The transformation of Reserve Bank Governor Adrian Orr from snow white 'dove' to the aggressive 'hawk' we are now seeing is nothing short of startling.
All it needed was a little - well, a lot of - inflation.
I think many doubted that this was a Governor that would pin the ears back and just target inflation, inflation, inflation. They were wrong. Right now that's the only thing the Governor is aiming at.
"We are in a different world now," he said on Wednesday, as he talked about the need to get inflation expectations (which have been rising along with real inflation) down.
And he concedes by aggressively hiking interest rates the central bank is now risking doing too much too soon - rather than risking having done too little too late.
For the RBNZ it's a credibility issue. People need to believe it can get inflation back into its target band mandate of 1% to 3%.
In its latest Monetary Policy Statement the central bank is picking inflation to peak at 7% in June (it was 6.9% in March) and it now sees inflation getting back under 3% again by December of 2023 - so about a year and a half away.
The 50 point rise in the Official Cash Rate on Wednesday was seen as pretty much inevitable (notwithstanding the fact that's a big rise). But the RBNZ still managed to blow the markets out of the water with the projections for FUTURE rises.
A projected 3.4% OCR by as soon as December (which would be the highest level since early 2015) is serious stuff.
"We are confident this is our best foot forward to provide sufficient restraint on demand to smooth pace that back to matching supply and seeing inflation return to normal." Orr said.
He thinks that the projected path of the OCR up to nearly 4% by next June "is the best path that we can follow to achieve our mandate".
Orr has spoken a lot about a 'least regrets approach'. And that came to the fore again.
"At least try to steer away from the worst possible outcomes. For us at the moment that least regrets would be to have done too little too late and at that point inflation expectations are just continuously rising and the task of putting inflation back to within its range becomes incredibly costly.
"So that's why we have erred to risking doing too much too soon rather than risking doing too little too late.
"I use the words least regrets. There's a regret at both of those ends, but it's around what would you most prefer to avoid."
Asked about whether there was a chance the aggressive OCR tightening that's been signalled risks tipping the country into recession, Orr said the RBNZ was "doing what is necessary with the information at hand and with our remit as it stands".
"We don't project negative [economic] growth in any of the quarters in the period ahead.
"I would say that without doubt we need to slow the growth in demand until it is better aligned with the ability to supply that demand. In the absence of that, inflation will keep going higher."
Additionally the RBNZ "are very confident" households can cope with the forthcoming interest rate rises.
Orr appeared to accept that mortgage rates were likely to be at least 6% as the OCR continued to rise.
He said such rates had only been what the banks have been testing their prospective mortgage customers at over the past 12 to 18 months anyway.
"Of course there will need to be some belt tightening."
The RBNZ has previously indicated it sees a 'neutral' OCR as being about 2%, which is of course where it has now risen to. The perceived 'neutral' rate means that at that rate monetary policy is neither stimulatory nor tight, but just, neutral.
Asked about where he saw the current OCR level, Orr said: "We would say the monetary conditions and financial conditions as a whole are now at least neutral, if not tightening.
"Why do I say that? Because the actual interest rates that people receive are significantly above the Official Cash Rate. What are we doing today? We are just confirming where market pricing had already got to.
"And I think that's an important thing that people need to remember and it is that market pricing is largely where we have said we are today. So while it may surprise some commentators it wouldn't be surprising, the pricing, in that sense.
On the RBNZ's projected decline in house prices of 15% from the peak of the recent housing boom to a likely trough by 2024, Orr said this was "mild and benign relative to where they have come from".
Asked about the RBNZ's projections of future GDP growth among NZ's trading partners of in excess of 3%, Orr conceded there was a huge band of uncertainty.
"China in particular is so important to us and that is a nation that is going through significant Covid challenges at present - as well as then the broader geopolitical issues that we are seeing globally. It is a risk variable. I don't see the risk of it suddenly proving to be a lot stronger. It's a risk for us around that China concentration of trade."
