Kiwibank economists say the Reserve Bank should hold off making any increases to the Official Cash Rate while the country deals with the impact of Cyclone Gabrielle.
The RBNZ is set for its next review of the OCR on Wednesday, February 22. Most debate between economists is whether the central bank will raise the rate (currently on 4.25%) by 50 basis points or by 75.
However, in the Kiwibank economics team's latest First View publication, chief economist Jarrod Kerr says the RBNZ "should pause next week".
"The RBNZ can come back in April and resume tightening if required," he says.
He says talk of a 50bp, or even 75bp, hike "should be sidelined".
"The need to tighten aggressively from here has evaporated. Inflation is peaking at lower levels. And global inflation pressures are abating. Currently at 7.2%, inflation is below the RBNZ forecast of 7.5%. The balance of risks are tilted to the downside," he says
He concedes, however that "what we think they should do is not what they will likely do".
"We expect to see a hike, but the discussion should be around 0 or 25bps, not 50 or 75bps."
But in reiterating the belief that the decision by the RBNZ could be postponed to April, Kerr says "temporary relief, of all kinds, is needed in the time of crisis".
"A pause from the RBNZ next week would be welcomed by most Kiwi, and highlight that officials are cognisant of the economic damage being inflicted. The Government has called a national state of emergency. There is significant damage to key infrastructure, buildings and housing. And there will be severe damage to crops and farms. Many businesses and households have also lost income with an inability to trade during the flooding. Guesstimates of the total economic impact are now in the billions, not millions."
Kerr says the next phase will be the clean-up and rebuild and we will see a sharp lift in economic activity as the nation rebuilds.
"Unfortunately, the construction industry is already operating at full capacity, with a shortage of labour. Existing projects may be postponed as we divert resources to the areas most in need. And the rebuild will take many months, possibly years in parts.
"The rebuild will be inflationary, especially in construction related costs. We may find there are shortages in materials, and our capacity to deal with the workload will be tested. And inevitably, there will be implications for insurance premiums. We’d expect the RBNZ to look through the impacts of the disaster, with the spike in economic activity and inflation likely to be temporary.
"That’s what we think the RBNZ should do. What we expect the RBNZ will do, however, is deliver a 25bp or 50bp hike. We believe a 75bp hike is well and truly off the table. RBNZ officials are concerned about the path of inflation. And they may want to keep their foot firmly on the brake. But we expect to see a more moderate path for interest rates. We expect a peak of 5%, down from 5.5%."
130 Comments
Any excuse.
It isn't clear to me how a storm might slow inflation. In fact it may exacerbate inflation if farmers suffered crop losses which lifts food prices, insurers have to pay out for repairs or rebuilds which will raise material costs and government has to fix infrastructure which will increase labor. The Christchurch Rebuild was widely seen as stimulatory.
Kerr isn't suggesting they just "look through" the inflation that will be caused by the floods. If he was, he would be suggesting that the RBNZ don't deviate from their proposed rate track (i.e don't raise rates HIGHER than previously proposed, if they believe the flood recovery would be inflationary). But what he is actually suggesting is that RBNZ should lower the projected rate track to "support" flood victims.
There is nothing in the RBNZ mandate that provides them power to provide disaster recovery. Why would we only provide this "disaster relief" to those with mortgages? Why would we provide "disaster relief" to mortgage holders in cities unaffected by the floods?
Any required disaster relief needs to come from government that actually has the mandate to provide it.
In a war there are going to be casualties. Lets start with the mental health of the tens of thousands of kiwis who can't even place a phone call to tell Mum their house and employer both got washed out and they are unable to work.
Sorry folks, in the words of the great JA... "you are not us".
Tony combover Alexander put out another newsletter today, have you read it yet
Something I noticed, that above CPI wages growth has now caught up with house price growth. So that the ratio of wages to house prices is the same as pre pandemic. I found that very interesting. Of course houses are still unaffordable, /sarc
Yes, that's clearly happening, but the difference is that long-run interest rate expectations are higher, driving equalibrium house price to income multiples lower. Add to that the effect of negative sentiment and the dreaded heard mentality, and you are a way off achieving equalibrium.
