David Hargreaves says while inflation is finally heading in the right direction, there's still not enough evidence that the RBNZ's strenuous, interest rate hiking, efforts are going to be able to completely tame high prices in the short term

One could even say that most things aren't the result of one input, but instead just single points on a very long thread, being influenced by a wide range of external and internal factors, able to be manipulated, but never mastered by one fell swoop. 

Then again "money printer go brrrrr" rolls of the tongue better. 

re ... "This narrative about needing a higher unemployment rate makes no sense in my view. "

100%. This is a FALSE narrative.

It makes me sick and disgusted when it is parroted by people who should know better! 

How about the narrative changes so that the "owners" reduce their profits (i.e. prices) instead?

Why has no one thought of this?

Oh yeah .... Right. Profits for the 1% before people that make up other 99%.

Sharpen the guillotines people. We'll need them real soon. 

(If you don't have guillotine to sharpen. Stay tuned. IPO coming soon. [very, very evil grin])

"Inflation would subside more quickly if RBNZ dropped rates"

No it wouldn't. It would roar. But we'd opt to do as we always do, classify it as Capital Gains and not Inflation - and that, of course, is seen as good.

There will be no way out of this, no matter what solution any of us recommend, until the current driver of our economy - Speculation on Asset Prices backed by evermore Private Debt - has been driven into the smallest corner of our economy. Until that happens, expect a much higher OCR as the 'bad' RBNZ keeps losing ground.

(NB: Part of the problem is that the RBNZ fixes interest rates at all. Floating the currency yet keeping interest rates controlled makes little sense. The "But interest rates settings controls the Exchange Rate" argument is futility writ large in an economy of our miniscule size. Even the second-largest economy on the planet doesn't do that. They control both)

Great comment. I was thinking of writing something similar. You have not only stated your opinion but clearly explained the rationale around your thinking. 

or...higher interest rates will force sales.  Said properties will be purchased at much lower prices with much lower debt.  New owners have lower mortgage costs =  rents can go down.

You are focusing too much on costs and not the supply of money. Increasing interest rates dries up credit and the supply of money, when people have less to spend companies (and landlords) find it much harder to increase prices. It may not happen overnight but it will happen.

I can guarantee you that if the RBNZ dropped the OCR back to 0.25% tomorrow inflation would become much worse. 

Well said, my friend! It is impossible to overstate just how terrible NZ's monetary policy is.

re ... "RBNZ continually misdiagnose inflation as a high consumer demand phenomenon. They are wrong and it is costing us."

Key word? misdiagnose!

The fools at the RBNZ seem to be locked back in the 70s, 80s. 90s where most people had mortgages and most people were at working age. 

News flash RBNZ! Those days are well gone.

The OCR was a silly tool 20+ years ago and is patently silly - and destructive - now.

(Have I mentioned that the MPC and the RBNZ governor should be sacked and replaces?)

A timely reminder (for those that leveraged up in property or anything else) that everything that goes up must (eventually) come down. the higher something goes....   the further it will fall.

Houses, tulips, bitcoin...   history is our teacher. Not speeches from politicians and reserve banks.

For those that are investing for their family...  it is wise to learn from history and those that succeed in the long term (e.g. Mr Buffet...) as they definitely dont leverage up and invest in any single asset class.

Inflation is far from sorted - domestically or internationally. Putins blockade of ukraine wheat will drive food prices up again, as the economy starts to rise again fossil fuels will sort issues, ukraine war (and global conflicts) have a long way to play out, locally we have huge issues with economic imbalances...   its probably more likely than not that nz mortgage rates will go up a lot further than now to affect employment rates - and house prices thus likely have a long way further to fall

That said - opportunity knocks...  uncontrolled AI is finally delivering lots of wins, property class asset price falls means investment is flowing elsewhere, efficiency and marketing spend is growing rapidly. 

As always - as one bubble deflates others inflate - happy days!

re ... "I do think the only way inflation will come under control will be for unemployment to rise".