119 Comments
The caption illustrates the said “hawk” taking flight from the carcass of the horse flogged to death by grossly stupid, unnecessary and futile lowering of the OCR in the first place. Any stimulus from that on offer had been exhausted well before the pandemic. All that was achieved was an explosion in property values and now the rampant inflation upon all of us. What sort of crazy outfit embarks on a policy of inciting the people to borrow to spend. Absolute nuts!
We are no where near even reducing our reliance on fossil fuels, if we arent utilizing what is available in our own back yard we are just paying for it to be delivered from half way round the world which is essentially unnecessary.
The world is 98% reliant on Oil, we are just starting to see how much with the increased costs of fuel and the down stream inflationary effects.
Battery powered cars arnt going to save us unless there is some revolutionary technology advancements, IMO green hydrogen utilizing off peak electricity is the only viable option for the future and that in itself will require massive development and advancements.
All the talk of decarbonizing right now is just that "talk"
To move all current fossil fuel processes (transport, heating, industry etc etc) to renewable electricity requires an increase to current production by 150%. If you want to use green hydrogen instead of EVs, that number becomes 200%. Adding an extra 50% of current capacity just so a few people can save 10 minutes refueling does not make economic sense.
We'll never get the 150% increase, let alone the 200% so that means, as PDK often points out, we will have to do less.
At last a Government with some sense Palmtree. The only people that are "lacking in intellectual capacity" are the loud mouthed group of activist whack-jobs that think the only way to save the planet is to punish every living human being today (you do realise that if you live in developing, or undeveloped countries, there is a decent chance you are burning dung as fuel! Now that is pretty carbon intensive. Of course the extreme end of the IPCC predictions are always quoted by these people that lack intellectual capacity (the sky is falling didn't you know?), and the IPCC even says that there is low confidence in their higher temperature predictions. And I believe in adaption Palm. So lets not going screwing our economy and trying to have the world screw the global economy.
If he wants to get inflation down then let's abandon Net Zero, get rid of the ETS and start natural gas exploration. Oh, and produce some fertiliser.
Thought not....
Also, does this mean they are now regretting the least regrets?? https://www.rbnz.govt.nz/news/2020/09/confidence-in-a-world-of-uncertai…
He didn't say all. And it is fairly true, the cost of getting things done has increased greatly in a covid environment, irrespective of central banks.
Additionally, governments let money flow like water (TRILLIONS OF DOLLARS), but a lot of that money was plugging holes punched through economies by covid. Rather than just have no monies, we put it on deferred payment.
It's like saying covid mitigation in NZ was a joke, because covids only linked to around a thousand deaths, without factoring in the 10s of thousands potentially dead if we did nothing.
Yes, of course you are right. Money printing has caused this inflation, supply chain issues have only triggered it.
Unfortunately, once the money has been printed and is in circulation, it is impossible to withdraw it from the economy again without causing the debt-laden economy to collapse. Such a collapse is precisely what is going to happen if the RBNZ keeps raising interest rates. Mortgagee sales are already beginning, even before the latest aggressive rate hike,
The alternative would be to let inflation run its course. Inflation cannot be avoided anyway, after years of quantitative easing. But it seems the RBNZ, in a stubborn way, do not want to admit that. They seem to be determined to try to preserve the value of the NZD (which is impossible) via OCR hikes, and this is going to crash the economy.
Mr Orr is like a dogfish on a wharf - Total Flip Flopper!
Though I believe (for now) the OCR will continue its upwards trajectory, let's not forget Mr Orr's top 5 singles:
1. It's Transitory
2. Ready Bank Systems for Negative Rates
3. Funding for Lending
4. The LVR Backflip
5. It's Sustainable
He seems to turn-on-a-dime.
While I support hikes in the OCR, in fact they’re well overdue, the newfound sense of urgency and hawkishness about the future outlook feels worrying similar to his excessive insistence on the importance of size and scale when using the printing press (QE) and his insistence about the need for negative rates when it was obvious neither would be needed in late 2020.
Look at the dire consequences of that decision for inflation and inequality … is it just me or does it feel like he’s now leading this country down the garden path in the other direction just as the outlook for growth is starting to materially deteriorate???