That said, it's my firm belief that long term interest rate expectations will deflate in concert with everything else. Recent tax policy changes will keep a lid on any giddiness at the BBQ, but we should establish a bit of a floor in the RE market.
But the uber rich dont want a 'free market'... they want one that can be tilted so the majority of cash flows their way. Its why they lobby and sponsor all the political parties and why they like that those parties appoint the rbnz exec.
Game has always been rigged .. and always will be.
If there's any lapse in rate hikes it will need to be in conjunction with a new government package aimed at easing the cost of living crisis because that's not substantially abated yet.
We should never sacrifice the important for the urgent. Use your Eisenhower matrix.
There will always be a reason not to do what has to be done.
"We can't put up the OCR because the economy is too weak!"
"We can't put up the OCR because the economy is just recovering and that might hamper the recovery!"
"We can't put up the OCR because the economy is looking good, and putting up the OCR might stop that!
And now we get:
"We can't put up the OCR because the economy needs time to recover from The Cyclone!"
None of what's happening today is either new or unexpected. It happens, and will again. What is an old story, though, is that we aren't either prepared for it or want to deal with that.
There is no right time to make unpopular changes. And if they are due now, then delaying them will just make matters worse. The answer? Re-regulate the entire New Zealand financial system, and let the Government make the calls for the lot. Get The Free Market out of the way whilst we do what has to be done. That's fixing interest rates at a much lower level; fixing the NZ$ and bringing back Exchange Control of the Goods and Services so necessary to the long term viability of the country.
You know - exactly what China, the 2nd largest economy on the planet - does this very day.
No, they really shouldn't. When you fight on inflation, you'll need to take every opportunity to act. Spend a bit time to relax will cause more inflation and higher rates in future. They cannot afford to soft their tunes or delay their actions. Government should be the role to support whatever is needed for society to recover from this disaster, but RBNZ's role is about price stability and sustainable employment. It's not their job to compensate and support the nation to deal with disaster. If they do, there could be some serious consequences in future. Remember what they did when covid happened? Now we are facing the inflation consequences. The inflation is still really high and barely moved...
Total agreed! Sacrifice is necessary. I am feeling sorry for a lot of people lose life and house in this natural disaster however the inflation is the only matter now. Nothing else. RBNZ need to target the rebuilding process to make people extremely difficult to get any funding for rebuilding. RBNZ increase OCR to 10% paat least next week and 20%pa by end of this year until the inflation become negative and they can relax a little back 15% pa .
I don't have a problem with that as long as the proceeds can't go into one particular asset class.
If we used the funds; the Debt, for nation (re) building and productive enterprises, then go for it.
But if it's for asset backed speculation, then as we should know by now, that has to be smothered at birth.
As I suggest above, do all you suggest, AND regulate the entire market so that we direct the funds into the right direction. Would that work? Not on your nelly. Because there's a whole financial industry out there just looking for loopholes to exploit. Jarrod Kerr, of all people, knows that - he works for one of them after all.
So we will get back to the only thing we understand - financial and economic pain - and that comes courtesy of OCR hikes. A lot of them.
Yvil, you are no doubt referring to the covid support payments. They were targeted at those that needed it. Remember the clause that said you were only eligible if you exhausted other options such as borrowing or raising capital? No doubt some unsavory citizens just ignored that inconvenient part, took advantage of the scale of the situation, and pushed their snout up to the taxpayers tit.
The interest rate on those guys boats, houses and trucks have gone from 2.5 to 6.5 and will be 7.5 soon enough. This rebuild, which will take 2 years, will prop them up.
Lots of houses in flooded areas that have had their market value go from $1.40m to $0.04m. insurance will pay out the home rebuild value. Not sure if eqc will come to the party for the land value.
