Reserve Bank Governor Adrian Orr is conceding that the bank is "not in a great place now" regarding inflation.
His comments, made in an interview with the International Monetary Fund, come ahead of the release on Thursday of what's expected to be New Zealand's biggest inflation figure in over 30 years, with 'headline' inflation set to top the 7% mark.
The RBNZ hiked the Official Cash Rate by 50 basis points last week to 1.5%. In his comments to the IMF Orr reiterated that the double hike now was about doing more sooner rather than a signal that the OCR would be going higher than the central bank had previously indicated (in February) - which was an anticipated high point of 3.4% in 2024.
Orr said there was "significant work ahead" and "at least the direction is very clear".
"I always remember the words ‘if you are really struggling about what to do next it’s because you are probably in a good place now'.
"For us it’s very obvious what we need to do next, which means we are not in a great place now," he said.
"We need to tighten monetary conditions and that’s what we’ve been about."
He made reference to the RBNZ's "least regrets" policy.
And he said when the pandemic crisis began in 2020 it had been a question of "which regret would we most want to avoid. And deflation outweighed inflation".
"It was easier to risk over egging than under egging because deflation with zero bound floors is a nightmare to consider."
Now he said it was a question of the the RBNZ removing "any remaining unnecessary stimulus".
"It’s just getting on with it so that people can understand what we are about.
"We have to retain an anti-inflation bias in everything that we do. That is our role as central banks to head off that headline inflation expectation becoming baked in to price setting.
"We need to remain focused on the horizon over which we can be impactful but without doing unnecessary damage to output and financial volatility."
Orr said the challenge in front of all central banks now "is really how do we tighten our monetary policies to constrain inflation expectations but without creating a recession. The challenge of a soft landing coming out over the next two years".
"I would say central banks aren’t going to achieve their mandates on their own – low and stable inflation and maximum sustainable employment.
"We are going to need support. Central banks are going to have to communicate very clearly about our purpose and why we are looking to lift interest rates in the current environment.
"We are going to have to be very clear with our fiscal authorities around what we are doing and how they could assist around more targeted effective fiscal policies and I would say speaking to the global institutions we really do need to get on and make progress, work collaboratively on what I would call common issues."
This was all what he described as a "non-trivial challenge".
"The world has changed dramatically over the last two years," he said.
"The most obvious thing to us at the moment is the speed bumps the global economy has run into and that globalisation has hit.
"This is the end of a big beautiful globalisation sprint and we are now reflecting on what is a more optimal situation."
205 Comments
Key message, "we have the inflation stats and they are worse that we dreamed". They are announced this Thursday.
So the RBNZ is between a rock and a hard place. Well documented on many blogs, both here and elsewhere. Hes calling out they have to manage inflation, and need guidance from his masters at the central banks. Accordingly the Feds statement to lift, lift, and lift some more is telling, especially to those leveraged.
Fed is responsible for looking after its global dominance using the USD....everyone else just puppets until somebody challenges them and replaces the USD.
Fed don't care that we pumped a massive housing bubble using the imported deflation from cheap foreign goods.
US Fed 3 year inflation expectations are falling.
So this is the point I will admit I was wrong. Clearly the RBNZ is going to hike, and hike aggressively. Regardless of impact on house prices and employment, and regardless of whether hiking will make much difference to CPI inflation.
House price falls of at least 20% likely.
Yes your 1.75% will be breached in 5 weeks, and clearly going to at least 2.5, probably 3. And again, as they say in The Castle, the RBA "is dreaming" if they think they arent raising until 2024, was always a ridiciulous statement from them. But Housemouse, I respect everyone has the right to give their opinion on this site, which is why I enjoy reading it. I reckon houseprice correction for Auckland will be about 10 to 15%, with the median falling back from 1.2 million to 950k-1 mill.
I agree with 10-15%
As for the timeframe, they cannot be to aggressive to stall/choke the economy and then having to backtrack.
what timeframe are we looking at here before they start tracking backwards to reach 2-3% inflation target.
Hate to leverage in this environment but those who do can may come better off on the other side
Let's face it Kiwi's are hopelessly insecure - nobody will want to be that guy at the bbq who has just bought a house & all the other attendee's who are ostensibly saying good on yer mate are really thinking to themselves 'poor dude he paid a million for that sh*tbox?!".
I recall being matter of factly told at BBQ's last year that borrowing a million+ dollars for a lousy Auckland terrace shack is fine and it's "nothing these days".
When the mortgage rates hit 7% that's $70k pa ($1350 pw) of dead money in interest (on top of whatever capital losses you suffer).
If the debt is for your own home and you are keeping it for 10 years why does it matter? Dont forget , the average interest rate over 10 yr was 7% pa.
Easy to say I told you so when things are in wheels of motion right now but you cant make it the same prediction for next 10 yrs
Still, for FHBs who bought last year, it's not a nice start to your 'housing career' to be in negative equity, and facing big lifts in mortgage payments. A double whammy, so to speak.
