![A man walks past the Reserve Bank on Wellington's The Terrace](/sites/default/files/2023-08/rbnz-reserve-bank-new-zealand-walk.jpg)
It has been almost 200 days since the last increase to the Official Cash Rate, but the Reserve Bank of New Zealand says it may not be finished hiking.
The Monetary Policy Committee discussed lifting the benchmark interest rate above the current 5.50% at its November meeting, before deciding to wait for further data.
RBNZ Governor Adrian Orr said there was a new word to add to his alliterative summary of the central bank’s next move: watch, worry, wait, but be willing to hike rates if needed.
“We had robust discussions around now versus later, and whether it was going to be necessary or not,” he said at a press conference on Wednesday.
To signal this willingness, the RBNZ lifted its projection of the OCR—for the seventh time in the past two years—adding another 10 basis points to have it peak at 5.69%.
Bond traders would describe this as a 75% chance of a rate hike, if it were priced into market swap rates. Orr rejected that characterisation, however.
He said the committee and RBNZ analysts were demonstrating they had an “upward bias” towards interest rates, but it shouldn’t be considered a yes-or-no probability.
Rather, it was because the risk that inflation could be sticky was greater and more harmful, than the risk that it might fall faster than expected.
“Let me be clear, inflation is declining. Where we are nervous is whether it is declining fast enough for us to succeed in the lowest cost to the rest of the economy”.
There was “very little headroom” to absorb additional inflation surprises and “a lot more” room to absorb disinflation surprises, he said.
While they opted not to raise rates any further, the Monetary Policy Committee signalled it was becoming impatient to get annual inflation back below 3%.
“Some members noted that inflation has now been above target for some time, and that there should be a low tolerance for any increase in the time to return inflation to target,” the meeting notes said.
Meeting the midpoint
For more than a year, the RBNZ has been forecasting inflation will fall back into the target band during the third quarter of 2024. That date is now just nine months away.
Once in the target band, the central bank expects to spend another year pruning price expectations until annual inflation is once again anchored at the midpoint of 2%.
Training the public to expect a steady, slow rate of inflation again will take some time. Five and 10 year inflation expectations have been rising, with the latter now at 2.28%.
“We take that as a personal assault on our credibility and mandate here at the central bank,” Orr said.
Monetary policy has a long lag, and so the rate hike considered by the Committee this week would have been aimed at dampening inflation in June 2025 and beyond.
Or, the spectre of future hikes may have been intended to spook bond traders who were pricing in three rate cuts during 2024, prior to the November meeting.
Stephen Toplis, head of research at BNZ, said the “hawkish stance” adopted by the Reserve Bank may have been to prevent retail interest rates from falling any further.
“It would have feared that if it displayed any overt sign of satisfaction it was winning the battle against inflation that it would result in even more aggressive rate cut pricing by markets”.
“Householders and businesses need to be aware that current lending rates are predicated on the market expectation that the cash rate falls. If this is priced out, as the RBNZ desires, then lending rates will again rise”.
Orr said market participants were hastily predicting the start of the easing cycle, despite consistent signals from the central bank that policy would stay tight through into 2025.
Sharon Zollner, the chief economist at ANZ, said the tough talk may be partly a strategy to stop market traders from inadvertently easing monetary conditions.
“But there does appear to be genuine concern that the bulk of the transmission of monetary policy is now in the rear-view mirror and core inflation and inflation expectations have not responded as hoped”.
Migration matters
Kelly Eckhold, chief economist at Westpac NZ, was one of the few forecasters still betting that another rate hike was more likely than not, prior to the policy decision on Wednesday.
He said the key drivers of the more hawkish outlook stems from a reassessment of what impact very strong, migration-driven population growth will have on demand.
“Our overall first impression is that the RBNZ is concerned that further increases in interest rates may be required towards the middle of 2024. Key will be migration and housing market indicators over the next few months and the next couple of CPI outturns.”
Paul Conway, the RBNZ’s own chief economist, said his view of how migration was interacting with inflation had evolved since the August Monetary Policy Statement.
“Initially, we saw migration clearly easing the labour market, which was very helpful taking some of the heat out,” he said.
“But we said that the demand-side effects were likely to turn up at some stage and what's happened over the last three months”.
The central bank was now seeing more evidence that strong population growth was adding to demand, particularly in house prices and rents.
Eckhold said RBNZ seemed more focused on ensuring that inflation hits the middle of the target range in the next 18 months to 2 years, than it had been.
“Hence, given still persistent core inflation, strong population growth and an upwardly revised long-run neutral OCR (increased a further 25 basis points to 2.5%) the clear message is the balance of risks has shifted towards a need for further tightening”.
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21 Comments
It has been an even more embarrassing clown show than normal over that, unfortunately despite Peter's being 100% correct, the masses will only have the story from the MSM. Watching Jenna stomp her feet and hold her breath reminds me of Hamlet, "The lady doth protest too much, methinks"
You have to laugh. Everyone who labelled others a conspiracy theorists are being handed it on a platter that the mainstream media is blatantly opting out of real reporting in favour of opinion pieces and heavily slanted reporting that only supports the previous governments ideologies. I'd love to see a study done on the 2020-2022 articles and the language used consistently, as well as the percentage of articles that challenged any government decisions, laws, the level of use of emergency sessions used etc. Would be eye watering I suspect.
It was always ‘kicking the can down the road’! Most people knew trying to solve fundamental economic issues by stimulating consumption through lower debt servicing is like a junkie mainlining heroin; great while it lasts. Prudent folk saw it for what it was and conducted their affairs with restraint. Unfortunately, many loaded up on the junk and now it’s time to face the music! 🎶🎶
Is population growth the new term for net immigration? Perhaps Orr doesn't want to mention the imm word in case it upsets the new incoming finance and other ministers.