And whose wallets don't need stressing at the moment? Those who are suffering from being displaced or face having to rehome themselves. Do we really want to make if more expensive for them by ramping the price of property they will have to buy back up by not raising the OCR? Because that's what will happen if the OCR rises are paused.
What’s the damage? Who cares ? Our main purpose of RBNZ is completely destroy inflation by sacrificing everything. RBNZ need to increase OCR to at least 10% next week.As rebuilding will bring inflation up , RBNZ need to do everything they can to destroy the rebuilding process. We don’t need to rebuild. We need to bring inflation down to 0 or negative. RBNZ need to go extreme aggressive.
As The Fed might also now realise. Let's hope the RBNZ is still ahead of the game.
So much for immaculate disinflation. January CPI data make clear that inflation is not dropping to 2% without a recession raising unemployment above 4.5% and this underscores the view that the Fed erred by downshifting hikes. Money is not expensive on a pre-2008 basis and slowing the hikes to 25BP eased financial conditions, thereby reducing the Fed’s squeeze on an economy powered by asset inflation. A mild, mid-year recession is still the base case, believing that higher carry costs, lower equity prices, and inversion of real yields are still disruptive enough in total to weaken high skill employment and wages. In turn, spending slows and kicks off a small inventory cycle. The NY Fed’s latest Survey of Consumer Expectations reveals that this dynamic is beginning. If there is no recession, the Fed will rue its choice. The Fed is operating from its 2004-07 playbook – targeting the funds rate to reach some high real level using steady 25BP hikes, then keeping high real rates steady for an extended period while waiting for unemployment to rise to cut rapidly. This is not the same economy. The recession trigger resides with the asset side of household and corporate balance sheets. Further, there is today a structural labour supply/demand imbalance sustaining high wage growth that has the funds rate far from where it was in 2006-07, relatively speaking. Scheduling 25BP rate hikes every six weeks on into infinity is a gradualism that can morph into “perpetualism” . The slow pace can allow inflation to accelerate anew, underwritten by an upturn in credit creation.
But the banks have been wrong about a lot of things over the last 3 years. The inflation rate is far higher than the band it should be. It maybe slightly less than the forecast, but the fuel tax never got reinstated, which would have increased it, so it is artifically lower than it should be anyway. People can always cherry pick stats to support a position, and banks want to sell more loans. That is harder when interest rates rise.
No it's not at all about "being proved to be wrong", I still believe that the OCR will rise by 0.5% and I have maintained this call since mid January.
My comment was simply that if they expect the cyclone to be inflationary, then it makes no sense at all to pause OCR hikes, that's the .
Wrong. It definitely can make sense.
It’s quite possible to recognise that the rebuild effort will be inflationary, but to look through that at this point in time due to the economic impact on both rural and urban economies across Northland, Coromandel, East Cape and Hawkes Bay ( and parts of Auckland).
Agree. The upcycle needs to continue until inflation is contained in the 1-3% band. The storm fall out will be inflationary, as insurance money rolls in to fix peoples houses and buildings. Not sure about the roading infrastructure on the state highways. Are they even insured? How much will need to be borrowed for this Any borrowing is going to effect the NZ dollar (not in a positive way), and that will further increase inflation if we don't put rates up.
Yeah. I haven’t called anything firmly, but I have been saying there is a good chance RBNZ either won’t raise at all, or only raise 25BPs.
Almost no one has been expressing this viewpoint.
I think it points to a total misunderstanding of political economy.
Whether you think it is the ‘right’ decision or not is besides the point.
Targets demand side. Demand to rebuild and replace is not going to depend on interest rates.
Supply side constraints feeding inflation is also 100% immune to interest rates.
So inflation will not be increased by pausing now, just some relief for many many businesses and households effected by the biggest natural disaster since chch 2011.
Laugh me out this time
Starting to think if they don't get a lot of people out of Napier etc they are going to have a health emergency, need to get a road access open so people can self evacuate as needed. 2 weeks without power , limited gas for cooking and huge petrol queues = disaster coming up in 3.2.1
I recall after Chch there was a register set up (by MSD I believe) to register your home as available to house the displaced temporarily.
