ASB economists have abruptly changed their call and now say the Reserve Bank (RBNZ) will be forced to start hiking interest rates from as soon as November.
And they have quickly been joined in a November pick by the BNZ economists.
At the moment, the Official Cash Rate (OCR), set by the RBNZ, is at just 0.25%. The RBNZ's next Monetary Policy Review is on Wednesday of next week (July 14).
The change in call from the ASB economists (from their earlier pick of May next year for rate rises) comes hot on the heels of the release of the latest NZIER Quarterly Survey of Business Opinion (QSBO).
This survey is much watched by economists - and the RBNZ - and the results of the latest survey show an economy that is rapidly overheating.
Specifically the survey shows that labour shortages are now the worst they've been in the history of the survey - going back to 1976, while cost and pricing pressures are rising.
In a short email directly after release of the QSBO, the ASB's chief economist Nick Tuffley said the inflation and demand gauges in the survey are "so strong that it is increasingly clear that the RBNZ cannot afford to wait much longer before starting to reduce the amount of monetary stimulus currently in place".
Red flag
In ASB's subsequent detailed review of the survey, ASB senior economist Jane Turner said the key "red flag" in the QSBO was the extent of tightening in labour market pressures.
"Difficulty of finding labour and labour as a limiting factor are at record highs. Labour turnover surged in Q2, evidence that firms are now poaching staff off each other. NZ’s domestic demand is strong, fuelled by a strong fiscal and monetary policy response to Covid-19 pandemic, and subsequently resulting in resilient household income growth and household demand.
"However, the supply of labour is constrained by necessary border restrictions, and labour supply cannot easily grow to meet strong economic demand in the short term.
"As a result, we expect wage inflation to lift strongly over the coming year," Turner said.
"The heady mix of strong household income growth, underpinned by stronger wage inflation, coupled with generalised and broad-based CPI price increases is a wage-inflation spiral waiting to happen.
"Inflation expectations have started to creep higher and will likely continue to lift over the coming year.
"Against a backdrop of higher inflation expectations, the RBNZ is likely to become increasingly uncomfortable leaving the OCR at emergency settings. We now expect the RBNZ to start lifting the OCR from November this year (previously May 2022)," Turner said.
'The straw that broke the camel's back'
BNZ's economists - who actually think "conditions are ripe" for RBNZ hikes now - have also switched to a November forecast of when the RBNZ will move.
"For us, the QSBO is the straw that broke the camel’s back," BNZ head of research Stephen Toplis said.
"It’s not the only straw by any means with multiple other indicators suggesting the economy is currently on fire."
Toplis said while the BNZ economists have moved their "central projection" to November "there clearly remain risks around this".
"It’s not inconceivable the RBNZ feels the need to go earlier, especially if it starts to ponder the fact that it might currently be as much as 200 basis points behind the curve. Alternatively, if the RBNZ just doesn’t want to risk being so far ahead of other central banks, or it fears the ongoing threat of Covid it could easily hang tight for a while longer."
Toplis says the decision on what the RBNZ says at next week’s review of interest rates "has just got that much more difficult".
"Surely, the Bank must now formally acknowledge a tightening bias. And, just maybe, it will need to also formally announce when it might cease purchasing government bonds. Any such announcement might more clearly indicate when the tightening cycle might begin in the absence of a published interest rate track. Whatever the case, least regrets must surely mean tighter monetary conditions sooner rather than later."
'A rapid rise in inflation'
Kiwibank economists said what was clear to see in the NZIER survey was that firms are "bumping up against capacity limits, facing marked increases in costs, finding it difficult to source both materials and staff needed to meet rising demand".
"All these factors combined point to a rapid rise in inflation," they said.
"A net 39% of firms hiked prices in the June quarter, and a net 52% expect to do so in the next quarter – both well above survey averages. We are expecting to see annual CPI inflation to come in at around 2.5% yoy [year-on-year] in the June quarter when the numbers are released next Friday [July 16]. But as today’s numbers show we could easily see inflation come in ahead of our forecasts both in the June and September quarters."
The Kiwibank economists said if the economic data flow continues on the current path, "an earlier lift off than May next year in the OCR by the RBNZ is on the cards".
ANZ economist Finn Robinson and senior economist Miles Workman said indicators from the QBSO show that capacity pressures in the economy "have only continued to increase", as strong demand runs into supply constraints.
'Strong signals'
"The labour market is giving off very strong signals, and we think it’s well on the way to maximum sustainable employment.