Back in antiquity, economics 001 for dumb engineering types like myself differentiated fiscal from monetary policy.
Perhaps its Orr's reminder to the new incoming govt, in particular Willis who has a good background in journalism, politics and the corporate world at Fonterra with a final role of GM Nutrient Management
“We had robust discussions around now versus later, and whether it was going to be necessary or not,” he said at a press conference on Wednesday.
To signal this willingness, the RBNZ lifted its projection of the OCR—for the seventh time in the past two years—adding another 10 basis points to have it peak at 5.69%.
Bond traders would describe this as a 75% chance of a rate hike, if it were priced into market swap rates. Orr rejected that characterisation, however.
He said the committee and RBNZ analysts were demonstrating they had an “upward bias” towards interest rates, but it shouldn’t be considered a yes-or-no probability.
Powell (read Orr): ''We have actually paused but I am going to gaslight you with as much hawkish talk as I can so you don't send Spooz to 4,600 and start trading JPEGs again''. ''Thank you for listening to my hawkish rant more than watching my actual pause''. Link
But wait, I forgot migration was meant to be the answer to all our inflationary prayers! How can this be?
Meanwhile, Luxon at his post-Cabinet press stand up yesterday defending his backtracking on Smokefree 2025 due to "unintended consequences" which he could not elaborate further on (perhaps unintended consequences of missed tax revenue to fill various fiscal holes?).
You get the government you deserve.
We are not in unfamiliar territory here. The only issue was that it was unexpected, and it will mean more pain for those borrowing and for longer. With the new legislation being pushed through before Xmas, only the inflation rate will be their goal.
Its quite sneaky for they have kept the rate but indicated a possibility of an increase for that too will impact wholesale rates.
The market will be right.
The RBNZ is jawboning. (Alas, the banks will profit from this.)
After reading through the Nov MPS it is clear that there is a disconnect between the RBNZ's "speculation" on how events will unfold (using data already out of date by 1-3 months) and the observable facts and trends at this time. I.e. everything is basically heading in the right direction. Take that thought and read it yourself here:
https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/…
Couple of choice statements (mainly because people are quick to quote the rhetoric).
Page 3: "House prices have stabilised after earlier declines, with strong population growth and increased nominal disposable incomes offsetting the effect of higher debt servicing costs. House price increases affect inflationary pressures indirectly, via higher household wealth and an associated increase in consumption. Some members considered that the willingness of households to consume out of wealth may be lower given recent house price falls, higher debt servicing costs, and a softening labour market. Other members considered that there may be upside risks to house prices, and therefore consumption, given the anticipated decline in residential investment."
In short, there is disagreement. I'm in the former camp as, unless the OCR is dropped dramatically, people will be very cautious especially so given unemployment is rising and house prices (in the face of considerable spruiking) don't appear to be going anywhere ... And supply will continue to increase (NPS-UD, MDRS, Higher Density council zoning, etc.)
Page 3: "Members noted that net immigration has been higher than previously assumed. This has increased the supply of workers into a tight labour market. However, the demandside effects are becoming apparent. Strong population growth has contributed to an increase in housing rents."
Notice they added "has contributed to"? But didn't mention that LLs are almost certainly raising rents to cover losses due to interest deductability being removed. And that, thanks to the LL parties, is going to be reversed, so rents could in fact stagnate for a few years. (more on immigration effects lower down.) And further down we get:
Page 16: "High net immigration is also coinciding with recent increases in rents." Note "coinciding".
Page 4: "The share of disposable income going to debt servicing for households with a mortgage is expected to increase from 15 percent currently to 19 percent."
So even more money is going to be sucked from wallets. But what of the households without a mortgage? As we have seen when interest rates rise, people rush their spare cash into TDs. Which effectively stops them from spending it ... leading to further contraction. (And 5.5% or more on a 5 year term may look pretty good in a year or two.)
Page 8: "While there is significant uncertainty about its effect, high net immigration may lead to a stronger rebound in the housing market and spending via the wealth effect, which would provide some offset to the effects of higher interest rates."
So there you have it. Even the RBNZ isn't sure of the effects of high net immigration. In other places they are more forthright in drawing the link. The pub economists are certain of the effect. But real economists are very uncertain that its effect is as profound as pub economists (and spruikers) would have you believe. I'm of the view that the effects are vastly overstated, especially give the significant increase in housing supply over the last few years.
Chapter 5 (Domestic financial conditions) is well worth a read.
The net MPS is in three months time. After Christmas ... Which won't be flash as we are already seeing. The RBNZ will struggle to maintain the HFL line as the real world has a habit of ignoring central bank rhetoric when conditions on the ground tell people a different, and painful, story.
Still, central bank "predictions" can become self-fulfilling predictions. But when they do, and they overshoot, unwinding the damage can be a long and painful exercise. We'll know more come March.
I went looking for what figures the RBNZ used when estimating government spending. (Those on the right harped on about it being government spending that contributed most to inflation.)
Page 39: "- that government consumption and investment evolve in line with the macroeconomic and fiscal forecasts in the Pre-election Economic and Fiscal Update (PREFU) 2023.The specific nature of policy changes which may be implemented by the incoming Government were not known at the time these projections were finalised."
So if the NACT do get to slash and burn government spending (as the promised they would) then that isn't factored in. (I don't believe the NACT will be able to slash as much as they promised. It was con. A shame it worked.)
Anyways ... The RBNZ succinctly sums up the fiscal effects ...
Page 8: "With a new Government settling in, the fiscal outlook is also highly uncertain."
So ... If you believe the NACT rhetoric, we'll see much more of a disinflationary effect than was estimated in the PREFU.
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