Lol Rick, those hard working kiwi's that are paying for societies services are looking after my properties as well. You know, the sparky that is looking after the electrics, the plumber that sorts broken pipes and fixes leaks, the builder who extends the deck and does repairs, the gardeners who keep the grounds in good nick, the Real Estate agents who make fees off my sales and purchases, the property manager that charges me monthly fees. Or are they not hard working kiwis that are paying for society's services? And if they are, where are they getting their money from to pay for society's services Rick? And if you are big enough to concede at least some of it is coming from me, a property investor, then who is actually contributing to paying for society's services Rick? Along with the fact that using my capital, I am providing a roof over someones head that otherwise might not have it. So do you think that I have "knuckled down" hard Rick? So when it comes to contributing, who do you think is contributing more Rick, you or me?
How can inflation be contained via financial policy when it is caused by supply issues?
How is a 2% OCR 'neutral' when the property market is contracting sharply, even before the current OCR increase?
How are the models of the RBNZ not projection recession when recession is already beginning, in the property sector?
What is the RBNZ trying to achieve? Trigger a property crash and financial crisis in New Zealand a la USA/Europe 2008? Do they want to whack the New Zealand economy and see a drove of insolvencies and banks that need to be bailed out?
Could it be because they are only using models focused on particular segments rather than the whole picture?
The housing economy isn't the only economy in NZ but when it needs more money it is definitely the first one to get paid, and leaves the dregs for everything else
Sounds like you believe the RBNZ are playing god and can save the economy from recession forever. This isn't true. Central banks have overstimulated economies to prevent asset bubbles from bursting back in 2020, and now we have inflation....and yet we still may also get the asset bubbles bursting...they just managed to kick the can down the road by 2 years.
Also saying that inflation is only caused by supply issues isn't a full view of what has happened the last 2 years. Money supply relative to GDP/goods and services produced has exploded around the world....
Precisely there is no way out for us… no matter what Orr and Co. try!
By the way, those who advocated for such a hard and long lockdown to save the oldies lives will now see the pre-mature deaths of many more over the next decade from economic hardship, rise in crime, dugs and so on.
Inflation was masked by falling commodity prices.
The RB should have seen through this. High wage inflation numbers without productivity increases was a better proxy for the real inflation since 2000.
With the US fed reacting Orr has little option but to follow suit.
Seeing what happened to Turkey when they refused to increase interest rates is something to note.
Your comment doesn't make sense.
Firstly house prices are not part of RBNZ mandate.
Secondly, contracting sharply on what measure? They are still higher than 12months ago, so contracting is probably the wrong word to use.
Thirdly, economic health is better with low house prices not high house prices. Our national debt would be far lower.
Yes, house prices are not part of the RBNZ's mandate. The employment rate, however, is part of that mandate.
In a property-dependant economy such as ours, house prices are one of the main drivers of prosperity and employment. Rock-star economy (2016) and now potential doom - both driven by the property sector. I do not like that fact, but it is a fact. We cannot pretend, as the RBNZ apparently does, that we do not care about house prices, by simply focusing on the inflation rate.
I think economic collapse in NZ right now could likely be prevented if the RBNZ would take a look at Australia's OCR policy (low rates over there, with modest increases). Australia may serve as a good example these days.
Unfortunately, consumer price inflation seems inevitable to me. I do not see how the purchasing power of any fiat currency can be preserved in the current supply crunch.
The only question is, do we want inflation and economic collapse (high OCR), or only inflation (low OCR)?
Yes, the key now is to engineer some sort of soft landing, without collapse. Stagflation would be the optimal outcome, given the circumstances.
However, the RBNZ want to avoid inflation at all cost. I think this is illusionary. The price to pay may be economic collapse, whilst inflation still cannot be avoided.
Generally speaking, healthy economies are accompanied by a healthy housing market - there's always a level of interplay.
Obviously we have been living through some exceptional times, and house prices have had a large juicing. But that's not the total sum of what's been driving the economy, it's just the one most people are tuned into.