But assuming you can deal with the much higher mortgage payments, and are planning to live in the house for at least 5 years, a dip of 15-20% over the next year or so it's such a big deal. Prices will eventually edge up again in a year or two, once the OCR is slashed again...
The bigger issue is what this means for industries relying on discretionary spending, as well as industries like the residential construction sector.
I wouldn't jump to conclusions yet HM....who knows what might happen as the Fed starts QT and raising rates....a 1929 style sharemarket crash could very quickly induce deflation....which in turn could see the Fed/RBNZ back to the money printers!
They're walking a tight rope between out of control inflation and deflation and the margin for error are exceptional small, and the outcomes very bad in either direction. Trying to control a soft landing is going to be very hard because they overcooked the market intervention in 2020, and now they have been too slow in reaction to the inflation data.
I think any outcome is on the cards here...but I do think that real asset prices could be in for a bumpy road ahead (as to nominal prices, well I'm not so sure - they call also fall in nominal terms if this quickly becomes deflationary before they start the money printers again).
Agree, I still think HM is likely to be right at some point, these higher interest rates will eventually cause a recession and that will probably remove inflation and the need for higher rates. The question is whether the recession happens before or after the RBNZ has finished tightening.
The money printing is what has created the inflation. Now inflation is here it will take years to lower as debt becomes more expensive asset prices and risk on stocks will crash. So house prices will take huge hit, crypto currencies will also take a hit some will just not exist anymore, gold should climb to new highs. Bond markets will wake up pushing rates even higher lots of bankruptcy will occur, new developments will just stop more and more retail shops will close. Commercial offices in large cities will also take a hit as more people work from home. If a huge crash does happen in stock markets this would also wipe out pensions. Sorry for all the doom and gloom but all this is on the table the party is over and people need to wake up so our kids and grandkids have a future.
HouseMouse,
I'm not quite ready to concede yet. I will move my target a little higher to 2.25%, but i still think that by then, the very real prospect of a recession will be so apparent that on the principle of 'least regrets'. Orr will again, like the Grand Old Duke of York, change course and lead his troops back down the hill.
At the current rate of inflation, you will be looking for an economy crash in order to have a recession. It won't be 2.25% in my opinion, as 2.25% is still stimulus. Housing price will need to drop at least 40%- 50% for that to happen. It is very possible that we will have stagflation first, which result in OCR staying high for quite a bit time to stabilise CPI.
I was on the same page as you, HM, until about six months ago when it became clear that inflation internationally was not transitory, and that central banks were not able to properly admit or explain, much less combat it.
Inflation is absolute political poison. So is collapsing the housing market. It'll be really interesting to see which wins out. But ultimately, inflation ruins everyone, while a housing crash ruins a substantial minority.
At this point I don't think the RB has the option to ignore inflation in favour of propping up housing. Fundamentals for the $NZ are very, very weak. the Fed can raise more than we can without destroying their economy, and we have to keep up.
I don't think it comes down to whether the RBNZ is prepared to battle inflation (I think they are), it is whether they will need to after causing a recession. You won't need to pay top dollar for a sheet of Gib if no one is building anything for example, same with labour if there is unemployment.
True.
but the only reason I didn’t think the fall would be 20% plus was because, rightly I think based on past performance, the RBNZ and govt wouldn’t let that happen. That protecting the ponzi would come over anything else, including high inflation.
And this is still possible, if the housing market and economy slump happens fast enough.
In Auckland average wage earners have no hope of buy a property so who will buy a investor would be crazy to buy a 3 bedroom house on tiny lot for a million plus, costing 1350 per week for mortgage at 7% over 30 years and could only rent it out for 750 per week. The market is now dead only people buying will be crazy or have some really good reason. Now the market is on way down and interest rates are still at emergency levels, inflation is rampant, this housing market is probably one of most over valued in the world compared to income 12 x average wage earners couples income. This market is on way down 50% too 60% people who think 10% too 20% are dreaming once a downward spiral starts only when average wage couple can afford will it slow.
Hello Bagholder2020,
If you were bright, you would understand that when your brightest leave, the IQ of your country decreases. This is not rocket science.
Neither it is wise to parrot the incoherent ramblings of a mind ravaged by alcoholism. You don't want to go down in the history books as a loser like piggy.
Hi Pamela Anderson,
If you would like to learn more about their superstitious beliefs please follow the link below.
https://www.rbnz.govt.nz/about-us/the-journey-of-te-putea-matua-our-tan…
I cannot speak for all kiwis, but I'd prefer they dedicated their full attention to doing their job properly.
Hi Pamela,
Working on the 24th of June is a fantastic idea. Can you think of a dumber time for a public holiday than in the bowels of the New Zealand winter but before the ski season starts properly? I will certainly swap it out for a more convenient date in August. I will call this new day "Mate-a-ski-ski". 🏔️🏂
People who try to "play God" tend to be egotistical and controlling, and have an overinflated idea of their capabilities.
