Look, everybody expects them to do it, so it would be impolite of them not to, wouldn't it?
That's right barring something very odd happening between now and Wednesday's D-Day (August 17), you can bet your expensively mortgaged house on the folk at the Reserve Bank (RBNZ) executing an unprecedented fourth consecutive 50-basis-point hike in the Official Cash Rate.
Yep, four in a row. Bang, bang, bang, bang.
It's amazing how quickly this all came upon us and I guess equally amazing how quickly we got used to it. Not many months ago 50 basis point OCR hikes were a rare thing - in fact last seen in 2000.
And yet, here we are with universal expectation of a fourth consecutive 50-pointer that will take the OCR up to 3.0% - its highest level in seven years.
It will mean the OCR will have risen by 225 points this year (already a record with two OCR reviews to come yet in 2022, easily beating the previous 150-point record in the 2004 calendar year).
And it will mean the OCR will have risen by some 275 points since the beginning of this hiking 'cycle' in October 2021.
It's a remarkable, and as I say, unprecedented, display of firepower, all designed to stop the current rampant wave of inflation (annual rate 7.3% as of the June quarter).
The big question, of course, is how much more ammunition do the RBNZ folk think they will need to unload in this hiking cycle? And how quickly?
When the RBNZ's latest Monetary Policy Statement (MPS) becomes available at 2pm on Wednesday all eyes will quickly descend on the page towards the back that has the forecast OCR 'track' covering the next three years.
The most recent MPS from May had a 'track' that showed the OCR reaching around 3.5% (literally it was 3.4%) by the end of this year and nearly 4% (literally 3.95%) by June of 2023 - and then staying at that level for the next 12 months.
In reality though the RBNZ has since then been increasing the OCR at a faster rate than it indicated back in May and assuming the OCR is at 3.0% by the end of next Wednesday this will be some 30 basis points higher than indicated in that previous MPS.
There's two key questions then really: First, will the RBNZ still be signalling an OCR of 3.5% by the end of 2022, which would imply 'just' 25-point rises in each of the next two rate decisions? Second, will the central bank still be picking a 'peak' OCR of around 4%?
At this point it is worth referring to significant data that has become available since the last cash rate decision in July.
The June quarter Consumers Price Index release showed an annual inflation rate of 7.3%, versus an RBNZ forecast of just 7.0%. So worse than expected.
The June quarter labour market data showed unemployment rising to 3.3% from 3.2%, when the RBNZ expected a fall to 3.1%. If that could be seen as moderately 'good' news for the RBNZ, given that the extreme tightness of the jobs market has been seen as helping fuel inflation, the wage data certainly wasn't good news. This showed private sector hourly wages rising 7%, when the RBNZ had picked only a 5.6% increase. Big miss.
So, there were two significant lots of data that were very much telling the RBNZ it has more to do with the rate rises.
Of slightly more encouragement for the central bank will have been the results of the RBNZ-commissioned quarterly Survey of Expectations, which showed a sharp fall in expectations of inflation in two years' time from 3.29% in the previous survey to 3.07% now.
Yes, true enough, 3.07% would still be putting inflation outside of the RBNZ's officially targeted 1% to 3% range in two years' time - but the fall in expectations in the last quarter shows that the RBNZ's message that it's deadly serious about dousing inflation is getting through.
Would the outcome of this survey be sufficiently encouraging to persuade the RBNZ to back off and perhaps 'only' signal a 25-point rise at the following review in October?
Hmm. Well, probably not. The inflation and wages data were probably sufficiently worrying to suggest there should be no slackening of the pace for now.
So, probably best to expect that the signal will be for another 50 pointer in October. But November? Well, that might be more open for debate.
One emerging problem the RBNZ has is the growing conviction in some parts of the marketplace that the central bank might have to start actually dropping the OCR from next year. Right now there's no way the RBNZ itself would want to be signalling any such thing.
Wholesale interest rates have been easing back. At time of writing the markets are just-about pricing in another 50 point OCR rise in October, but then leaning towards a 25-pointer in November. The markets broadly agree with the RBNZ's last forecast of an OCR peak of a shade under 4% - but the current pricing suggests this would occur in February 2023. After that, the markets are expecting the OCR to start slowly declining.
Mortgage interest rates, which have rocketed in the past 12 months, have eased back very slightly in the past few weeks in reflection of these easing wholesale rates.