Did you say rock star economy 2016? That is a matter of perspective..
In reality, it's a housing market with a few pints of milk tacked on the side.
So now it's a bubble economy, not a rock star.
The fact is, a central bank must control inflation to remain credible. The housing market decline is just part of the process when you only have the OCR as a tool. But I think alot of people saw this coming didn't they? Smart people have had atleast 7mths to sell and take profit.
Would be good to go back to the interest.co.nz new year predictions from 1.4 years ago and see how many commentators predicted high inflation. Easy to criticise Orr (and he probably deserves some), but for over a decade now the RBNZ has not been able to create inflation, and who would have guessed a pandemic would cause it. Easy in hindsight.
Here is where I first wrote about it at interest.co.nz in June 2020.
And here is where I followed that up a month later.
And here is what I wrote in December 2020
And then I wrote three more articles in 2021 on the same topic of the inflation that was coming.
With more than 50 billion of QE it was inevitable that inflation would occur.
KeithW
My response to Keith's article back in June 2020 around central banks backing themselves into a corner:
Have a look at these charts on inequality in the US - I can only imagine that we're in a similar position, following similar trends as we mirror Fed policies:
https://www.nytimes.com/interactive/2020/04/10/opinion/coronavirus-us-e…
It looks like central banks are doubling down on their experiment of lowering rates and QE - which to me is just backing them even further into a corner which they probably now can't escape from. Even the body language of J Powell and A. Orr is a give away. They look like they're shitting themselves as they know they can't keep doing what they're doing without it eventually backfiring on them (it would look to me that we're either going to follow Japan and head into long term deflation, or inflation is going to show up in the form of stagflation and we're going to struggle with high unemployment, high price levels but no wage growth = misery index extreme level).
Love him or hate him Peter Schiff (and others largely banned from mainstream) has been banging on about the inevitable inflationary effects of QE forever.
Its basically the economic cheerleaders who are selected for commentary by msm who missed it.
That's why one should get their news elsewhere.
"Orr the hawk has landed - and he is VERY determined to get inflation under control"
Is it not the right thing to do. Economy cycle can be delayed but cannot be avoided. Will face extreme and willl be painful but should be good for long term economy - next boom.
I wonder how many actually put down physical cash deposits to purchase investment properties instead of using imaginary equity and having them all chained to each other and what the effect will be.
Some crazy numbers I was running the other day.
1,000,000 loan last year at 2.3% interest only = $450 a week
1,000,000 loan this year at 5.7% interest only = $1100 a week
Indeed. Speculators are now facing declining paper equity, higher debt costs, removal of interest only, and actually paying tax. Oh...and don't forget DTI on the horizon. All of this is why house prices blown up to the mess we have today totally devoid of any relationship to income. Completely artificial. Good for bank profit and speculators that have exited. Very very bad for those leveraged. If you can afford the next couple of years where the debt rug is not only pulled out, its set on fire while doing so, then well played. Picking that will be very few of the "interest only stack to the moon" seminar worshipers will be able to do so.
Income will matter again....finally.
Three predictions that the RBNZ are getting wrong:
1) The NZ economy is not as resilient as they believe. The trifecta of an erased wealth effect as the property market drops, with the a stubborn cost of living pain, and more expensive credit will push us into recession much faster than Orr expects. A sharper peak of OCR at 3% with a modest drop by 2023 is my call.
2) The change in economic metrics within the property market are already dropping prices in Auckland City by over 10% in 3 months and this slide will become a run, and that will infect the provinces 6 months or so later. The changes will be deep (30% average with investor and apartments being ravaged) wiping out wealth sentiment and discretionary spending. Construction, cars, and so on will decline fast.
3) The NZD will settle at a lower value. Imports will be more expensive and overseas travel will again be restricted to the wealthy.
The big NZ economic reboot is under way.
I guess there is a certain symetry in NZ becoming a case study for how not to respond to supply-side shock driven price increases. Shame that tens of thousands of people will have to lose their jobs / health to learn what is blatantly obvious: Reducing disposable incomes and increasing business costs to reduce aggregate demand only reduces prices if those prices are high because of excess domestic demand.
