So, was it 'hawkish'? Was it 'dovish'?
It was neither.
It was 'hawkish by omission'.
Be in no doubt, there's a real chance that the Reserve Bank will have another Official Cash Rate hike for us before Christmas.
All eyes will now turn to the inflation figures due to be released on October 17 and also, but to a slightly lesser extent, the labour market figures out on November 1.
Economists and the markets seemed to form mixed views of what message the RBNZ was conveying in its OCR review on Wednesday.
Let's be clear, 10 days out from an election the RBNZ was never likely to come out and explicitly suggest that an OCR hike is coming in its next and final review for the year on November 29.
Consider for a moment the current situation. Wholesale interest rates have been going through the roof in response to a global spike. All things being equal banks should now be raising their mortgage rates in response to this.
Now, if the RBNZ had made all sorts of 'hikey' noises on Wednesday this would have been a heaven sent opportunity for the banks to raise their mortgage rates now.
Why give them the excuse?
And consider the current political environment.
We've already got a Finance Minister Presumptive blaring out incessant messages about "mortgage misery" and "reckless spending".
Why, if you are the RBNZ do you willingly want to put yourself in the centre of such a febrile situation?
So, what the RBNZ has done is play a completely dead bat. The wrong assumption that the latest statement was 'dovish' comes from the absence of 'hawkish' words.
But the key point is what the RBNZ did not say, relative to what it had said previously.
The key closing paragraph in the RBNZ's August OCR statement was this:
The Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment.
Compare this with the closing paragraph in the October 4 OCR statement:
The Committee agreed that the OCR needs to stay at a restrictive level to ensure that annual consumer price inflation returns to the 1 to 3% target range and to support maximum sustainable employment.
The word "confident" has been removed in the latest version. And also there's now NO reference to a timeframe in which the OCR will come down. I'm sorry, but this is NOT dovish. This is classic RBNZ 'raised eyebrow' language - saying something without saying it. It is hawkish by omission.
And this further passage from Wednesday's OCR review further demonstrates the point:
The Monetary Policy Committee discussed the appropriate stance of monetary policy. The Committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time, to ensure annual consumer price inflation returns to the 1 to 3% target range and to support maximum sustainable employment.
"A more sustained period of time".
For me the latest OCR review statement clearly indicates that what happens next is entirely dependent on how particularly the inflation figures pan out. We won't have too long to wait.
As at the June quarter the annual inflation rate as measured by the Consumers Price Index (CPI) was 6%. Bear in mind the RBNZ is trying to get it back down into the targeted 1% to 3% range. Long way to go yet.
In its last set of forecasts the RBNZ actually forecast that annual inflation would again be 6% as at the September quarter. Which is not encouraging.
However, I reckon there's a fair chance the figure will come in HIGHER than 6% - IE moving in the wrong direction.
The obvious culprit will be rising oil prices on top of the already-expected impact from the Government's reversal at the end of June of the 25c petrol excise duty cut.
I will be previewing the inflation figures closer to the time, but for now, I will say that the really crucial factor will be what the domestically sourced (or 'non-tradable') figures are like.
A high 'headline' inflation figure of north of 6% will be bad enough because of its potential to influence future price setting. But if the domestic inflation (and it has been proving, as the economists like to say 'sticky') surprises on the high side then an OCR rise in November is virtually guaranteed.
In terms of the labour market figures out on November 1, the RBNZ's got a forecast of 3.8% unemployment for the September quarter, which compares with an actual figure of 3.6% as of the June quarter. If unemployment doesn't go up as the RBNZ expects then that's another nudge toward a rate hike, as might be higher than expected wage figures, if that turns out to be the case.
Going back to Wednesday's OCR release, the lack of some sort of market 'consensus' on what the RBNZ said and meant is really interesting.
Normally I don't think the RBNZ would be that pleased with such a mixed reaction. It likes the market to have a clear view of what it (the RBNZ) is intending. On this occasion, with the election looming, and with wholesale interest rates having been rising steeply like they have, it might not actually mind.
What the somewhat perplexed reaction of economists and the market on Wednesday ensured was that there was no further ratcheting up of the wholesale market pressure. As long as wholesale rates are not FALLING it actually doesn't matter whether people think the OCR will go up any further or not for now. That's what the RBNZ may think, anyway.