"And, firms are finally starting to pass on higher costs to consumers (something that they struggled to do pre-Covid), which has helped see a recovery in profitability.
"These developments are important for the monetary policy outlook – it’s easy to look at supply disruptions and say that these are persistent, but not permanent, sources of inflation pressure.
"But with the labour market tightening and firms starting to pass on cost increases to consumers (a significant behavioural change), that speaks to a more sustained source of underlying inflationary pressure that will require a tightening in monetary policy, and sooner rather than later," the economists say.
NZIER's principal economist Christina Leung said inflation pressures are intensifying.
"These labour shortages and supply chain disruptions are leading to a further build-up of capacity pressures across the New Zealand economy.
"The increase in both costs and prices points to rising inflation pressures, which is underpinning expectations of interest rate increases from the Reserve Bank over the coming year."
The survey highlighted the very heated situation in the construction sector.
A strong pipeline of work
"Strong construction demand is boosting confidence in the building sector, with a strong pipeline of residential, commercial and government construction work over the coming year.
"The pipeline of residential construction work is particularly strong, in line with annual dwelling consent issuance rising to record highs.
"Against this backdrop of solid demand, capacity pressures are becoming more acute in the construction sector.
"These pressures reflect Covid-related supply chain disruptions and labour shortages, with building construction firms’ difficulty finding skilled labour at the highest for the survey's history (going back to 1976). Nonetheless, profitability in the building sector is the strongest since December 2002, reflecting the greater ease with which firms are passing on the increased costs by raising prices," Leung said.
In expansion mode
She said that generally firms are looking to expand further through hiring and investment.
"In particular, a net 15% of firms increased headcount in the June quarter, while a net 20% of firms are looking to increase investment in plant and machinery over the coming year.
"This increased focus on investment in plant and machinery likely reflects the labour shortages that firms are facing, which is encouraging firms to consider the use of labour-saving technology.
"The scarcity of skilled and unskilled labour is at the most acute on record over the history of the survey, with firms finding it particularly difficult to hire skilled labour."
125 Comments
That's the issue we have here, it seems they respond a bit too slow now. The traditional tool they have was proved as not effective during current covid situation. If they don't hike OCR sooner by November, they might have to do a heck of a lot hikes in coming years.
NZ is notoriously slow because the economic data is usually compiled quarterly. Onlyhousing seems to be monthly. Most of the OECD get data indicators monthly - particularly unemployment and GDP indicators-they also make central bank monetary policy decisions monthly (NZ does it quarterly). In the case of the US they get unemployment figures weekly. It enables them to see economic trands quickly and make tweaks. Unfortunately NZ often has to wait 3 quarters to get their data and the horse has usually bolted by then.
A hike in November is too late. the OCR should be raised to 1% (which is just pre-Covid levels, after all) on 14th July, and raised to at least 2% by mid next year.
The RBNZ have no more excuses for keeping rates at these ridiculously low and damaging levels. Time to act now.
It has long been recognized that economic policy in general, and monetary policy in particular, needs a forward-looking dimension. “If we wait until price movement is actually afoot before applying remedial measures, we may be too late,” as Keynes (1923) observes in A Tract on Monetary Reform.
1 Introduction https://www.nber.org/system/files/chapters/c7416/c7416.pdf
Haven't we spent years trying to generate a high-wage economy, and a bit of inflation?
Yet when it happens, there's a freak-out at the prospect of *actually* increasing wages. In an economy where the cost of housing has gone through the roof.
Inflation is only supposed to be for the poor, apparently.
Anyway, I don't believe a word of this rate-rise talk. The boy has cried 'wolf!' not once or twice but dozens of times. Talking about rate rises is all that will ever happen; at some point people will cotton on that threatening the property industry is *not* on the agenda.
It seems a democracy is about letting the "market" screw those who are not in the "market" and then every 50 years or so have a war or a reset or both.
The rate rise will happen but super slowly, it has to happen super slowly so as not to spook the "markets" into profit taking but still has to happen so we can still pretend inflation will one day eat the debt elephant (it won't of course).
Wages will not match asset growth, we are beyond being able to put the globalisation, financialisation and automation genies back in their bottles.
I know most people really dont want to beleive interest rates will rise (nobody wants to think about people needing to cough up extra a month in house repayments )g - but the consequences of them not lifting rates are a severe recession.