Adrian Orr didn't try to "play God". He tried to "play Tane Mahuta". It was revolting cultural appropriation, and showed pretty clearly just how up-his-own-bum he was.
In my experience "the best and brightest" can find opportunity in any 1st or 2nd world country.
Also, you don't need to be the best or brightest to do well in life. A good attitude, open mind and a work ethic are the most important things.
Some of the best and brightest in an effort to prove themselves fall flat of their faces. They plunge themselves into untold vices and situations in a struggle to gain useless status, wealth and prove themselves wise.
Brock,
Will you be among them? I wouldn't be at all surprised. Much as NZ is now home and I am very happy here as are both my sons, we all came when house prices were reasonable, but now? I doubt it.
When I left Scotland in 2003, the sale of my house enabled me to buy 2 properties; a 2 bed apartment in the area I lived in and a 240sqm house in Mount Maunganui where I still live. Now, that same house would buy me a small property in Outer Papamoa. My younger son, wife and family live in central Auckland in a nice but ordinary house recently 'worth' $3m. Even with their very good combined incomes, they could not afford to buy into that market now, though it might soon be a $2m property.
Why wouldn't younger people seek seek better prospects elsewhere? I find it sad to see what is happening to the country.
I agree, when I read of house prices dropping it's hard not to think that they have at least another 50% to go. I've lived all over the world and still shake my head at the shoddy homes for sale here.
In the US, we had triple glazing, amazing central heating offset by solar, but living in the SI, I still see homes for sale (close to $1m) with one heat source, basic insulation, some single glazing, wood rot, etc.
I see the Vested Interest Brigade ( VIB ) are out in full force at the moment . The fires are raging while the VIB are desperately running around with their little extinguishers. But it's hopeless, even a full monsoon bucket would only turn to steam. The VIB thought they were the VIP. RIP.
Tim Mordaunt and others from this site have put together a little something for you all .
https://www.youtube.com/watch?v=op4B9sNGi0k
7% interest rates this year, Guaranteed . ( Very Shortly )
See, there you go HouseMouse. Repeat that one more time for me, please. Lets all sing that one line together again, "7% interest rates this year, Guaranteed ."
I must go now HouseMouse. Oh, dont get upset now, but drinking this early on a Tuesday Morning is not Healthy.
Kiwi Tim - Thank You for being honest. That takes some balls. HouseMouse does not have balls, well maybe, but they are very small being a little mouse and all. To some it is amazing how fast rates have gone up over such a short period of time, but this was all planned. I can see it, most others cant. The trick is to keep away from the MSM and do your own study. People were sold a lie that the rates would stay low for a very long time, but it was just that, a lie. Here is a little secret, but please dont tell anyone, the rates are going much much higher than 7%. You have seen the conflict I have got over just the last month for making 7% claims. Imagine if they found out what is really coming. Its not spam, its a warning to those that have ears.
If he had any self awareness he would understand the RBNZ’s decisions in 2020/2021 have been a massive part of their problem.
As I have said before, the error wasn’t originally cutting to 0.25. The error was in not raising the OCR back up to something like 1.5 by about September last year.
In large part he only has himself (and other similar overseas people singing from the same hymn book) to blame. By early 2021 it was blatantly obvious that the economy was being over stimulated and house prices were headed for the moon with all the 'free' money. He carried on with his stimulation foot to the floor and still is below neutral settings. Those who were sucked into buying hoses at these hyper inflated prices can blame him in part and the Government principally for their total failure to address the housing issue. Those of you who have watched house prices disappear beyond their hope of ever getting out of renting can also blame him and the government. This is a total cluster F and the only rational thing that young people can do is get the hell out of the country.
Agree with your points re Orr/RBNZ and the ridiculous decisions that were being made. I would say however that individuals are going to need to take accountability for their actions as well. Just because the country was awash with cheap $$$ doesn't mean you 'have' to jump in and over indulge!
While some went absolutely bonkers on ludicrous amounts of debt, living like kings and throwing money around like confetti believing the rhetoric that this was the new way forward and the good times would never end, some in fact held off after looking at the situation and making a common sense decision that "This is insane and simply cannot carry on!!!" Instead they payed down their debt on low interest rates.
With the future looking as it does the latter group may well have become believers in 'Karma'.
By the time covid struck & the OCR was dropped to floor level, it was just flogging a dead horse as the preceding cuts to same, had provided all the stimulus possible. Therefore the only rationale was the government & RBNZ were hell bent on prodding NZrs into borrowing to spend to stimulate the economy. And here we are now then.
"which regret would we most want to avoid. And deflation outweighed inflation".
So the RBNZ had to make a decision, choose one. That's fine. What's not so fine is did you monitor weekly or at least monthly. And based on expert economic modelling, arrive on actions that could have been taken monthly.
Perhaps we ought to question the conventional wisdom that deflation is pure evil. Seems to me that the ideal target for inflation over the long-term should be 0%. https://mises.org/library/deflation-really-bad-economy
Yes.
All this discussion is based on is how hard we push growth for growths sake.
