There's rising tension globally between monetary policy aimed at low and stable inflation, and governments’ longer-term fiscal priorities, Reserve Bank (RBNZ) Governor Adrian Orr says.
Speaking at the INFINZ (Institute of Finance Professionals NZ Inc) Conference 2022 in Auckland, Orr said governments around the world are looking to provide the necessary support to those people most impacted by geopolitical tensions — for example, defence, food, and energy support), and health and wellbeing related expenses accentuated by the COVID pandemic — amongst many other priorities.
Meanwhile central banks globally— the RBNZ included are working to actively slow domestic spending by raising interest rates so as to constrain inflation. This means employment prospects will be increasingly compromised, as people delay their spending and investment decisions.
"This fiscal tension is further accentuated by the need to progress climate change adaptation. Investment is needed at scale to manage a transition to more environmentally-sustainable forms of economic production. Investment will put demand pressure on resources and hence inflation in the near-term.
"Likewise, there are potential one-off relative energy price changes as nations move away from fossil fuels to more sustainable alternatives," Orr said.
He said the rising geopolitical tensions in the world "are also significantly constraining global trade".
"This is concerning when you consider how important the decline in the relative price of technology-related goods has been in maintaining low inflation over recent decades. Less access to shared resources and technology globally will slow potential output growth — all other things equal. Sudden changes in trade access will have significant economic effects.
"The tensions mentioned above between inflation and employment, rising interest rates and financial stability, monetary and long-term fiscal policy, geopolitical concerns and climate change are already testing political consensus within and between countries. The most used word of the IMF and World Bank meetings [that Orr recently attended] was fragmentation of global trade and policy consensus," he said.
Orr told the conference he was deliberately keeping his comments "high level" as people would be hearing from the central bank "multiple times" over coming weeks.
"Between now and end-November you will be treated to our Financial Stability Report, our five-yearly review of our monetary policy activities, our Monetary Policy Statement, and round two of public consultation on the five-yearly review of our Monetary Policy Remit."
The Financial Stability Report is to be released on November 2.
"The most obvious theme will be the resilience of our financial system to manage through challenging economic times. New Zealand is not unique in facing growing economic challenges — they are global in their making. However, New Zealand is well positioned to manage," Orr said.
"...New Zealand’s financial system remains well placed to support the economy — with banks’ capital and liquidity positions strong, and profitability and asset quality high. However, there will be stresses in business and amongst households as interest rates and asset prices adjust. Of critical importance to overall financial stability will be the robustness of the labour market."
November 2 also, coincidentally see the release by Stats NZ of the labour market figures for the September quarter. These are expected to again show a very full jobs market and wage pressures. The RBNZ is itself forecasting that unemployment will be 3.3%, which is what it was in June, while its also forecasting that annual private sector hourly wage rises will have risen to 8.3% from 7% in June.
Going back to the IMF and World Bank meetings, Orr said the IMF and World Bank formula for success is best summarised in the following four key areas:
- Inflation needs to be contained in a goldilocks manner, where tightening is sufficient to tame inflation expectations, but without sending countries into a deep recession.
- Fiscal policy needs to be at the least targeted and temporary. Targeted toward the people most impacted by higher food and energy prices, and temporary in that policies can be removed when the circumstances permit.
- Financial resilience building is critical, so that the financial system can do what it does best, allocate resources to their best long-term use. This is especially so in the rapidly growing ’non-bank’ sectors of the global financial system.
- Ongoing structural reform is required to enhance productivity and enable the flow of resources to efficient use. It is this area of global economic policy that has received least attention for some time, with the focus being on monetary and fiscal stabilisation through the COVID years, and now war, energy constraints, and food shortages.
43 Comments
".... the relative price of technology-related goods has been in maintaining low inflation over recent decades."
Yes, well, our RB has been the taking credit for the low inflation, but not now when it goes up though do they admit any fault in being too slow to hike.
The OCR is still negative in real terms.
ANZ chief economist put out her predictions this morning on the radio saying the domestic economy might dwindle soon with domestic consumption taking a tumble. This plus tourism spending will also 'solve' our current account woes.
I fail to see how the NZ economy will mend itself and Kiwis either become more productive or start living within their means again. I bet most Kiwis instead believe this period of 'high' OCR is only temporary until the rates go back to restart the housing Ponzi.