What I would say is, don't be too surprised - particularly if the forthcoming inflation figure's a shocker - if we suddenly see a speaking engagement for either the RBNZ Governor or Deputy materialise, perhaps with some magnificently generic title like: 'Development of monetary policy trends in New Zealand'. If that happens - then it's all go.
This is how the RBNZ operates.
If the RBNZ is minded to raise the OCR in November it will want to 'reset' the market to build in some expectation of that ahead of time, I would imagine. All it would need is for some choice words, or choice eyebrow raising from one of the top brass and the market would be clear about the direction ahead. Watch out for this possibility.
Remember, the November 29 OCR review is the last one for the year - and the last one for a whole three months. It's a very long time. And the RBNZ has to think hard about the kind of setting it wants in place for summer.
Last year for example a lot of things were up in the air as November rolled around, so the RBNZ took what was the least risky option in the circumstance and reached for the blunderbuss - with a 75 point jumbo hike to the OCR. Merry Christmas everybody.
Obviously nothing so dramatic would happen this year. But the RBNZ will have to think very hard about the mood it sets for the summer. Three months is a long time and much could have changed by the time the next OCR call is made in late February.
It all hinges on those inflation figures.
22 Comments
Only short term rates are heavily influenced by the OCR. Medium-long term rates are heavily influenced by the swap rates, and they have been significantly increasing in the last few weeks. Ther 3-year swap, for example, is near to the 5.6% level, which is a multi-year record.
Current saving and mortgage rates have not fully reflected such increases yet, so it is just a question of time before they both raise again.
And the message from the other main central banks is quite clear - higher rates for longer, which is going to put upward pressure on current swaps.
We definitely have not reached the peak yet.
A good rule of thumb is the x-year swap + 1.5% interest rate margin will give you the expected price of a x-year fix. So this gives, based on current swap rates:
- 1-year fix ~ 7.43%
- 2-year fix ~ 7.28%
- 5-year fix ~ 6.89%
Not exact as banks play with the margins depending on how much business they want to attract and they also tend to load longer fixes with a higher margin.
re ... "Ther 3-year swap, for example, is near to the 5.6% level, which is a multi-year record."
Take great care with peaks. When a peak (or trough) is reached it is easy to envisage further higher peaks. (In fact, the greater fool theory relies on this.)
But in fact - and is statistically easy to prove with all other things being equal - the likelihood of a trend reversal increases.
Its what you get from a committee
Years ago I had to write monthly reports to a minister as HOF for a Govt dept. My words would then get poured over by the executive team and especially the assistant to the CEO and double speak would be the outcome.
Projects were always underway but the bulk of expenditure would be incurred next cycle etc etc blah blah
I even had to invent a carry forward process for the end of a financial year for items approved and budgeted for but not actually done. It did avoid the wasteful end of year expenditure and people actually paying for stuff before it was delivered - which was actually not that uncommon
I'd concur on 70% for Nov - but i think the odds numbers are higher for March. Petrol at $3 a litre alone (a 20% increase since June) is going to result in an ugly inflation rate . It will be interesting to see what Christmas looks like for Regional NZ and how many families can afford the petrol to drive to their favourite holiday spots.
Interest rates are NOT restrictive. Chat GPT says "When central bank interest rates are set lower than the rate of inflation, they are typically considered to be stimulatory. This situation is often referred to as a negative real interest rate."
Just saying the word does not make it so.
Exactly.. if we have inflation at 6%, wage inflation at 4.3%, how is the reserve bank going to get inflation down to 2%, at 5.5% the OCR is only mildly restrictive, and not for everyone.
https://www.thepost.co.nz/a/business/350085123/unruffled-reserve-bank-s…
The RBNZ is very much done with hiking according to this article which interprets the last meeting. Interestingly, the RBNZ is not concerned with the property market starting to rise as it is on very low volume of sales.
The RBNZ is in follow the data mode, if the CPI is strong they will HAVE to lift another 25 bps to maintain any credibility, but with food inflation so strong and our need to eat, perhaps they are pissing into the wind. One of the first rules of offshore sailboat racing is piss on the deck so you don't fall off.......
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