But as the BNZ's head of research Stephen Toplis said this week the RBNZ would not want any further mortgage rate falls "any time soon".
It seems to me that given the recent easing of interest rate expectations, there may be some pressure on the RBNZ to now forecast a slightly higher OCR peak for this cycle, perhaps of 4.25-4.5%, so that it can keep something in reserve for next year in order to convince the markets that wholesale rates shouldn't be any lower, and indeed that mortgage rates shouldn't be falling.
At the very least it will want to re-assert the message that with inflation far from tamed, the OCR will be staying up for a while yet.
This is all nicely summed up by Westpac's acting chief economist Michael Gordon (who is forecasting a peak OCR of 4% by the end of this year) and who says, the RBNZ "will want to keep emphasising its inflation-fighting credentials".
"Its task requires not just lifting interest rates to a certain level, but holding them there for long enough to do their job of bringing demand back into line. Any softening in the RBNZ’s tone next week could see market interest rates fall even further, which would risk undermining the good work that the RBNZ has done so far," Gordon says.
So, there we have it. The tough talk will continue and so will the hikes, for now. Next stop 4%?
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
96 Comments
The main effect of the OCR is not on consumer price inflation but on the property market. Property prices are falling at a rate that suggests negative equity, foreclosures and a financial crisis is coming. This would destroy the livelihoods of many, including many employees and prospecting property buyers. Ireland after 2007 is an example. The crisis in Ireland led to many insolvencies, even suicides. In the end, ironically, property purchases became even more out of reach for tenants. A video on Ireland was posted on this forum recently which was very instructive. Our property falls are faster than Ireland after 2007, and our debt level is likely higher.
I am very worried about any further OCR raises, as I fear this could prove to be destructive for entire NZ economy. I can't understand why the RBNZ do not consider the housing market in their OCR decisions, when this is what is most affected by the OCR.
some people here seem to forget the OCR is currently only at 2.5%!!!
anyone relying on 3% mortgage rates forever was just kidding themselves.
Everyone else will be fine, remember stress testing was always at 6% minimum, so providing that was actually done, no problem.
The artificial gains of the last 2 years will be erased from the housing market, but that too is a good thing.
It's lolz seeing spruikers pleading to keep OCR rates low for altruistic reasons.
Door A: Raise the OCR above neutral, tame inflation, allow risky FHB/investors to get stung, send the message that reckless property speculation carries risk, lower house prices, weed out unproductive building industry and adjacent businesses, reduce homelessness, inequality, crime and make the country appealing to retain intelligent young people.
Door B: Keep the OCR at emergency levels, let inflation increase further, protect wealthy property speculators and risky FHB, send the message that unproductive infinite property speculation is government backed and risk free, increase house prices, increase already harrowing homelessness, crime and inequality exponentially, drive all intelligent young people overseas.
Real tough call 🤔
Door D: Don't create a massive property bubble (by extending too much debt) in the first place to investors and FHBs...). Giving yourself the benefit of being able to raise rates significantly if inflation does arise in the economy.
But yeah nah that wouldn't be a good idea!
Bank suggests OCR track to 4.5. That puts rates well over 7% with a sniff of 8%.
https://i.stuff.co.nz/business/129552188/anz-believes-reserve-bank-may-…
The main effect of increasing the OCR is to increase the cost of importing money from the future (which causes inflation today - which would've been obvious over the last decades if they'd been including house price increases in the measurement, instead of by its secondary effect on rent, which was also massively under-weighted).
The effect on the NZ property market is a secondary effect. Only the over-leveraged need fear this - which is a very vocal but tiny percentage of the population. But inflation hurts us all, especially without wage increases, and that is why the RBNZ shouldn't care about house prices.
As for all the fear-mongering that businesses backed by housing are going to fall over and lead to unemployment spikes - that may be true in some sectors. But I suspect not as many as the fear-mongers would have us believe. None of my business friends have their businesses backed by houses - but I'm in the tech sector - and those who did lost their houses years ago :P.
Better late than never.
You clearly believe the economy is very strongly coupled to the housing market - I agree with you. This alone shows how broken the economy has become. The money we pour into housing could go into something far more productive.