OCR changes take 6 to 18mths to become meaningfully measurable.
So how can the RB responsibly begin to wind down for a least a year from the last rise which could be almost a year away itself.
Global recession is the event they have to balance against, ....
Wonder if the "Least regrets" language will start again?
Least regrets has to be doing everything to hammer inflation. Surely to God.
Is he preparing base for shift in goal post or rules of the game.
Wait and watch
taimaiakka0
Probably not. But he is warning that there are tough times ahead with no easy solutions. And he is correct.
Although he does not admit it, a considerable part of the current situation is a consequence of stuff ups by the RBNZ and other central bankers.
The current situation has been coming down the track for the last two years.
KeithW
Imagine a drunk throwing back shots of tequilla at an AA meeting, in the hope of sobering up.
This is what is happening to the economy.
Significantly negative real interest rates, continuing the FLP, large budget deficits, with inflation at levels it hasn't been seen for 4 decades.....all of this with the aim of financial stability and bringing inflation back to 1-3%.
Financial resilience building is critical, so that the financial system can do what it does best, allocate resources to their best long-term use. This is especially so in the rapidly growing ’non-bank’ sectors of the global financial system.
The RBNZ claims round two thirds of NZ households have no mortgages. The debt to income ratio changes dramatically when those without mortgages are excluded. Moreover, given the iniquity of the risk weighted asset regulatory capital scheme, around sixty one percent of bank lending is allocated to residential real estate for one third of households
According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.
This isn’t strictly about the profit potential and risk characteristics of individual positions, nor portfolios of positions. Banks work as any real economy business does on a budget; only theirs isn’t just about payrolls costs and operating expenses. Their entire output – this ledger of money/credit – is likewise governed by a budget predicated largely on computed risks.
How much in assets can a bank stuff onto its balance sheet? Theoretically, the amount is unlimited, infinite. In the ledger system, there’s no need for real physical money like bullion or vault cash since convertibility isn’t actually an issue for fictional currency and ghost money. Therefore, total systemic “money” supply for the entire global reserve (fictional) currency system is what’s added up from all the balance sheets on the shared ledger.
However, for every asset you do add to the asset side of the balance sheet (setting aside the liability side) you incur risk. Thus, the effective limit to balance sheet space is the likelihood of future losses wiping out the accounting fiction of capital reserves or ST borrowing capacity (if we’re being more realistic, that’s the endpoint real constraint); when booked losses are greater than a bank’s retained equity or repo viability, really long before then, it’s game over.
A lot of money has gone into retail mortgage lending systems at NZ banks, and less into wholesale space... mainly due to ROI driven by the traditionally small capital required per $1 of mortgage issued vs wholesale or say Dairy Farm lending....
All predicated on the belief that there is significantly less risk in retail mortgages....
Banks allow you to own around three properties (2 investment one live in) before you are classified as commercial lending....
Of course if the entire econoomy tanks at the same time, its going to be game on.
What could possibly go wrong.
He is pointing out that in modern wokkey countries, there is still a belief that you can fight inflation without anyone getting hurt.... especially the lefties who voted the fiscally irresponsiblle leaders in.
The reality is, that in any fight, you are going to get hit in the face.
So lets print too much money causing inflation, then hand out more (printed or borrowed money) to those who are hurt in the fight to cleanup Inflation....
We are going to look back on all this with total disbelief, we where all distracted by the (paper based) capital gains being made.
Only the most astute took advantage of the top of this market.
and lets make inflation even stickier by driving up energy costs with mad cap uncosted schemes to stop climate change - madcap because they either dont work (think Indonesain coal burning instead of natural gas) or they will mostly punish poor people who will then need fiscally irresponsible leaders to support them
what a circus
Our MPs have been running policy to inflate their property portfolios for the last two decades, and you managed to make the enrichment of landowners somehow a complaint against the horrible scary "left"?
Working Kiwis were thrown under the bus to protect property speculators over the last few years. Nothing much "left" about that.
The current situation in FHB land is that since you borrowed all that money, only 12 months ago in some cases, the banks have now hoovered up your total deposit (your savings remember) as house prices continue to decline. You're now locked in paying for something that is now worth 20% less than you bought it for, which is not easy to live with. We went through a similar situation in the share market crash of 1987. We finally broke even in 1995.
