Well, here we are again. In the blink of an eye we are approaching that very important last Official Cash Rate (OCR) review for the year.
It seems like only five minutes ago I was previewing the last OCR review of 2022. But much has changed.
As I said then, all the talk in the run-up to the November 2022 OCR review was not if we would get an OCR hike, but whether it would be "large - or extra-large". In the event Reserve Bank (RBNZ) Governor Adrian Orr and his merry band of Monetary Policy Committee members came out swinging, with a record "jumbo hike" of 75 basis points to send us all off staggering into the festive season.
Given that there is now customarily a three-month break (a long time in economics) between the last OCR review of the year and the first of the next, the logic of that super hike was sound. With inflation by no means under control the RBNZ basically covered itself for the summer break.
So, what about this year? The problem's the same. Inflation. But the situation's quite different. There is NO CHANCE of an OCR hike when the MPC meets to review the situation this coming Wednesday (November 29).
The backdrop is that key economic indicators are beginning to behave in the way the RBNZ wants. And it's fair to say also, behaving in the way the RBNZ has picked. Its forecasting performance in certainly the last six months has been very good - picking what's been a rapid cooling in the economy in the second half of the year.
The central bank's job is to keep inflation (as measured by the CPI, the Consumers Price Index) in a 1% to 3% range, with an explicit target of 2%. The RBNZ began this OCR hiking cycle in October 2021 as inflation began to soar. Inflation peaked at 7.3% in June 2022. Job most certainly NOT done.
After that jumbo rate hike in November 2022 the OCR stood at 4.25%. This year we saw hikes in February (50 points), April (another 50) and then May (25 points), taking the OCR to the current 5.5%. At that point the RBNZ declared (through its set of forecasts) that it was done with hikes - at least for the foreseeable future.
This has worked well. By putting away the spectre of future hikes the RBNZ was able to keep a relatively low profile during the election campaign - a campaign which could easily have seen our central bank become a political football if it had been undertaking rate rises during the campaign.
All might not have been so good of course if the economic data had gone the wrong way. But it is moving increasingly in the right direction. The RBNZ's last set of forecasts in its August Monetary Policy Statement were for the annual rate of inflation to be 6.0% as of the September quarter. The actual rate undershot this at 5.6%. The RBNZ had forecast unemployment to lift from 3.6% to 3.8% in the September quarter. It actually rose to 3.9%.
So, right at this moment, the inflation fight is on track. That, strangely, poses its own challenges for the RBNZ.
What is Governor Orr to do in the coming week? Announce no change to the OCR, say that there will no more future hikes, and that everything is just wonderful, it's all on track, and have a great summer break? Well, no. That would not be a great idea.
For one thing, if we look closely at the inflation figures we can see that domestically-generated inflation's still way too high and dropping only very slowly. In fact, the so-called non-tradable inflation figure for the September quarter was an annual rate of 6.3%, which is exactly the SAME as it was in June 2022 when the 'headline' rate hit that 7.3% peak. So, no room for relaxing there.
Then there's 'the markets'. The wholesale interest rate markets love to second guess. Back in 2021 our mortgage interest rates started increasing before the OCR had been moved. That's because the wholesale interest rate markets had begun anticipating hikes - so wholesale rates were pushing up strongly. And that of course affected the funding costs of the banks - so up went the mortgage rates.
Therefore, although inflation is starting to recede, there's a couple of things the RBNZ does NOT want to happen this summer. And they are linked. The two things would be signs of falling mortgage rates and signs of the housing market waking up.
The RBNZ has a new Monetary Policy Statement also coming out on Wednesday at the same time as the OCR decision.
The forecasts contained in the back of that new MPS will be of vital interest.
Will the RBNZ change its view of how long the OCR going to stay high? Will it indicate that there's no further chance of any more hikes?
In the August MPS forecasts the RBNZ didn't forecast any rate reductions till the second quarter of 2025. That's a long way away. What will the central bank say this time? The inclination might be to modify that rate track and bring forward the time of the first OCR cut. HOWEVER. Our friends in the wholesale markets would for sure seize on that and start to pre-empt, with wholesale rates starting to fall quickly.
Already (at time of writing) the wholesale markets are 'pricing in' three full 25 basis point cuts to the OCR by February 2025 - IE by BEFORE the RBNZ is currently forecasting there will be even ONE cut. It's called jumping the gun. Or is it adroit anticipation? Either way, it's potential a pain in the painful spots for the RBNZ if 'lower, sooner' starts to be the perception. Because as mentioned above, this would likely lead to lower mortgage rates. So monetary policy would effectively be 'eased' before the RBNZ is ready - potentially.
This was always going to be the difficult juggling act for the RBNZ once we got over the inflation hump and started moving down the other side. From the RBNZ perspective, if it lets the brake off too fast then there is a real risk that much higher than desirable (IE above 3%) inflation becomes ingrained and with all the economic poison such a reality would entail.