People will have less money to spend as a result of higher mortgage payments. This is the main driver of change. Further, by limiting access to equity withdrawal people can't go out buying new cars that they can't really afford. It'll hurt but as another contributor mentioned, we can't go importing money from the future without bankrupting the future.
The main effect of increasing the OCR is to increase the cost of importing money from the future
Well, yes...the problem is we have rather a large cohort who are accustomed to feeling wealthy by living off the wealth of younger and coming generations rather than their own means.
I strongly agree. An OCR peak art around 5%, held for a few years, would be exactly what is necessary for the NZ economy in order to keep inflation under control, have some monetary policy leeway if necessary in the future, and rebalance the NZ economy away from parasitic housing speculation.
International markets have recently started to react in ways as to say, inflation is now on a path back to normal.
Premature?….probably
The interesting question will be if this reaction becomes too big it, will it in itself stir too much activity and stop the actual inflation easing.
We get pretty good weekly data on earnings these days, which, once smoothed, provides some insights on what is actually going on in the labour market and the wider economy. What RBNZ - and many commentators - have missed is that earnings fell back sharply in winter 2021, surged back in October - December 2021, and then returned to their usual 3% (ish) growth trend from January 2022.
What this means is that the latest 'shock horror' data tells you a lot more about the slump in winter 2021 than it does about what is going on in winter 2022. Earnings in September 2021 were even lower, so expect the September 2022 data to look even higher. Hopefully, RBNZ will have spotted this and they won't mistake a low baseline in 2021 for runaway growth in 2022.
Before anyone jumps on me for method, I know that actual earnings and hourly wages are different. I prefer to use earnings as this is a much better economic indicator. Earnings have been showing moderate growth for the last 7 months - some people are getting paid more per hour, but a lot of people are getting less hours (construction, hospo etc well down).
In order to stop inflation interest rates need to be 2% higher than the inflation rate. The speculative all need it to go the other way. Picking there is more to come.
Any more black swan events coming. Perhaps we need a bank collapse or 3. Que Chjna, and they are using tanks and media suppression to try and hush it up.
Role the dice...
via Mauldin:
Let’s look at what normally uber-dove Minneapolis Fed president Neel Kashkari says- “The idea that we’re going to start cutting rates early next year, when inflation is very likely going to be well in excess of our target, I just think is unrealistic...I think a much more likely scenario is we will raise rates to some point, and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back...the Fed “is far away from declaring victory on inflation"
People keep talking as if hiking the OCR won’t destroy the economy and demand. Well it probably will.
More chatter about a construction crash:
https://i.stuff.co.nz/life-style/homed/real-estate/129528399/is-the-res…
Yeah
Well I guess while there's still a good pipeline of projects being worked through, and while that is the case, and employment in the sector stays strong (for now), it's easier to keep a brave face.
It's what is going to occur in 6-9 months, once large chunks of the pipeline are worked through, that is the issue.
What isn't being talked about is the slowdown that will hit design professionals over the next 3-4 months. They will be hit first.
That pipeline is not a certainty...indeed if past experiences are anything to go by, the 'pipeline' will be amongst the earliest casualties as reality bites.
The eternal optimists appear to be banking (literally) on open borders riding to the rescue....too little, too slow. too late.
Agree. I guess when I was thinking of pipeline I was thinking more of the large number of projects currently underway, and to be finished within 6 months.
But yes a pipeline of work is more accurately described as the next projects following completion of current projects, and I agree those are on shaky foundations in many cases.
Its an opinion informed by historical involvement, historical events and current anecdote compounded by the current financial position.
Edit....it always surprised how many involved couldnt see the obvious downturn coming and carried on as if there was nothing to worry about.
You don't need to eat ultra health food all the time, what you need to do is get off your ass and exercise. Exercise appears to be a real problem for anyone over 30 and by 40 the general population is looking terrible. Basically 1 in 3 people are obese, the cost to the healthcare sector will be enormous.
Rubbish its energy in vs energy out it really is that simple. You can pretty much eat whatever you like if you are prepared to exercise like a lunatic. Pure weight control via diet only is hopeless, you need muscle mass and exercise to burn those calories. Nobody wants to do the hard part these days and that's sweat, everyone is looking for that magic easy fix. Yeah Putin would have all the fatties thrown in the Gulag for some forced labour.