Genuine FHB who are in for long term will still be fine though will not have good feeling but is on paper.
Yes flippers and speculators or so called First Time Property Speculators who borrowed in extreme and greed are in for some tough time unless they have long term holding capicity.
Will they? Is that if they bought a forever home they can live in for decades? What if they bought a modest starter home like everyone says they should have? Career setback? Unexpected pregnancy? Car problems? Accident? Illness? Redundancy? Wages not keeping up with inflation?
An absurd amount of people live paycheque to paycheque. Saying "FHB who are in it for the long term will be fine" is assuming that literally none of the other things that regularly happen to other people happen to them. It's time to stop minimising the harm or potential harm recent FHBs face if something goes wrong or something unplanned happens.
that's right GV now they are bleating the we need to get unemployment up. So redundancy is on the cards for some, some of the poor buggas they sucked in believing if interest rates did go up it will be gradual over many years and a soft landing if any. it was less than 12 months ago you still get interest rates under 3%...my things have changed. When times were good it was me me me, when they are going bad its Putin and the rest of the world who caused it. It really is quite disgusting what they have done to some (and yes many are not financial literate)
Get Real.
An $800k 30 yr mortgage on an asset purchased at the top of a bubble and which is rapidly popping to 'normal' is a recipe for long term misery.
These buyers have been absolutely screwed, potentially for life, by dishonest bankers, complicit politicians (just look at their rental portfolios) and a sleepy media.
And if you borrowed 600k you are probably on the hook for another 3% or $350 a week in interest very soon. You work for the bank now!!
Did you get a 30k annual pay rise? That's what you need gross to fund $350 per week net.
If your parents collateralized their property to get you over the LVR line then the bank may go after both houses if you loose your job and are pushed into default.
Over 2020-2021. 67193 FHB borrowers took on 32.2 billion in Mortgage debt. Only 38% of that was lent with LVRs of better than 80%.
So probably as of now or very soon. Around 20 billion of mortgage debt has no equity or negative equity backing it. What ever the house is worth now is all debt. Whatever real money was contributed to get the deal over the line is all gone.
Hang on...
For that to have happened prices have to have fallen below where they were in 2020, and then down by more than whatever equity they did put down, and also by whatever equity they have paid down since 2020.
Looking at Auckland, median price in March 2020 was $950k, assume a 10% deposit, and a 30 year table loan.
According to the amortisation table their loan balance is now $820k.
REINZ HPI March 2020 = 3063, latest = 3533 (Auckland). $820k/$950k * 3063 = 2643 - This is about where the HPI would have to fall to for these buyers to be at zero equity. That is another 33% down from the latest HPI.
Auckland Median is still over $1m, so another roughly 20% fall to get them to zero equity if you want to use that measure. (I prefer the HPI
There is still a long way to fall before these buyers are in negative equity, unless they refinanced and ticked up a new ford ranger raptor (with obligate Jetskis) and holiday on the mortgage in the boom times. (And hopefully for everyone of those there was a prudent household that threw all the Eating out and holiday money they couldn't spend in lockdown at the mortgage)
Numbers will be worse the later in the craziness they bought, but its far short of $20billion of mortgages in negative equity no matter how you cut it.
So buyers who purchased in 2020 may be better off. Things really kicked of from Q4 2020. Auckland median went from 950k in Aug 20 to 1.2m in Aug 21 and kept going from there. If you bought at the Aug 21 median 1.2m and that is back to 1m today you lost 200k. You put in 10% 120k down for a deposit. You are 80k under water and you have probably paid bugger all principal off in that time.
Peak to trough fall is now being predicted as 25%. So 1 mil is not the floor for that 1.2 mil purchase
Changing date ranges etc can make the situation look better or worse. But the fact is the majority of Covid era FHB buyers with high LVR loans are going to struggle. 2% additional interest on 800k is 16k. You need additional 25k per year of gross salary to cover that and retain your current cashflow position.
I suppose we just have to wait and see what happens when everyone is paying over 5% interest, 20 Billion was lent to FHB in 2 years at rates 2-3% lower than they are now. With deposits of 20% or less. With house values predicted to drop 25% peek to trough.
Add in the 2020-2021 investors, trader uppers, take a little out to buy a boaters.
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