Time for us to re think our approach.
Climate change and fossil fuel dependancy etc should provide a great opportunity to have this discussion.
What do we need out of our currency? Does it need to be more than a simple method of exchange?
If domestic sales can be substituted for exports then contracts will migrate towards exports when they can. So domestic pricing will reflect international prices. Inflation can therefore be imported via the new domestic price, and also via the surplus profits of export companies.
Because no matter what the inflation figures are and what negative impact they are having on NZ, the supermarkets will not pass up an opportunity to gouge a bit more from their ever suffering 'customers'.
Having recently been given the green light from the absolute waste of space that is the Commerce Commission, expect things to only get worse.
Because the export markets and imported Labour Markets dried up. So rather than have an oversupply they farmers all cut (or in some cases completely halted) production.
There were stories about Asparagus crops being mowed as it was cheaper than picking. Salad crops being left to rot. Tomatoes and Capsicums not being planted.
NZ doesn't have a domestic market, we are just the scrap pile for all the stuff that can't be exported.
"We need to remain focused on the horizon over which we can be impactful but without doing unnecessary damage to output and financial volatility."
Orr said the challenge in front of all central banks now "is really how do we tighten our monetary policies to constrain inflation expectations but without creating a recession. The challenge of a soft landing coming out over the next two years".
Or in other words we’d like to have our cake and eat it too.
When ever I see their “No regrets” stated, I read “No regerts”. Seems more adequate but I annoy myself not pronouncing it right.
Literally everyone in the financial world has predicted this when they started pumping more and more money into the "economy" (just into unproductive assets, really).
Yet still acting surprised. Path of least regret? Everyone knew back then that it was just the path of delayed regret.
"Oh boy, tomorrow me is gonna hate today me for this..." - Adrian Orr, 2020 (allegedly)
My suggestion would be to unwind QE rapidly to avoid a rates overshoot scenario. Bugger 'soft landings', they need to get this thing down before they crash it.
We are definitely "risk on" still for inflation with China shutting down. Most inflation, short and long term, is still in front of us.
I believe it is impossible to unwind QE, as it is impossible to unwind vaccines. Once injected (money into the economy or vaccines into bodies), there is no way to unwind.
Regarding QE, we can at best hope to have a period of high inflation (without hyperinflation). Deflation, in turn, would be nothing short of disastrous.
I strongly disagree. Deflation may mean mass unemployment and insolvent banks, possibly total breakdown of society.
High inflation (7-15%) can achieve devaluation of the debt bubble over the course of several years. This would solve the problem whilst hyperinflation (inflation rates over 100%) can almost certainly be avoided.
China shutting down is something that simply cannot be addressed with NZ interest rates. I agree much of the current inflation is supply shortage driven, there is no way to change this.
Rather, inflation must be accepted, in order to avoid something worse (deflation). Even the central bank seems to agree with this (least painful approach or least regret). I am happy they agree, but on this basis I do not understand why they are raising interest rates aggressively into an already correcting real estate market.
"Orr admits RBNZ 'not in a great place now' with inflation"
Realization is the first step in solving problem but will he take LEAST REGRET Approach in dealing with inflation or is it just crocodile tears.
Wait and Watch.
165 billion in New Mortgages since March 2020 to 513 thousand borrowers. 321 k average each. Every day hundreds of those loans roll over onto a new fixed rates 2% higher than previous. Total sales for 2020-2021 156000 properties. Hundreds of thousands of people took the opportunity presented by low interest rates and easy credit availability to buy their first home, upgrade their home, refinance their mortgage, buy an investment property. Even crazy stuff like borrowing against their home to fund a business. Until late 2021 this was being done with the expectation (backed up by RBNZ pronouncements) that interest rates would stay low for a long time. Inflation was transitory and nothing to worry about. Just for good measure we had the Prime Minister on the Podium of Truth saying that house prices were going up a bit fast but in the long term 5% property inflation per year was a good thing.
They were dumb when they dropped the rates too low. They will be even dumber when they raise them too high. The have no idea of the consequences of their actions, a total wait and see game. At 5%, payments for most will go up 100% and spending in the economy for those affected will drop 99%. At 7.5%, payments will have gone up 300%. The question is, are they happy to crash the economy?
Why the admission now, when it has been evident since long !
It can be as he knows that have goofed up and goofed up in a Big way and is no longer able to kick the tin down the road, which they have been since last two years.
Important thing to note is not his admission ( as has no choice and is forced) but he is publicly sharing his fear that is worried that inflation may be baked in to price setting - to me it indicates that it has already baked in and is just trying to save his butt.
Is he a candidate for sympathy to be in a situation that he is - NO. As he responsible for this situation and it may just cause him his job ( Does it matter in his position and knows that No politician will touch him) but to common people and many it will lead to disaster - bloodbath.