Putting this all together would indicate that the RBNZ will be of a mind to leave well alone. It would be a surprise if the forecast OCR track is changed much, if at all. Maybe the RBNZ would bring forward the first cut by a quarter or something like that. Or maybe just leave it as was in August. What about the slight chance of a future hike that the RBNZ had in its previous set of forecasts? I suspect this will be retained too.
Likewise, the commentary in both the MPS and the Governor's remarks to the media could be expected to retain much of the previous 'hawkishness'.
I would hope and expect there's some more detailed reference to the migration flood NZ is currently experiencing. And the potential ramifications. The RBNZ devoted a lot of space to the subject in its August MPS, but has to date been playing down the inflation risks from the current migration surge.
Since August, however, the numbers of migrants have just kept going up and up, with the annual net migration gain running at now well over 100,000 people.
Undoubtedly this is a big factor in the labour market rapidly losing heat. So, that's actually a positive for the RBNZ. But...
The flip side though is just what the demand-side implications - and therefore the inflation implications - are for the economy from this migration surge. More people mean more need for housing, and for infrastructure and for services. It's inflationary. And the RBNZ has an inflation problem. So, this seemingly unchecked pouring in of migrants is potentially petrol for inflation's fire.
Right now, the RBNZ seems to have the fight against inflation heading in the right direction. But it would be very easy to stumble off the path.
For the RBNZ, the 'on hold' decision it will deliver for the OCR in the coming week is the easy part.
The hard bit is getting across the message that the inflation battle is not won and now is not the time for falling interest rates and getting too relaxed. And the RBNZ has to make this message stick for the whole of the three-month summer break.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
64 Comments
Our official CPI numbers come out rather slow and we don't know what's really happened until 4 weeks after the end of quarter. Economists all play the guessing game of what's the number. Funnily some high profile economists are the ones who are most wrong, on the high side. Brad Olsen
So even though imported inflation is dropping right now, we won't know that until after the fat man has been
We also had 15 years with a RBNZ that didn't forget Economics 101 and throw millions at the retail banks to lend like crazy when there was a global supply disruption. So take your pick: a) population growth keeping inflation down, or b) a RBNZ making a total cockup that drove inflation up.
re ... "That ship has sailed"
Or you could take the view, as I do, that the 15 years established a 'new normal" in NZ.
It is worth considering that, in those 15 years, NZ's interest rates that were historically much higher than overseas rates actually came down to be only slightly higher than overseas rates. (Muldoon and his National Party, followed by radical reform, was a reason for significant distrust in NZ Inc.'s economic leadership.)
I see no impediment to a return to those conditions. There is no longer any valid reason for NZ to pay as much as did 15 years ago for borrowed money.
Sounds right
Jerome Powell is US Fed chairman of a board not one man band
I bet that Nicola Willis as finance minister is still just spokeswoman for the whole coalition govt, again not a one wo/man band.
She was looking stunning in her colourful outfits this week especially the red one lol
I can see a fiscal mess in the making with Willis's signature all over it. If global wholesale interest rates are indeed trending down, ours will remain unusually elevated. This is the price for thinking we can just carry on selling overpriced houses to each other.
In the face of China's slowdown, we need to produce goods the rest of the world wants. That's going to present a near impossible challenge for the (one term) Coalition.
Anyone can retire at any time. They just may not necessarily afford the retirement they desire.
If unemployment will rise as you say, that's not compatible with your claim of continued elevated interest rates.
If you are editing, usually you note edit above your additional comments. Or the whole comment if you delete it and start from scratch.
Pa1nter, you're now telling the story. All you have to say is that you disagree with said views, let go and move on.
Anyway, performing of some very basic research provides an insight as to how the world views our debt issuance;
New Zealand 4.97
Australia 4.54%
United States 4.47%
Italy 4.39
United Kingdom 4.28%
Greece 3.80%
From a purely amateur perspective, I’d suggest RBNZ has prudently expanded it’s foreign currency war chest in the event they are forced to reduce the OCR earlier than anticipated causing our currency to be dumped. As you know, the need to support our currency to mitigate imported inflation is the objective.
As a country, we are borrowing to maintain infrastructure as opposed to expanding it…
Pa1nter, you're telling the story...
I'm replying to your assertion. Your position excludes a host of monetary policy tools used by the RBNZ. I can't see them claiming to cease using them (or even more tools in the future). Here's some info from the RBNZ:
https://www.rbnz.govt.nz/hub/research/additional-research/monetary-poli…(OCR,their%20transaction%20accounts%20at%20RBNZ.
the need to support our currency to mitigate imported inflation is the objective.
That's an objective, but not "the" objective.
Let's nail down your position then, no date guessing needed, you're saying here and now that the RBNZ is not going to deploy monetary tools in the next financial upheaval?
It's discussion, not just a sound board.
