time in the making.
Our RBNZ incompetence ( my view) has ignited the whole thing ... like a rocket.
Throw in Labours fiscal/environmental compliance policies. ( which seem to focus on spending/taxing and not at all on productivity).
Covid and The fiscal/monetary response was the inflationary "light switch" coming on. ( productivity shock + demand stimulus).
Ukraine war accelerated it.
I have no confidence , in our RBNZ. I see them as a bunch of reactive people guided by ideology, rather than first principle ideas.
( It makes me cringe when they talk about "least regrets policy".etc)
I like what David Mcleish says...and am just wanting to add to it.
I think "cost inflation", manifesting as rising costs thruout the whole economy.... is not an easy beast to tame.
( I think inflation will be here for longer )
I agree with him that The RBNZ is being destructive with its incredibly rapid rises in interest rates.
(Bob Jones wrote a whole book in 1996 ( Prosperity denied) about the harm that the Reserve Bank can do, about the short comings of the inflation targeting policy framework)
...of a bigger concern now is the speed that the WEF is now working on their CBDC to bank roll the globe. Bringing in blockchain 'experts'.
With NZ and Canada's Leaders both WEF ex Youth Leaders , we will be having these conversations in the next 12 months. Right now Parliament passing digital legislation as we write....
I agree with a lot of this, but Bob Jones was very wrong about Govt spending, which accounts typically for around 5% of the increase in the money supply (the rest increases as a result of prviate sector demand for credit). You can see this clearly in the NZ data - around $600bn money in circulation with around 10% being the result of net Govt spending (mostly over COVID). Private sector loans are around $550bn.
Miss-management has been the name of the game for 5 years now.
We will continue to over-correct then under correct as has been the pattern of recent times. Orr's new 5 year term came as a shock to me. The man failed at his main mission (at both ends) then gets reappointed by a dozy FM. There's definite collusion on a plan that comes from afar, me thinks. If they don't kill it, they'll try to make it twice as expensive.
Which will then kill it.
Well worth listening to the George Gammon's podcast on the recent WEF 's Klaus interview: https://www.youtube.com/watch?v=nKuz6JNQ2yI
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.