When an economy overheats (which there are very strong indications that the NZ economy is currently doing) it means there is too much demand for products and services resulting in a lack of labour and material costs inflate as businesses demand short supplied materials. This demand/ supply imbalance can result in businesses going broke. Quite simply they run out of materials and labour and cannot produce enough products/ services to stay viable. As businesses go under they take connected businesses with them - the result is a spike in unemployment (as the people at the business who went broke are laid off) , the public gets scared and stop spending fearing they will lose their jobs and the recession spiral effect occurs- people stop spending, more businesses go broke etc.
The quickest easiest way to stop overheating is to raise interest rates as it takes some of the heat out of the economy - the interest rates make it more expensive for businesses to borrow - reducing inflation effects, but higher interest rates also reduce consumer demand as consumers need to spend more financing their own debt. this enables a rebalancing of supply and demand.
"raise interest rates as it takes some of the heat out of the economy - the interest rates make it more expensive for businesses to borrow".
Nice theory, but no evidence that this is the case in the real world. Businesses invest when they are confident of generating a return - interest rates are almost irrelevant.
The quickest way to prevent over-heating is to identify the products or sectors that are over-heating and ask whether the distributional effects of inflation are a problem for NZ. For example, if construction costs are increasing - do we need to take action to prevent the sector paying higher wages, recruiting more apprentices, and investing in innovation (e.g. eco-friendly pre-fabs) - or is that not the market doing it's job to adjust relative prices?
Yes that is a good explanation of the theory of supply and demand.
Unfortunately NZ is not in charge of it's own destiny financially so we are not that free to follow the theory. If we raise interest rates out of range of the Fed our currency will be fired from a cannon into Venezuela territory. The impact of this will be reduce the cost of things here a) because we can buy foreign things more cheaply and b) we wont be able to sell a good idea overseas and so those exporters that can pivot to sell to a domestic market will do ok at the margins and everyone else in that sector will get smoked. Most importantly our primary export, the sector that pays the most tax will be a memory.
I understand that's the orthodox expectation.
However: with interest rates so low, would another 1% on interest rates make the slightest difference to business lending if the investment is worthwhile?
It's low at the moment, but clearly not because interest rates are too high. It must be because they can't see a lot of really solid investment opportunities - or those opportunities are snapped up without anyone having to visit a bank, which I think is the case.
The combination of inflation and low rates is a Goldilocks world for property investors, ie. voters. I still think we'd have to see catastrophic inflation - not 3% or 4% or even 5%- before they raise rates.
This increased focus on investment in plant and machinery likely reflects the labour shortages that firms are facing
The scarcity of skilled and unskilled labour is at the most acute on record over the history of the survey
These two developments in NZ' labour market are actually interlinked.
AI experts agree automation done well predominantly replaces mid-skilled workers across an economy while creating more jobs for lower and higher skilled workers.
More high-skilled workers and business investment pouring into a local economy brings more overall spending on low-value services (cleaning, hospitality, retail, tourism, etc.), thus creating low-paid jobs that cannot be automated.
Bank speak for: Our loan books are the biggest they have ever been, we've baited everyone in with low interest rates and want rates to increase (bait and switch) to increase our net interest margins. We don't want to be seen to be increasing our short term "carded" rates due to competition, therefore we want to scare monger people to prematurely fix on the longer terms to bridge the gap between now and when the RBNZ increases the OCR in hindsight.
Transitory is in the eye of the beholder. I think RBNZ will hold as long as CPI doesn't get above 5% annualised. New Zealand is likely to have a higher CPI figure due to global cargo transportation issues but thise will be resolved within the next couple of years.
I don't think they can afford to have CPI sitting between 4% and 5% for couple of years. Best way to do this is to increase OCR gradually until global cargo transportation issues resolved. The longer they delay it, the worse damage they are going to get for the economy.
Pensions are indexed to wages (can't remember exactly the relationship.. might be 2/3rds of average wage?) so if wages increase so does the pension.
Benefits have been eaten over the last decade by inflation.. both the small amount that shows up in CPI, and the things that don't get reflected accurately in CPI, so benefits probably need to go up another 15-20% to get back to where they were a decade ago in real purchasing power.
My recent experience re workforce shortages:
We had a software dev job offer up for 2 weeks, only 5 candidates applied. For similar ads we usually get about a hundred in the same time period.
From the employee perspective, I've been looking at senior dev jobs in the past few months. 2-3 months ago most were in the 100-120k range. Glassdoor also confirmed my suspicion that most devs with some experience are at around 100-110k.
In the last few weeks I started seeing lots of ads in the 130-140k range, some going as high as 160k. Still not worth for me to chase a new job, as the net increase is negligible compared to the work/life balance perks I enjoy at my current position. But perhaps this is the start of a much needed wage adjustment in the sector.