Orr, maybe we won't learn at all? Maybe OPEC will increase oil supplies and Putin will get out of Ukraine in 2023 and prices will fall - and Adrian can strike the Volcker fake hero pose?
No 'perhaps' about it.
Next question is what should we be doing?
We should look to the past. In the two previous 'oil shock' inflation episodes (1973 Yom Kippur war and oil embargo and the 1979 Iranian Revolution), oil-dependent developed economies got hit with major inflation because oil was an input cost to basically everything they did. On both occasions, inflation fell away when the oil shock was over - although obviously monetary policy enthusiasts managed to convince the world that it was their heroic increases to interest rates that 'beat inflation'.
It is worth noting that Japan had a major wobble in the first oil shock - but they responded differently to US, UK, NZ etc. Japan decided that their dependence on oil and oil-reliant industries was a major threat to their security. So, they spent the mid-70s re-engineering their economy to be much more energy efficient and less dependent on oil and imports generally. As a result they sailed relatively unscathed through the second oil shock - whilst the US and other countries had a repeat performance (and subsequent recession).
Our response to the current oil shock inflationary episode needs to be more strategic - we can't carry on crashing demand and increasing unemployment everytime a dictator spits their dummy out.
We also should probably avoid QE in the future and excessive fiscal spending at the same time as supply shocks - not just blaming the situation on far away dictators who don’t care that we’ve created a massive debt bubble - or that they knew that we had and waited until our most vulnerable economic situation in decades to launch their war plan.
I think it's a bit deeper than just Russia, but moreso Russia playing it's part in a Chinese Russian playbook very similar to a game of chess. Everything since 2020 could have be a step by step process, with the end result of weakening the west.
The food crisis is only just beginning. Wait till the northern harvest fails to meet demand. Yup you guessed it .... More inflation, alot more
I think it's a bit deeper than just Russia, but moreso Russia playing it's part in a Chinese Russian playbook very similar to a game of chess. Everything since 2020 could have be a step by step process, with the end result of weakening the west.
If their Chess game involves destroying lots of anti-armour missiles with their tanks then they're doing swimmingly (river crossing pun intended).
Better late than never.
However if they truly believe 2% is the neutral rate can they unload the balance sheet before raising further? Otherwise we are likely to drive the OCR higher than it needs to be and increase the risk of rates driven recession. Also this will allow government to set a long-term strategy appropriate for actively manage debt in a market environment. Not to mention that should we ever need LSAP again in future we'd be starting from a clean slate.
I think the first job of RBNZ is to control inflation if inflation stays at the current level for the next 1 year then it will be nearly impossible to curb it. As the salaries cannot be rolled back, the only option, in that case, will be hardcore recession which no one wants.
Currently, businesses are under stress not because of the unavailability of finance but because of the unimaginable amount of inflation.
If we think without any bias as an economist then 2% OCR is still very low if inflation swings around 7%. If someone gives an argument of property owners will be suffered if the interest goes up then we can clearly see the hypocrisy in the statement, as no one among those owners complained when the prices went up 40 to 50% in the last 2 years.
The normal OCR is 3% but considering the inflation, it should be above 4%.
And if you think that dropping rates always results in higher asset prices, I was in the US during/post GFC…interest rates were falling and house prices also.
If the market psychology changes, simply dropping mortgage rates again may not bring buyers back to the market as they are afraid of catching a falling knife. That could happen here also the next few years.
That is a very important point that people would do well to read carefully and understand.
It is true, not just of the USA, but of almost every major housing market crash that the world has seen.
Falling interest rates do not save a falling housing market. Especially when banks and buyers become risk averse.
There appears to be insufficient discussion about the Govt's role in this inflationary spiral and the impact of any action that they could take.