If you make comments that are well founded, then there's not much for me to dispute. If you make comments that are more narrow in view or absent of other factors then I'll respond or get you to flesh out your reasoning.
Robust inquiry is a good method to form more reliable viewpoints, and make better decisions.
We have a higher credit rating than the US. NZ govt. debt is a lot lower to GDP than many of these countries. The Australian cash rate is 0.2% below their bond rate whereas ours is 0.5% above our bond rate. The Greek bonds tend to be pegged to the EU cash rate so is distorted somewhat. Our bond rates attract enough demand to function and will continue to do so for a while yet - we are not viewed as “risky” from global investors.
In a nutshell there’s many variables that impact them but they don’t sit above the radar from any real negative perspective
The RBNZ is generally oversees a stable economy (whether that's because or in spite of the RBNZ is another matter) - evidenced by 15 years without a protracted recession.
When it does make a serious intervention though, like the last 4 years, it usually either comes in the form of massive stimulation, or destruction. They know this, but will deem it a necessary evil on a road to stable prosperity.
Yes and the tax cuts we all know we cant afford will be inflationary. No change from RBNZ is my pick, staying at 5.5%. Oil price a key factor. Credit rating agencies are watching closely (and on 3 waters and local government debt). I think the hawkish tone has to remain or NZers will very quickly be back to re-inflate the property market (fuel supplied by National and Act). Seems like Acts highest priority for NZ to start with is making housing investment tax free again as fast as possible, selling cigarettes to all ages again, and bringing back semi-automatic weapons for some. Hideous.
I'll be interested to what they find around the possibility of reopening marsden point. It would need to be a strong case and research done well as the cost of reopening and maintaining it will be gargantuan but the variety of products and byproducts it created other than just fuel would have had flow on impacts in various sectors of NZ.
Yes, it was clearly shut down without any comprehensive analysis or understanding of how important the products were. A prime example was its production of bitumen for the roads. Now we import cheap, substandard stuff and wonder why the roads are full of potholes that get repaired and within weeks are potholed again. Not to mention the multiple jet fuel issues we have had and the CO2 issues for food and beverage production.
In the seventies
Yes buying a house "in the seventies" before the inflation and unemployment spike was certainly wrong. Those who invested in term deposits were making a killing
... wait a minute
In 2023 there is even a thing called Accommodation supplement to help with the mortgage.
.. all net tax payers. And as one (with children too, I might add), I see this as a good thing socially, though we're really just covering the employer's slack.
AS and super, OTOH, we could do without, as they provide no benefits to the future of our society. (i really don't see why super should be higher than UB, so just get rid of it and all the oldies who qualify can get UB).
"Inflation" is always and everywhere a monetary phenomenon....and in a global trading economy that means also in relative terms.
If we reduce our collateral value in housing we must increase our capacity somewhere else ....decades of history in NZ indicate we are severely limited in that respect.
Of course deflation is always a potential response...as is outright collapse.
"The flip side though is just what the demand-side implications - and therefore the inflation implications - are for the economy from this migration surge. More people mean more need for housing, and for infrastructure and for services. It's inflationary. And the RBNZ has an inflation problem. So, this seemingly unchecked pouring in of migrants is potentially petrol for inflation's fire."
This is assuming that the many immigrants currently flooding into the country can find a job, which is becoming increasingly difficult as the labor market flips to an employers market. For immigrants to create demand they first need an income.
Interest rates are shaped by economic fundamentals: growth, inflation expectations, investor sentiment. (lower growth, lower interest rates) 2011's market movements were a response to broader economic and monetary anxieties, not policy decisions. Link
Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages owed by one third of already wealthy households
This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:
[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.
When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Link
The wholesale markets employ economists. Good ones too. And they are not required, like the retail bank economists, to publish infomercials, to increase sales and profitability, which are all too often confused and conflicted.
The wholesale markets economist will have looked at the raw economic data and modeled where it is trending based on how NZ Inc has responded to previous OCR rises. And then adjusted the predictions based on the sharpness of the recent OCR rises and for the fact that consumers were able to weather the initial impact using up the buffers they had built up through covid. They will have, if they're looking at the same data I've been using, have concluded the economy is contracting faster than many expect, or those looking backwards in time. I've no doubt the RBNZ will have likewise concluded the same thing albeit their rate of contraction may be different, or the rate they admit to will be different given they can change it in 3 months.
The RBNZ will talk the talk. But the track of a lower the OCR has to move.
"lower sooner" will result in central banks hiking interest rates again. They are already warning the markets.
“If the markets don’t infer from this that it’ll be high for longer, then we’ll have to use our rate instruments and hike to get where we want to go.” (ECB)
https://wolfstreet.com/2023/11/22/even-higher-for-longer-if-markets-kee…
RBA now singing the same tune as well.
https://www.afr.com/policy/economy/bullock-has-gone-full-hawk-but-the-m…
Pays to remember the stock market adage "Don't Fight The Fed". Are the bond markets about to learn the same?
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