Can agree - I track Snr Developer, and Snr Product Manager rates and while good talent in NZ has always been scarce big tightening started last October and has continued. Average Seek Prices for this bucket has moved from $140 to 160k. A conservative 10% increase in rates this year.
On the construction site I think its worse. Anecdotally I wanted a drainlayer recently and was quoted 9500 for a two day job (1 guy and 3k of materials). Piping is going up due to shortage of piping resin globally.
Everywhere I look I see labor tightening, materials shortage and demand - Government construction projects and residential construction.
QUESTION: Are there any sectors that are not facing price pressures / labor shortages right now?
- Horticulture labour shortage
- Construction - labor shortage plus materials shortage
- Software - labor shortage
Quickest Lever government could do is postpone meaningless stimulatory building projects?
Knowing Labour's delivery record I think a postponement of any of their initiatives is unnecessary.
In IT we will have wage growth due to local demand but we will also see outsourcing get juiced again. I can still get development done in India for 50% of the day rate here and that gap is widening.
Indeed, outsourcing has a bad rep for good reasons, but time moves on and so we learn and change. Working with an off-shore team in an agile manner to have delivery occurring every two weeks manages the delivery risk and keeps the scope really manageable. There are still misses of course but I would have to miss half the time for it to cost me more and I am a long way from that.
Hi Jesse, I am lucky to have an Indian native as my dev lead and so he really helped qualify the vendors. We also used that short delivery window to make sure we had a delivery on time. Not that it's too related but I also worked a year in India myself so I am accustomed to the culture and ways.
With a clear approach to qualifying them (you will want to get formal on this, business reg, non-indian previous references with web-sites etc) and a small exposure, limited scope engagement model it can work well.
Brock.....
Yes.. wage price inflation gets them aggressive.
Their rhetoric goes into a threatening/punishment mode.
They perceive wage price inflation in a very negative way .... as a bad thing.
This is a stark contrast to their love of asset price inflation , and their oblivious blind eye to unintended bad consequences of excessive asset inflation.
My work place was looking for two senior applications managers, paying 240K+ (+17% super), they had 3 candidates and all three turned down the offer due to the booming mining sector.
Not sure what an 'apps manager' is but that's good coin. I suspect the role is not a gate-keeping desk body. BTW, Myfoot Bhompson is a great handle.
Specifically the survey shows that labour shortages are now the worst they've been in the history of the survey - going back to 1976, while cost and pricing pressures are rising.
Hmmmm...
We should thank the unemployed for their service. They've been used to control inflation
Not here they don't G, here we import reduced cost labour that keeps prices nice and easy.
What will drive the CPI up is the cost of resources, oil (which we are determined to make as costly to ourselves as possible) and imported manufactured goods. This is somewhat controlled due to our bond interest rates but this is the area that inflation will come through.
The one year rate is still trending down. Most of the seasoned investors I chat to, believe we are now in a long term low interest rate environment. It's the newbies who are freaking, they spend too much time listening to the mass media, bank economists and of course, the Labour Govt.
"(skilled) labour shortages"
Call me old-fashioned, but I understood the tsunami (hundreds of thousands)of immigrants over the last 2 or 3 decades was to fill skilled labour shortages and yet it obviously hasn't worked out.
The only way now to reduce the likes of house price inflation is to audit all immigrants that have arrived here over the past 3 decades to see if they are in the professed skilled work. If not, I suggest we pack them off to where they came from whether they have acquired residence or citizenship or not; this would be justified on account of their falsifying their immigration papers. This would apply to all immigration agents as well; with the consequence that all New Zealand-born agents who rorted the system would be banned from all immigration work and face such financial penalties that in total would be used to repatriate the rorting immigrants.
I think govt is about to review the entire immigration process. It should've been done a decade ago. The thing is, NZ is not prepared for people who are good at finding and abusing loopholes. I don't think there's enough staff to handle 90000 immigrants per annum (seen last year), let alone to investigate scams.
Pretty much everyone knows that a lot of ethnic restaurants and construction companies operate as visa factories, abusing the freshly imported workforce and violating employee rights in the process.
I agree. I think there's still a kind of hangover in the public service attitude from when NZ was a small, homogenous, tightly-knit place and trustworthiness was basically assumed. Our regulations are extraordinarily easy to skirt if you're willing to be a little dishonest, while being very onerous for the honest. Applies across a lot of spheres, not just immigration.