"I support the current thing" https://t-shirtat.com/shop/i-support-the-current-thing-2022-t-shirt/
Will the inflation figure have an 8 or higher in front of it ? If so mortgage rates will be approaching double figures. Orr will have to hike much more rapidly and aggressively to get on top of inflation than he has currently, this is going to produce a recession for sure and a likely period of stagflation. It is not in the reserve banks interests to be concerned about residential mortgages .
NZ population is flat lining. 1000 home completions in Auckland per month. New home construction will fall off a cliff in Q3. Once existing projects that are past the point of no return have washed through. Rents will fall. Both of those were given increased weighting in the CPI review in 2020. That has exacerbated the inflation number on the way up. But will act in reverse now. A few more tweaks to the CPI basket in 2022 and we will have inflation beaten by Q2 2023 (on paper) just in time for a couple of 0.25 BPS cuts prior to the election.
I think it is impossible to contain inflation which has mainly been caused by too much stimulation in the past and is now also imported due to uncontrollable international factors.
The best we could do now is to allow inflation to run its course. Inflation would eventually devalue debt, which would heal our overindebted economy (after inflationary suffering as a 'medicine').
The worst case would be deflation which would lead to total collapse of the economy. As our economy is largely property driven, we are already seeing worrying signs of deflation in the property price reductions.
The steep interest rate increase last week was a mistake, in my opinion. It has set us on a path to recession/depression. It needs to be corrected, by at least halting any further rate hikes to see the current levels take effect.
This will take a while, as mortgage holders are usually bound by medium-term contracts before they renegotiate interest rates. Many mortgage holders are already struggling.
The decision is between helping those mortgage holders (a moral hazard) via low interest rates, or allowing a deflationary collapse that would damage everyone.
Our economy is overindebted and too much dependent on property, so a collapse of the property market must strictly be avoided. A real estate collapse would not help anyone, not even tenants looking to buy. In a recession/depression, those tenants would likely lose their jobs and/or banks would further tighten their lending, thus making it impossible for tenants to get into property.
The choice is between inflation (a moral hazard) or deflation (which would mean total collapse for everyone). The answer is obvious, in my opinion.
Yes, I do realise that. Another part of the RBNZ's mandate is to maintain a low unemployment rate, to which a deflationary collapse would be disastrous. Central banks were raising interest rates in 1929 and in the early 1930ies, which led to total collapse.
Also, the housing price index should be incorporated into the consumer price index, as housing is a necessity. This would have mitigated the housing bubble in the first place, and now it would lead to lower statistical inflation rates which could prevent interest rate hikes.
At this moment in history, inflation can no longer be controlled, in my opinion. The currency value has effectively been ruined already by vast money printing in the past, there is no way to restore it. Money printed in the past alongside worldwide supply shortages are now beginning to affect consumer prices, much like a tsunami hitting shallower water. There is no way to control inflation anymore. A few sand bags on the beach won't do the job, and it is pointless, even dangerous, to try to pile them up on the beach.
The best we can do now is let inflation run its course. This will have a healing effect in the mid-term, after all the debt has been devalued, the Paul Volcker moment will arrive where interest rates can be hiked. Doing it now, in a fragile state of the NZ housing-dependent economy, spells disaster, drowning at the beach to stay within the methapor.
For younger people who don't own houses....a depression and unemployment for a few years is better than a taking on a $500,000 to buy a dump/start home.
Yes they might be unemployed....but if house prices fall by 50% in the process, then they are earning hundreds of thousands of dollars a year in reduce deposit and mortgage servicing costs over the next 30 years.
Its only those with something to protect and who have already been treated like royalty (asset owners....) that are afraid of a depression. For people who can't afford to buy now...they are already experiencing a depression and have likely done so for the past 10 years as central banks have done everything to make life a hell for them for the benefit of those who own shares/property/bonds.
Interesting that you refer to 1929. Records show that the lead up to that crash was a period excessive money printing causing over inflated assets, and allowing companies to buy their own stock thus artificially inflating their share value (good for bonuses). This created an investment culture of gambling like speculation, with price completely devoid of return/yield fundamentals. Sounds familiar..oh that's right, this is more or less exactly whats been happening lately.
Yes its going to be messy, but bring on reality.
Reality, if deflationary collapse, is likely to bring on a total collapse of society, then dictatorship (likely some form of communism). No-one, except party members, is going to benefit from this. The young will find themselves enslaved to the state alongside everybody else.
There is a temptation for the poor to envy the rich and wish for the above form of collapse. However, no-one would benefit from it.
The Germans did not benefit from the 1929-1932 deflationary collapse. The found themselves suppressed by a dictator, then at war, their sons and homes destroyed. Yes, this had been caused by speculation on the share market and by an overly positive investment culture, much like we are facing in NZ regarding property. There is just no way to unwind this now, the money has been created ex nihilo for mortgages, and it cannot be taken out of the system anymore. This money is now finally hitting consumer prices, after much delay. I note, I was never a friend of free spending government and QE. But there is just no way back now.
The money has been printed and the Dollar devalued. The damage is done. Our options at present are limited to painful inflation or total collapse.
If collapse, the way things are going, we would like face some new form of Soviet Union, with total electronic control over every aspect of life.