.. it is entirely possible to maintain a healthy body weight without any exercise apart from the regular movements in daily life ... no running shoes nor gym memberships are required ...
( not sure why you " rubbished " me , because I never said anything negative about the balance of energy in / energy out )
Carlos - I am medical and work in the weight loss side of health provision. You are 100% incorrect. The UK actually sponsored a state run exercise programme a few years back and it was such an abject failure in terms of obesity reduction despite good uptake, they were maligned into a secondary health education initiative. "You cannot out run a bad diet" was the slogan.
If exercise is the fulcrum to weight management you will fail. Illness, musculoskeletal wear and tear (spine, knee, hips) and age will all come in to play for all of us in our lives. Unless a good diet (quality and quantity) is observed weight gain is inevitable.
Movement is the key to life. Mental health, preservation of physical function, and defending lean muscle mass are all vital. However, this shouldn't be confused with weight control.
Sorry I'm going to disagree, exercise is not something you suddenly take up once your fat, its a lifetime commitment. Plenty of low impact exercises so you can avoid running so you can still exercise into your later years. You are only seeing the people with issues, the rest of us are motivated its all about attitude. Your body is a diary, those that record decent exercise get rewarded. Sure there are those who are genetical predisposed to being obese or have genuine medical conditions but that's like 1 in 100 or more not 1 in 3. We have generations of kids coming on now that are fat and lazy, end of story.
I totally agree with you Caughtinthe middle. Spot on.
A huge problem is that Nike, Adidas and gyms worldwide (such as Les Mills) have spent obscene amounts of money 'informing' people (via ads) that if you want to look thin and healthy, you need to exercise - preferably while wearing ridiculously expensive branded clothing.
Ads for peas and carrots do not generally carry the same weight with the public, sadly.
Nobody wants to cook. They'd rather buy Potato Chips @ $10/kg than $3.50/kg on Potatoes that they'll have to unfortunately wash, peel and cook. Waaaah Cheese is so expensive at $13/kg, but no issue buying an Irvines pies which is also $13/kg. Milk is so expensive at $2/litre but no issues buying a bottle of coke for that.
Love pizza now and again, great pizza from "The orchard thieves" here in Tauranga, if your lucky enough to have one in your town give them a go. Best pizza ever in their Gourmet range, the spicy Tandoori Chicken is great. Reminds me of Hell Pizza when it first started, before it went downhill.
Uhhh. Not saying you're wrong about the cost of food, but a quick look at Countdown online:
- Apples $3.50 kg
- Potatoes $3.50 kg
- Carrots $2.00 kg
- Bananas $3.40kg
- Kumara $4.00kg
People are just lazy and buy Potato Chips ($10.00 kg) or an Irvines Pies ($12.90 kg)? Coke @ $0.20/100ml when water can be bought for $0.06/100ml.
It is easy for supermarkets to raise prices because of the lack of competition. So people end up spending less on other things.
It is basically proven by the massive rise to food price inflation over recent months. Supermarkets seem to be making hay while the sun shines.
We also need to remember that CPI generally doesn't seem to take into account SHRINKFLATION, where many things are having the packaging size decrease. But they are still selling the items at the same price or even raising the price. Almost all products in a supermarket apart from fruit and veges that are unpackaged are victim of shrinkflation.
The masses should have been listening to The Prophet (who gave his life for our sins) and not false idols like Ashley Church.
That million dollar mortgage is heading north of $70,000 per year of dead money in interest charges.
The secret that these real estate crooks and property charlatans never let slip out, is that many sellers are in a position where they MUST sell, but no buyers are ever in a position where they MUST buy.
The power is always with the buyer, it always has been.
... you know that when the average house price in NZ is more than double that across the USA , a financial & technological behemoth , that something has gone horribly wrong in NZ ...
The situation simply went from bad to freaking horrendous when Adrian " tree trunks " Orr crushed the OCR into the floorboards , stimulating another 35 % spurt in house prices ....
Nice for the rich , the boomers .... but , at the expense of 20-40 year olds ... forever priced out of ownership by greed & stupidity of the powers that be ...
Yes, you described one side of the craze. The other is occurring now, with aggressive rate hikes when the property market is already falling, so those that did manage to buy property are now losing their savings.
Every time, the RBNZ seems to oversteer. The result is economic mayhem.
Markus nothing you write seems to make sense.