Sadly -  you have fallen victim to the neo-liberal con. (This happens when 'bank economists' are the only economists ever quoted.)

I.e. you have been fooled into believing this. (It's repetitively repeated propaganda so don't feel bad.)

Try another thought ... What say the "owners" reduce their demand for profits?

(i.e. they accept that their margins are lower for a while. Where is it written into law they have to make 7% or more each year?)

Boring!

https://www.oecd.org/newsroom/consumer-prices-oecd-updated-6-june-2023…,(Figures%201%20and%203).

Well the alternative is National who intend on pulling the hand brake on spending, we’d be more likely to have a deflationary recession if they made any meaningful cuts now. But they’ve backed their spending cuts with cuts to PAYE. So we’re in the same deficit but fewer employed, so we can each have a few pennies a week.

 

Also, targeting benefits for property investors, which is all well and good, but in a recession where the government is trying to pull money out of the system and cut that deficit down, how likely are banks to lend? We’ll see those low rates again but high risk as there are fewer buyers. Construction will still grind to a halt.

And not to not to mention, many people will be trying to cash up and leave, taking large sums of money out of the country and leaving us with what? The same old houses we already had.

Both major parties are unimaginable. 

 

Anyway, per capita GDP is down, even with the deficit. Those cuts you mentioned won’t be enough to bring down inflation. The next big influence is energy and transport.

That's small change compared to the nearly $600 billion that the banks have created and lent into the economy.

Labour caused worldwide inflation by buying back guns and investigating a harbour crossing?

Thats a minimum of $1.5b just for the new bureaucrats. Isn't it amazing what happens to the economy and inflation when you remove 15,000 professionals from the private sector.

Is it though? While it imposes costs on production, at the the same time it forces price increases to be limited due to falling ability of customers to spend.

Is it? I find this question interesting. 

Raising rates, I'd assume, would displace spending. More income going on interest costs, necessitating less going elsewhere. That's the theory. It assumes that the money going into extra interest payments is not recycled back into demand for actual goods and services. I'd be interested to know if there's any way of actually measuring that. If the money is 'eaten' by the rate rise, that's a plausible mechanism for deflation. If it is, in practice, recycled (through extra bank profit, perhaps?) then maybe not.

As for the argument that it causes inflation by increasing costs, I guess that would depend on the current margins of the industry in question and the state of competition. I can see why it shouldn't cause inflation, in a theoretical frictionless monopoly-free market, but of course reality is very different, so maybe it is. I'd like to see some real empirical judgments on this.

And yet central banks were cutting rates the last 20 years wondering why they couldn't generate any inflation!

(because they were decreasing interest expense costs for business and households each time they dropped cash rates - and reduce the input costs to produce goods and services in the economy = less pressure on CPI)

(and in the process of doing this they have created very dangerous debt/asset bubbles by allowing too much debt to be extended at low OCR settings - so the problem isn't raising rates now - it was dropping rates GFC - 2021)

Central banks were created because of a series of colossal booms and busts in the 1800's, they're there for a very good reason, only goldbugs don't think so. 

re .. "and it gets harder to control every time central banks intervene to prevent free markets from correcting financial/economic imbalances."

ROTFLMAO ... Seriously? ... "to prevent free markets from correcting financial/economic imbalances" ... Wow! Just Wow!

Boardrooms all over the world know that they can rely on central banks to save them - and their shareholders - every time. 

It "gets harder to control every time" not because central banks intervene but because they HAVE TOO.

(As an aside - this is a problem in NZ too - but since covid, the RBNZ has caused almost all the issues with pre-historic monetary policy that simply beggars belief!)

Which government spending would you choose to restrain? 

Completely agree, the yearly figure is mostly old data (even the latest quarter is old data!).

But because that is positive news no one else will agree. 

Technically you need to compound your annualised rates but I doubt it makes much difference...

Yes but that ignores seasonal changes, and timely influences, such as the RUC back on, fuel tax, public transport. Things will get tight pretty quick, then the annualised data will look messy at the other end