This is not desirable, I am speaking from experience coming from East Germany. Unfortunately, there appears to much socialist/communist mentality again these days.
Whilst I understand the frustration over the vast divide in wealth that money printing has created, I do not sympathise with socialist or communist ideas. I know that does not work in practice.
Inflation or even stagflation in the style of the 70ies is much better and our only viable option at this point, in my opinion.
I think it is not possible that the equity in homes disappears without significant flow-on effects: Our economy is largely real estate driven. Our banking system and our job sector depend on real estate much more than they do in other countries.
If the equity disappears out of homes (real estate crash of which we seem to be seeing the beginning of), then we will likely have massive unemployment, possibly bank defaults. This will affect accounting firms, the IT industry, cafes and restaurants, car dealerships, etc. Almost everything depends on real estate in NZ, whether we like it or not.
Rubbish. Crashing the housing market does not necessarily lead to societal collapse. Housing markets crash all the time without society collapsing. Those heavily invested/leveraged in property lose their shirts and everyone else moves on.
Complete scaremongering. Let me guess, you are heavily invested in property.
I agree, crashing the housing market does not necessarily lead to societal collapse, but the risk is high. Short of societal collapse there is the prospect of mass unemployment, bank defaults, etc. In my opinion, a period of high inflation (without hyperinflation) is strongly to be preferred over these scenarios. The central bank seems to agree with me, but I find their actions recently do not make sense in light of this.
Housing markets have crashed in other countries, without societal collapse, this is true also. However, other countries (U.S. for example) seem to have a broader economic base with less dependency on real estate. Even so, the 2008 property crash in the States has almost lead to financial meltdown.
This is the reality, not scaremongering, unfortunately.
I don't know what you mean by letting inflation "run its course". As if inflation will burn itself out? My understanding is that inflation is the value of the dollar dropping, and since the value of the dollar is intrisically 0 , you let inflation run away and it becomes hyperinflation until the dollar reaches 0 and price of everything becomes infinity.
Not an option.
what i mean by letting inflation run its course is something akin to the 70ies (preferable over the 30ies style collapse): inflation rates of around 10% p.a. for a few years, then a 'Volcker' moment with massive rate hikes once the debt has been sufficiently devalued (maybe after about five to seven years at those inflation rates).
1929 and straight to Germany and the Soviet Union...but no mention of the New Deal:
The New Deal was a series of programs, public work projects, financial reforms, and regulations enacted by President Franklin D. Roosevelt in the United States between 1933 and 1939. Major federal programs and agencies included the Civilian Conservation Corps (CCC), the Civil Works Administration (CWA), the Farm Security Administration (FSA), the National Industrial Recovery Act of 1933 (NIRA) and the Social Security Administration (SSA). They provided support for farmers, the unemployed, youth, and the elderly. The New Deal included new constraints and safeguards on the banking industry and efforts to re-inflate the economy after prices had fallen sharply.
Investing in society for the benefit of many more people seems far preferable to continued welfare for speculators, as we've had in previous years.
Anyone not keen on "socialist" ideals can always opt out of NZ's pension, our only universal welfare benefit redistribution.
Precisely, exactly my thinking. This should have been done already. It would have likely led to higher interest rates in the past, mitigating the property price bubble.
Even if it is done now, it will help: As house prices are now falling quite sharply, including them in the Consumer Price Index should prevent interest rate hikes. This would be good, as any further interest rate increases may crash the economy.
Lol - it would just lock in the gains for those who already own assets at the expense of those who do not.... limiting the falls of prices....and based upon affordability or fundamental ratios are priced far above where they should be.
Sure if this was done back in the 90's or closer to when we started CPI inflation targeting. But to introduce it now would be to double down on the madness.
Ultimately what we need are price reductions across the board, a reduction of the debt/mortgages and a general increase of rates back from the current emergency deflation fighting settings that they are now.
We've thought we were clever by kicking the can down the road GFC - now. But all we've done made the situation worse.
Further we should have had DTI ratios instead so each time that interest rates were dropped over the last 20-30 years...a limit on the amount of debt provided to mortgage holders was capped. But instead we allowed people to use equity in previous houses to buy more houses...increasing the concentration of debt and leverage....significantly increasing the risk if prices were to ever start falling.
You reap what you sow....and we've planted the seeds of a financial crisis at some point...perhaps this year...perhaps not.
Probably need to start taxing where the wealth has been transferred to via policy - property speculation - and lowering taxes on the people doing the productive work in society. Land Value Tax on the unimproved value of land.
It'll take some courage and selflessness to fix what lazy entitlement has done to our society.
I agree with much of what you are saying, the Housing Price Index should have been included in the CPI much earlier. Doing it now, would lock in the gains for those already invested.
I agree, I don't think it was clever to print so much money after the GFC. Money was effectively created ex nihilo by retail banks lending for mortgages. This money is now in the system. It cannot be removed anymore without killing the economy. It is surprising that it has not trickled down into the CPI earlier and steadier, and this kind of CPI inflation is now hitting hard and sudden.