”so those that did manage to buy property are now losing their savings”
They aren’t savings if they have spent them on a house.
They might lose their equity in the house ie, the loan may well be worth more than the market value of the house.
Interest rates are below their long term average….it’s the over leveraged that are the root cause of the problem…not the RBNZ
greed has a way of catching people out..the chance of getting ahead ha…
Umm… last time I looked it was the RBNZs core role to regulate the banks. If so many people are over leveraged this suggests yet more negligence on the part of RBNZ.
Like the comment above, what have interest rates and high food and petrol costs got to do with one another. The OCR is a complete waste of space. The RBNZ should be targeting those causing inflation and ensuring a) effective competition and b) increased production capacity.
Despite all this let us never forget what a complete stuff up central bank stimulunatic monetary policy has been: worldwide stagflation is still the most likely outcome, and this is all at the feet of our central banks which are instruments of centralised control, not free markets or free lives.
And I have nothing but contempt for RBNZ's current woke governance. I think our monetary policy is now in the hands of a Marxist identity propagandist, frankly, who really hasn't got a clue. I believe there isn't even a person on the board with training in monetary policy? Some small business guy from Nelson with no experience whatsoever, and everyone else is learning te reo.
Like many we in my household are making the decision there will not be a prosperous rural based economy in New Zealand left after four or five years of current policy under Labour, certainly, but also National, and as we are forced down the road of a Pacific Zimbabwe, a violent uncivil society, with all equal before the law and one person one vote being deliberately and under-handedly destroyed via partnership and the nonsense co-governance under Mahutacorp, it's time to leave.
Thought I may as well just get myself banned from every digital orifice first.
Agreed , our MSM are by & large asleep ....
... one extraordinary performance by the AB's doesn't make up for a string of matches where there was no skillset , no pizzazz , no mongrel , no plan B , C & D ...
That could equally apply to Ardern's circus of clowns .... time to boot them out , anyone else would be an improvement , even Luxon ...
Our CPI increasing may have started with oil price increases, amongst other things, but it won't end with oil price decreases, as it is now embedded. That said, the northern winter may see the oil price reach new highs. The RB need to keep increasing the OCR and keep it high until we see inflation reducing to the target band.
We now have serious and ongoing weather events like the drought in Europe now which clearly has been getting worse for years but has finally become a big problem and finally hit the news. Expect "Water Wars" to start occurring round the planet because thats a resource your simply cannot live without. Everyone is focused on oil but the second you turn on your tap and nothing comes out it is an immediate problem. The world is going to go from one drama to the next in higher frequency. New Zealand will be the place to live.
I used to think it was about courage. But i am starting to think its something else.
They were all great about dropping the ocr further than any one else. But raising it faster doesnt seem to be as easy a decision even though it seems an obvious solution to everyone - and there is likely to be no real backlash except from leveraged people.
Makes one wonder whether fighting inflation is the real priority?
My observation is that some types of inflation are easing thanks to energy dropping. However the labour market remains tight as a drum and wages are being propelled along nicely by that.
RBNZ will likely want to see consecutive quarters of steady, back-to-back inflation declines before they even start thinking about how they are going to get back to the target rate zone.
All over the news today inflation is still rampant on Food. The RBNZ are not going anywhere near fast enough to rein this in because A. They want to inflate away all the debt they created and B. The do not want to crash the housing market. We will still be seeing rate rises into next year they are going so slow.
On the link you can find report written by Zoltan Pozsar - Credit Suisse’s global head of short-term interest-rate strategy.
https://advisoranalyst.com/wp-content/uploads/2022/08/zoltan-pozsar-aug…
Get some popcorn...
great article, thanks.
The market and the Fed’s SEP (perhaps the market, because of the Fed’s SEP) is telling us that we will curb the biggest outbreak of inflation in fifty years with a “hiking cycle”, where the peak of the “hiking cycle” next year corresponds to negative real interest rates… unless you think that inflation moderates to target, that is 2%, by next year. If that is true, I am going to re-take Economics 101
So if, as Zoltan speculates, US cash rate might get to 6% to slay inflation, NZ is going to be real trouble. At the end of the day, G3 rates determine what happens here. As a small open economy with floating exchange rate we need to match real rate rises elsewhere or the currency plummets (capital outflows) and we import inflation big time.
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