Yep, we've got to get people out as the risk of a typhoid fever outbreak is on the cards.
I haven't seen such a register to take in those displaced, but I am hoping it is coming.
As economist Bill Mitchell states on his blog,
“As a tool for limiting demand, monetary policy turns out to be primitive, blunt and unfair.”
I think ANZ's take on the likely outcome of the disasters on the OCR are much more "on the money" if I may say.
https://anz-singletrack.s3.ap-southeast-2.amazonaws.com/NZ_Insight_infl…
I can see why politically it might be a golden opportunity to "be kind" and in doing so earn some votes by holding the OCR. Economically, and hopefully, the RBNZ will act independently the Cyclone is inflationary so along with current economic data this should support a solid rise in OCR. On a humanitarian level, cyclone support should be specific, meaningful and highly targeted; but most importantly should be from central government not the RBNZ.
Sadly, the cruel blow will be for those who bought a house at a very over inflated price in 2021 which has now flooded and needs serious work done. If owners cant get back soon after the flood subsides to remove the under floor insulation and air out under the house, there can be structural damage. a relative of mine just did a carpet job in Westport and the owner of the house had been living above theirgarage waiting 18months for tradies to get in and do the work after the Westport floods e.g builders, gib stoppers, plasterers, painters, carpet, imagine what it is going to be like in Hawkes bay for the next 1-2years. I for one feel for them, as if the mortgage interest cranking up and cost of living wasn't hard enough already on them.
How do you think all those poor souls who have lost their homes, commercial buildings and businesses will feel on the 22nd February 2023 if he puts up the OCR. Not only have they lost their improvements but they are required to carry on making payments if they have loans secured against those improvements. I for one would be gutted. Stop arguing amongst yourselves over petty matters and stop trying to get one over the other. Start thinking about those a whole lot less fortunate than yourselves.
They are meant to be independent though. Inflation is not good for anyone. Part of the reason we are in this mess is because they didn’t raise rates during Omicron even though inflation was evident.
maybe a 0.25% or 0.5% says “we are still trying to battle inflation but don’t want added costs passed on to flood victims”. Either of those would cause a decrease in swap rates as they would be less than the already priced in rate.
Almost everyone who comments here seems to think The CPI is their one and only decision making reference point.
Earth to commenters - it’s not.
Their mandates also include financial stability and employment. What’s more, their CPI mandate is a medium term one.
Further, while these are their overarching decision making reference points, they don’t have to be 100% bound by them, especially in terms of short term considerations. They still have quite broad discretion.
Having said that I am not saying the RBNZ will, or should, not hike or only hike by 25BPs. I just think there is a reasonable chance they will, which most here seem to be dismissing outright.
People keep comparing this with the EQ. But extreme weather events are predictable, and we have been predicting them to become more frequent and more extreme since the 70s. Certain people like to kibosh projects to mitigate or adapt to climate change, because they see it as a political issue, rather than one of science. I really hope that the climate change deniers take this opportunity to look deeply at themselves. It's so ironic that farmers are protesting measures to save the environment awhile also believing they are entitled to support when he inevitable comes.
Reduce their emissions by moving to regenerative farming and help to restore the water quality and biodiversity of our country as a whole. As opposed to putting green crosses on the side of the road and stonewalling any conversations about the path to net zero.
I come from a rural background and follow the farming nz facebook pages. The rhetoric around environmental initiatives, net zero, 3 waters, the green party etc. is disgusting. They aren't doing themselves any image favours, and will run out of social license at this rate.
The greenies are the biggest menace to a functioning community. The forestry slash is but the latest example
The last 2 or 3 years during covid, has had vastly reduced emissions, from air travel, manufacturing pollution, and fuel sales. Much much more reduction than less cows will produce. So where is the climate improvement
And look at the PM, as soon as climate change policies start to hit urbanites in the pocket he backtracks for political reasons, in other words, so he can be re-elected.
No doubt the ruminant animals will pick up the tab
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