But there is no way to avoid inflation now. Price reductions across the board are not possible (beyond a certain extent of perhaps 20%), without causing total collapse of the entire financial system.
I agree we've planted the seeds for another, bigger, financial crisis. I believe this massive financial crisis must now be avoided as it would destroy the economy and lead to a complete breakdown of society.
Interest rate hikes would likely lead to this kind of breakdown. That must be avoided by allowing inflation. Once we have had high inflation for a few years (much like in the 70ies), another 'Paul Volcker' can come and introduce 20% interest rates, to stabilise the system then. If done too early, we will have insolvent banks, mass unemployment (refer Germany early 30ies), middle class wiped out, a radical coming to power, some form of war.
With the sharp reduction in property prices in the March 2022 report and anedoctal evidence of a glut of properties hitting the market, our property-driven economy seems at the brink of collapse now. I believe interest rate rises must be stopped or reversed now, to avoid this.
Yes, this will benefit the wealthy, unfortunately not so much the poor. The alternative would be hellish for everyone.
Thus, I believe inflation is far better than deflation (even in economically important asset markets such as NZ real estate). I believe the decisive moment is now.
If interest rates rise much further, a landslide collapse of our overindebted economy seems inevitable.
Well that wouldn't work because inflation of the usual basket of goods could well keep increasing at 8%,the banks would continue to lend $30B a year and staff would be told inflation is just one or two percent so hey that's your pay rise.
After three or four years we would have thirty percent less in spending power.You will have a recession anyway......for a long time.
Watch next as the banks realise the game is up and start really pulling back on lending.
You cant continue to lend billions of dollars to landlords who claim a loss....its going to send the country broke at some stage.
Its fascinating to see how technology is playing its part in this bubble and .......pop? The news about the downturn spreads so fast and so quickly.You only have to read the comments section on the MSM now to realise the whole country can see what's going to happen...week by week...it gets worse.People can see the valuation of their property/s on their banking website.....yikes when these drop substantially.I can see the questioning beginning on fb about why properties are taking longer to rent and more about preparing properties for sale.
I don't think anyone in Wellington have the faintest clue what happens next. This wasn't suppose to happen will be their position.
Well I reckon the housing market nosedives faster and faster from here.
Yes, we will have less in spending power, we already do. Money printing in the past combined with supply shortages now are responsible. It is surprising that consumer prices have not risen earlier and steadier, but are exploding suddenly now.
There is no way to stop price inflation after money printing. The damage has already been done, there is no way to keep pretending that the Dollar has the same purchase power as previously.
Much like a vaccination cannot be removed from one's body, the new money that has been injected into the economy in past years cannot be removed anymore. It would have been wise to thoroughly consider the long-term effects beforehand, it is pointless now.
I agree that we will likely have a recession. The choice is between stagflation (best case) or a deflationary collapse (worst case), in my opinion.
The best that can be done now is to wait a few years, whilst keeping interest rates low, until the vast debt that is crippling our economy has been devalued via inflation. Trying to remove the money from the system at this point will cause a liquidity crisis that could collapse the entire society.
The money was never "printed".
It was loaned into existence.
And it disappears from existence just as quickly, when loans are paid back or defaults happen or market prices fall.
What we call "money" is very transitory and illusionary. It is not something tangible that is printed. It is ephemeral, and disappears as quickly as a soap bubble. Pop.
Of course money is not physically printed much anymore, but loaned into existence. I fully agree.
If money should disappear from existence quickly (liquidity crisis), this is another word for disaster or total collapse. Large scale defaults would mean banking collapse in NZ, as NZ banks' balance sheets are property-heavy.
If the property market pops like a soap bubble, with many mortgage defaults, we will have insolvent banks. This would mean even supermarkets would be unable to operate, there would be a food crisis. Such a scenario is not desirable, not even for the poor.
I have neve been a friend of experimenting with QE, much like I have never been a friend of medical experiments. But the damage is done now and we have to face the results. Regarding QE, the result is inflation. The money has already been created, it is already there. Stark CPI increases cannot be avoided, bar everything going bust.
We are going way to fast, down hill , in an 18 wheel truck, on ice. we have to brake but how much? hard landings are often caused by braking too late, in this case way way way to late. And the finance minister is leaning out the window of the cab yelling yahooo...... Some of the older readers have moved quite some distance from the fan, knowing what the truck is loaded with. Meanwhile people here argue about 5 vs 10 vs 20% falls house price falls, we are so far past a correction now, what part of hard landing do you not understand.
Being German, I understand hard landing and I am very worried about it. A hard landing happened in Germany in 1931/32, with central banks raising interest rates when the stock market was already falling. The result was disaster, first financial, then economic, then political, then mass deaths.
Something similar must be avoided today. The central bank needs to stop raising interest rates and allow inflation to devalue the debt across a number of years, akin to the 70ies. This our only hope of a soft landing, stagflation. Much better than total collapse.
