The Reserve Bank (RBNZ) now seems set fair to do what I believe has been its unstated wish - to keep the Official Cash Rate (OCR) on hold at least till after the October 14 election and avoid being caught up in political games.
For the RBNZ then, it will most definitely be in the oft-quoted words of the central bank's officials, 'watch, worry and wait' time.
The labour market figures released on Wednesday were a case of 'some good, some not-so-good' for the RBNZ.
There's a number of wage increase measures in the suite of labour market figures - some of these came in under what the RBNZ picked. However, the figure I follow, the private sector annual increase in hourly wages came in a little hotter than the RBNZ picked - the actual figure was 7.7% versus the RBNZ pick of 7.6%.
Employment growth came in way hotter than the RBNZ - and others - picked at 1.0% for the June quarter versus the RBNZ's pick of 0.6%.
But unemployment rose to 3.6% from 3.4% and that was higher than the RBNZ's (and market average) pick of 3.5%.
Following on from the June quarter Consumers Price Index annual rate of inflation of 6.0% (versus an RBNZ pick of 6.1%) this means the most recent key economic data are sufficiently in line with what the RBNZ thought the situation was back in May. It was in May that the central bank decided to raise the OCR by another 25 points to 5.5% - but also to signal that it was now pushing the 'pause' button on any more hikes.
It was a bold call that could have blown up in the RBNZ's face if the subsequent economic data had gone against it.
As it was the CPI June quarter data produced domestically-generated inflation (annual rate 6.6% versus RBNZ pick of 6.3%) that was still worryingly hot. And that super-strong (+1.0%) employment number in the June quarter, along with still-hot wage inflation will not be giving great comfort.
There's nothing in the data at this stage though that goes against the RBNZ's forward scenario of continuing cooling inflation (it's picking 5.7% annual 'headline' inflation for the September quarter) and a fairly rapid rise in jobless numbers (unemployment picked to be 4.1% for the September quarter).
The RBNZ's next OCR review is on Wednesday, August 16. The only potential obstacle remaining in the road between now and then is the RBNZ's own Survey of Expectations, which comes out on August 9. This is where forecasters and business leaders give their view of where inflation will be in future, with the most watched figure being for two years ahead. The important thing about this survey is not whether the picks about the level of future inflation are right or not (they won't be, they never are). The key thing is the survey acts, in effect, as a market view of whether the RBNZ is on top of inflation or not.
So, to cut a long story short, the RBNZ will be looking for this survey to show a reduction in the expected future rate of inflation. And I think it will, though not necessarily by as much as maybe the RBNZ would hope given how 'sticky' that domestic inflation is looking.
But assuming there's no real nasties in that survey then the RBNZ has a clear path to 'do nothing' again at the OCR review a week later. The August 16 OCR review is accompanied by the full Monetary Policy Statement, so we'll be getting a series of updated forecasts from the RBNZ - including its forecast of the future level of the OCR, which as ever will be intensely scrutinised.
Then the next OCR review is on October 4 - a week and a half from the election. We can most definitely put the 'do nothing' tag on that right now, I think. Aside from the fact that it would be inviting all kinds of trouble to hike interest rates when our political great and good are in full election panic mode, there actually will be no reason to do so anyway.
There's only one key economic release remaining now before the election and that's the June quarter GDP figures on September 21. You might recall that by virtue of the March quarter GDP figure coming in just negative, at -0.1%, we 'officially' went into recession through recording two consecutive quarters of GDP shrinkage.
The only way the June quarter GDP figures could even mildly perturb the RBNZ would be if they came out unexpectedly hot, which nobody thinks they will. In any case the GDP figures are always pretty much old news when they come out. The politicians will likely get very excited of course if the GDP figure is another negative one, but that's about as far as it might go.
For the record, I'm still confidently expecting that we'll see an upward revision in the March quarter figure and we won't actually be in recession at all! How will opposition MPs hide their disappointment! Watch this space.
All of which means the RBNZ should be able to do its watch, worry and wait - emphasis on the 'wait' - right through the election period.
And after the election?
Yeah, well interesting. The next CPI release for the September quarter comes out on October 17 - just three days after the election. The next labour market figures come out on November 1.
Remember, the RBNZ is looking for a further slight fall in inflation - and a very sizeable rise in unemployment.
If either or both of those economic data releases do throw up nasty surprises, then the final OCR review of the year on November 29 would become very much 'live'.
It has to be said that based on the heat still visible in the labour market from the June quarter figures, it's the September quarter labour market figures that could be most likely to throw the proverbial spanner in the works. The RBNZ is expecting a very rapid cooling in the labour market and very fast rise in unemployment.
Look, the RBNZ might be right. The big wave of imported labour we've seen come into the country so far this year has clearly had a big impact in terms of the rapid filling of jobs - with presumably many of these jobs not able to be filled while the borders were shut.
The RBNZ is, I think, counting on that process of job vacancy filling now being just about complete - and that there will be a rapid cooling of labour market conditions from here.
Whether the central bank is right or not will be a key determinant of whether it can remain in 'watch, worry and wait' mode over the three month summer break, or whether it may yet need to give us an unwanted early Christmas present - another OCR hike.
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32 Comments
Inflation still under pressure. Govt servants in the form of nurses and teachers having a huge update (deserved). All Health staff just got paid for incorrectly allocated holiday pay from the last ten years, heard cases of $40-50k turning up for the specialists, so that's cost NZ billions. Noise this week of govt coffer in a complete mess. And educated tax paying kiwis increasingly exporting themselves to Straya.
USD rating downgrage, EU and US increasing their OCR, NZ doller getting squeezed down and oil back up again. All adds to to more inflation pressure on imported everything.