So everyone is going to get screwed for longer than necessary because Govt is still pumping up expenditure levels, minimum wages et al as well as dictating how the country can actually respond - for example I would hate to be a builder right now who is looking at cost increases of more than 20% but cannot get a consent change to use different materials to actually get a job finished and get paid
All energy costs are rising fast - including electricity where again the major player is still the govt
But hey lets keep living beyond our means - the farmers will keep bailing us out even as the Govt does its best to drive them out of business
The construction point will be a very interesting one to watch. With so much unpredictability around the cost and material supplies, most will just delay their new build plans until things settle down,
The poor builders may have to start dealing with flaky clients as well as everything else. Also new regulations come in October which will make building new even more expensive.
Buying an older house and eventually doing a Reno, suddenly starts to look a lot more attractive,
A reno that doesn't use gib...
I have extended family with a house they're trying to sell. Went on the market a coule of weeks ago. It's an estate sale - house built by the deceased in the 1970s with decor to match. They can't rent it out if it doesn't sell, because it won't meet the residential tenancy requirements without quite a bit of work that they aren't prepared to do. It will be a bargain for some people prepared to do the work, but only when the supplies become available. I think they'll be waiting quite a while to sell, and the purchasers will be waiting a long time before the reno. It's liveable, if you can bear the decor for 3 years or so.
Wow you couldn't make this stuff up......Oh wait. Seriously every man and his dog could see the problem on here 6 months ago now, really not sure what we are paying these people for, all they appear to have is a one trick pony of the interest rate lever and they cannot even get that right. The RBNZ was so slow to react and totally ignored the pending train smash. All I can hope is that people that saw the train coming had time to get their finances in order because otherwise 2023 is going to be a bad year.
More than 6 months. My post from two years ago:
It looks like central banks are doubling down on their experiment of lowering rates and QE - which to me is just backing them even further into a corner which they probably now can't escape from. Even the body language of J Powell and A. Orr is a give away. They look like they're shitting themselves as they know they can't keep doing what they're doing without it eventually backfiring on them (it would look to me that we're either going to follow Japan and head into long term deflation, or inflation is going to show up in the form of stagflation and we're going to struggle with high unemployment, high price levels but no wage growth = misery index extreme level).
But that post from 2 years ago isn't quite right is it? Because we are seeing actual inflation - not in the form of stagflation. And we are not struggling with high unemployment - in fact quite the opposite. And wage growth inflation is also becoming quite high. So none of those things you mentioned 2 years ago are accurate. Or are you suggesting that this is yet to come? If so, when?
Talk about reckless over-reactive driving of the economy.
First the govt and RBNZ pushed their foot to the floor in a panic when Covid arrived to try and speed away from it's impacts as rapidly as possible by removing all resistance to borrowing by slashing interest rates, giving 6 months mortgage holidays and overstimulating economic monetary policies. What did they think the money would be borrowed for? To grow a business? To plug a massive cashflow problem just because income dropped off for a whilst? They encouraged everyone to SPEND SPEND SPEND.
Go figure? Who would have thought their actions may stimulate house prices and drive the wealth effect fuelling inflation?
Oh that's right they didn't want to see rampant unemployment and the RBNZ policies do not drive house prices...
Now the economy is apparently "boiling over" and house prices have risen as a result of their irresponsible monetary over easing, they pull on the hand brake... threatening to throw out the anchor too and remind us RBNZ policies do not drive house prices...
Won't be surprised if the economic NZ vehicle rolls before long with this recklessness and the casualties being... job losses, just what they told us they were trying to avoid, before house prices rose.
Whatever happened to a more balanced and methodical approach?
Oh that's right they are being driven by the most powerful emotion of all, FEAR which causes erratic behaviour by the youthful naive and ill prepared who think they know it all in charge of the corridors of power at present.
Their actions remind me of the typical bank. Give out umbrellas when the sun is shining then take them back when a storm arrives.
The blunt instrument of interest rate hikes dont go hand in hand with massive government spending, this government are clueless. Add to that closing the Marsden Refinery at this time adds to the madness. Interest rates will hurt everyone , middle NZ in particular. And double hurt the new home owners who they have been "trying to help" . They seem to want everyone dependent on the government tit.
And when they continually change the rules ie measuring debt , they dont fool NZers, they can see the trickery and lies.
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