Inflation is a worldwide issue. Inflation worldwide is currently being generated by a too high oil price followed by higher food prices and higher prices for certain commodities.
If the oil price stays at these levels the world will go into recession. After the world goes into recession there will be disinflation.
The core inflation problem is only affected by interest rates in relation to credit being affordable. People worldwide have been able to extend their loans and keep their businesses afloat so keeping a level of demand intact.
What people aren't talking about is the ability of more and more nations being unable to access foreign currency to pay for imports. Sri Lanka is the prime example of this. Pakistan is going in this direction. The increased cost of fuel and food can only be ignored until the reality of having to find the foreign currency to pay for it hits.
China has already popped it's credit bubble and now it is scrambling to undo the damage. The US Fed is trying to pop it's credit bubble and will end up in exactly the same situation as China. The US has such disfunctional govt that the Fed is the only agency that can be relied upon to use any lever to reduce inflation. But the problem is that the inflation rate is mostly supply side.
If Nato had established a no fly zone in Ukraine, sent a fleet to the Black Sea and shut Putin down early in the conflict there would not have been these fuel and food cost pressures that are coming from that region.
If Biden had made a plan for the transition from fossil fuels to renewable energy instead of just shutting down oil exploration and pipelines then perhaps increasing the US oil supply would have been easier.
Inflation is being caused by real worldwide constraints on energy supply. Crushing demand will cause inflation to reverse at the costs of people's welfare.
It would be much more sensible to make a viable plan to transition from oil and gas to renewable energy sources while we as a nation still have the resources and foreign currency to make the transition.
Being good little neoliberals that never make a plan and always rely on the invisible hand to do our work for us will mean New Zealand will end up like Sri Lanka - broke and captured by interest groups.
The RBNZ is making these decisions for the same reason that the US Fed is making the decisions - because their elected politicians are neoliberals and won't do anything practical to resolve problems unless the interest groups within the govt will make money from doing something.
It's never a one-man show in any govt agency, the decision is collaborative, at least with consideration of fellow employees and their research.
The old lot worked in RBNZ has left in the last couple of months and hence we are seeing a double down on rate hike.
Good sense is prevailing, in reality, the inflation is really bad. Always remember if the pay rise is given to justify the inflation then it will be tough for companies to cut down their prices because salaries cannot be reduced. Then the only way left will be to sack high-paid resources and look for one who wants to work for less salaries.
And this will be really bad for the economy better curb the inflation monster now.
I agree we have an inflation monster coming. I don't think it can be curbed.
It is not good sense to attempt it, even. This may lead to a crash, our system has become that fragile. As an economy as a whole, we are overindebted. In particular, we have high levels of consumer debt (vs. national debt). This makes for a very fragile economy.
Add the fact that we don't have much industry in NZ. Our banks' balance sheets consist mostly of mortgage underwritings.
This is a recipe for disaster. A conspiracy theorist could get the impression the system wants to achieve breakdown.
Rather than misguidedly panning Adrian Orr and his broken-crystal-ball-and-hammer routine - never mind HouseMouse - how about some wisdom from James K Galbraith in response to the question of whether central banks are doing enough to fight inflation:
Say what? Seriously? OK, I’ll give it a try, but promise me this is not a joke...
The notion that central banks fight inflation is a pernicious myth, spread by their officers, acolytes, and by credulous reporters. Central banks raise interest rates. The blather about inflation is eyewash.
High interest rates are good for people with money to lend, and not so good for people with loans to roll over. Galbraith’s Law states that people who have money to lend tend to have more money than people who do not have money to lend.
Will higher interest rates stifle the US economy? Maybe. Maybe not. In the near term, overseas money will flow in. This will cause problems for the global poor. Some businesses may accelerate their borrowing to avoid even higher rates later on. Alan Greenspan hiked interest rates in 1994, and the boom lasted for six years. But, of course, it eventually came to a crashing end.
Can high interest rates squelch price increases driven by oil prices, supply-chain disruptions, war, and a big boost to the Pentagon budget? Be serious. The only way is through wage cuts driven by mass unemployment, alongside a flood of cheap foreign goods. Then-Fed Chair Paul Volcker engineered both in the early 1980s. The first would be hard to repeat, because there aren’t that many high-wage manufacturing jobs left. The second also is unlikely; there aren’t that many low-cost sweatshops out there anymore.
So, what will happen? My guess is bankruptcies, debt defaults, and financial crisis, beginning in Europe where the sanctions regime imposed on Russia will bite hardest. And then, rapid growth of the emerging non-dollar, non-euro trading and financial zone. A suicide of the clueless.
https://www.project-syndicate.org/bigpicture/are-major-central-banks-do…
While the choice was between two bad options the delay in action may result in both. Deflation in house and asset values and inflation in manufactured goods, services and labour.
But this may actually be good for NZ long term as house prices relative to the rest of the economy may rebalance at a lower level. If we also get some currency devaluation it will enable NZ to recover exports and tourism industries.
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.