According have to suggest leaving the ocr unchanged is a mistake. Yes the speculative who fixed short because Tony said so will complain the sky is falling. They are by far the minority.
Hold em or fold em for the over leveraged.
OCR is staying where it is because of the election. The OCR may stay fixed but the banks will still do whatever they like. This is all just can kicking until after Christmas and make no mistake it could all still get very ugly in early 2024. Labour is just handing the poison chalice to National, given a choice they should really just hand it back and make them drink it, but then we all would and it ain't no Kool aide.
"OCR is staying where it is because of the election"
And here we are told the RBNZ is an independent entity. Why would the election even factor into their thinking if they are really independent? To them, it should not matter one bit if there is an election 3 months away, or 3 years away.
Their focus should be on the data, not the politics.
Orrs real error was to low for two long at the behest of global debt interests, following international leads. Now those same interests are rising and want those that fell into the debt trap to pay up, why would he not follow the same pattern?
Rates higher for longer.
The pay correction for Holiday Act errors since 2010 is estimated to cost $1.4b (approx $5000 each for 240000 Health NZ employees). Some are being paid out 10s of thousands, including nurses. The payments are being spread over a year so not a sudden effect. Many staff are using the payments as set up money to move to Aus.
(Of note the correction process has involved Ernst and Young going through every single line of leave on payslips for all staff since 2010. It’s taken years. What would you estimated the commission to be - 5% of all errors found - $70m?)
Looks like some are already paying 10% Interest Rates.
"He said, when the banks were competing hard for business, some had offered low-deposit borrowers their special rates, plus the margin. But then when they came to refix, the bank’s appetite to offer the special was gone and they had to settle for a standard rate."
“Fast forward to where we are now and sadly interest rates have increased and with the second-tier providers if they were on a fixed rate at the time they are coming off with interest rates being in the late 9%, early 10% range. This is indeed causing financial stress particularly if they are on principal and interest based lending."
https://www.stuff.co.nz/business/money/300941816/the-home-loan-borrower…
10% Interest Rates This Year, GUARANTEED !!!
From an international perspective on central banks/interest rates, here are Ray Dalio's latest thoughts:
'Over the near term, if there isn’t a big supply/demand imbalance in which the amount of government debt sold overwhelms the amount of demand for these debt assets, it appears that a period of tolerably slow growth and tolerably high inflation (a mild stagflation) is most likely. Of course, there is a significant range of uncertainty around that because what we don’t know is greater than what we do know about a lot of influences (e.g., politics, geopolitics, the environment, and technology’s impact). However, over the long term, from looking at history and penciling out what is likely, it is virtually certain that central governments’ deficits will be large, and it is highly probable that they will grow at an increasing rate as the increasing debt service costs plus increasing other budget costs compound upward, and, as they increase, governments will need to sell more debt, so there will be a self-reinforcing debt spiral that will lead to market-imposed debt limits while central banks will be forced to print more money and buy more debt as they experience losses and deteriorating balance sheets'
https://www.linkedin.com/pulse/whats-happening-economy-great-wealth-tra…
"While central banks have had significant losses, they are not yet at the point of these losses affecting monetary policy, but it is not inconceivable that they will follow the classic late big cycle dynamic, which is also consistent with not unreasonable projections that are deeply concerning as to what might happen. The concerning scenario that could occur if deficits compound so that there is more supply of government bonds than there is demand is that either interest rates will rise or central banks will have to buy more to try to hold them down, but in either case central banks’ losses and their negative net worths reach magnitudes that could have adverse effects on monetary policies directly (because they have to monetize their own and the central governments’ losses) and/or indirectly (because such losses could become political issues)"
Yep not sure why people here are surprised and no more rises at least until the election. Doesn't mean however they are right, its just they are sticking to their guns. A few people on here said 2023 was going to be bad, how many think that 2024 could be even worse ?
I'm one of the voices that predicted that something will "break" in the second half of 2023, but yes, I certainly think 2024 will be worse than 2023. I remember thinking in 2006, that things will turn pear shaped any time, well as we know, it took another two years until something (US mortgage and financial markets) finally "broke".
Yvil, is thinking outside the square that impossible/unpopular for some here in Interest - (you perhaps)? Overseas market forces (Fed Reserve), their massive borrowing schedule and persistent inflation will more than likely be the decider of how many more rises the RBNZ deliver and when. Our currency is now beginning to look vulnerable. How easy it would be for us to start importing inflation especially if the Government of the day continues to borrow and spend like they are currently.
LOL. Does anybody really think that the puppet Orr will raise the OCR just a few days before the elections, so to damage the already slim prospects of his masters currently still in Government? Come on...
what happens after the elections is, of course, a completely different story, especially if the new Government changes the RBNZ remit as promised
Another perspective from the US, but no doubt this will impact global inflation/interest rates/RBNZ if the view is correct. This time from Bill Ackman:
"I have been surprised how low US long-term rates have remained in light of structural changes that are likely to lead to higher levels of long-term inflation including de-globalization, higher defense costs, the energy transition, growing entitlements, and the greater bargaining power of workers. As a result, I would be very surprised if we don’t find ourselves in a world with persistent ~3% inflation. From a supply/demand perspective, long-term Treasurys (T) also look overbought. With $32 trillion of debt and large deficits as far as the eye can see and higher refi rates, an increasing supply of T is assured. When you couple new issuance with QT, it is hard to imagine how the market absorbs such a large increase in supply without materially higher rates"
https://twitter.com/BillAckman/status/1686906272937869312?s=20
Note that Ackman is now shorting the 10 year UST and is vocal about that later on in his tweet.
Slightly different to the "Hell is coming" warning prior to the covid crash - which he made a few billion from.
But worth considering at least that he might be right again.
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