Shock, horror ...
https://www.rnz.co.nz/news/national/446303/papakura-liquor-store-pays-9…
It’s a good thing these migrant businesses owners are doing there bit to avoid the wage-inflation spiral.
Immigration just makes my head hurt lol but we are talking about a problem that has occurred and need to guard against it re-occurring.
We have a problem that occurred due to immigration being overtly used to keep wages down at the same time as tax take up. Beneficiaries have had some love recently but we have largely abandoned them in preference for importing low-wage replacements. Turns out that now we need highly skilled workers and we don't have them. We made weak efforts to incentivise short-term unemployed into skills training and now we have a productivity pulled-hamstring. No guesses for how this skills gap will be solved and no it does not involve training lol.
That is true, Banks have had almost a decade of saying say lock now before the rise and then, and then reducing rates. Lies lies damn lies.
But it is different this time as any further OCR cuts are more or less ineffective when the OCR is .25 of one percent. Any rise however from this base level has a steep curve on increasing what you pay. If the OCR became 1% that is a three fold increase from .25 percent. When rates are 8-10% (long term average) then an increase on .75% in more or less taken in stride.
What to do....popcorn.
It's a bit of a push to claim that the long term average is 8-10%
https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-mortgage-rates
what "Oil is doing" is fast going to cause something to break
Last time it climbed and climbed was pre the 08 crash ...
And the ceiling will be far lower than the $140 it got to then ...
the tipping point trend in each "ceiling" step down since says $80 is about as far as it will go
https://www.macrotrends.net/1369/crude-oil-price-history-chart
https://www.newshub.co.nz/home/money/2021/07/housing-return-of-fomo-to-…
For any meaningful solution FOMO has to be killed and for that government and RBNZ has to take step, wether the steps taken by them are effective or not is secondary, What is important is perception. To reduce FOMO perception that housing market is cooling and if it falls by few percentage ( though with 30% to 50% rise, fall of 2% or 5% is not much) - will help in change of perception otherwise fight over toilet paper and house will continue.
I think people forget this. Most of the chat here comes a cross like all the lending and credit increase was some accident. They deliberately let the breaks of for a reason. That reason was to Pump money into the economy to get us through a globs crises. So. Really, taking out a big mortgage.. Really its kind of like a public service..
Yip, as I said last week, unreliable shipping, shortage of materials, consents are a whole different ball game to completion. Throw in the shortage of skilled labour and there goes any catch up in housing supply.
Oh and if you are planning on being self indulgent in the near future, best get in now, as prices of anything imported are going to sky rocket.
labour shortages may be the worst since 1976 but wages and what they can buy are also historically low,if you get above the minimum and achieve a "living wage" it means you will never live in your own home,whereas home ownership in 1976 was achievable for those on an average income.
If you trawl through the RBNZ website they claim their changes to the OCR don't transmit into the economy for 9-18 months.
So they should have been raising rates already. Instead, they have sat back and watched the mother of all housing bubbles grow completely and totally beyond control.
Incompetent, blinkered fools. The medicine for inflation is going to be a bitter pill to swallow for many.
RBNZ has screwed the whole country with their loose Monetary policies. They follow the European and American banks. But there is a big difference in European and American population and debt levels. Those are highly developed economies. We have just started developing. This impact will be felt for next 2-3 generations.
If a wage spiral takes off everyone will be effected. In most cases employers will not be able to pay higher wages and thus we have stagflation which is the worst of the worst. This will drive whats left of young IT, medical, aged care, tradies and other important future tax payers to Aussie.
Options - raise interest rates immediately, OR reopen the borders to fill the holes accepting that Covid will cut loose and a bunch of our old folks will die before their time. Also accept that NZ would to be colonized a third time from India and China. You can bet once they control govt through the democratic process they will all vote to look after our no working meth addled population and settlement process with iwi. Yeah right...tui.
Australia has just announced it will wind back it's QE and start a tightening of its monetary policy settings. Given Australia has higher unemployment and currently on par GDP growth with NZ - there seems to be little excuse left for the RBNZ to hold its current position.
Pot of water on stove. Turn on heat and it warms up, then simmers. Nice rolling boil. Next minute it's splashing over the sides, water flowing everywhere, the level of water boils dry but still the heat is on, water turns to steam then the pot itself becomes the fuel then it catches the handle and that melts, acrid smoke, pot so hot can't touch it glowing red now, still the heat is on, melted bits look for other fuel source. Next minute the house burns down.
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