Inflation's pleasant shock! The OCR hikes may be over

Economy / analysis

Inflation has fallen by far more than anybody expected, despite surging fuel costs, which suggests the Reserve Bank's interest rate rises of the recent past are working

17th Oct 23, 11:22am by David Hargreaves

Source: 123rf.com

Rest easy folks. It looks like ‘Santa’ Orr from the Reserve Bank won’t be slipping an Official Cash Rate hike into the Christmas stockings this year.

And it could be that in fact we've now seen the last of the rate hikes in this interest rate cycle.

Yes, inflation has, for once in the post-Covid environment in New Zealand behaved itself. In fact better than that.

The 5.6% annual inflation figure as at the September quarter, down from 6.0% as of June is much lower than any forecasts. Economists had a range of around 5.8% to 6.1% while the RBNZ forecast 6.0%.

But the 'headline' main inflation figure is not really the important story.

The key thing is the 'non-tradable' inflation figure, effectively domestically sourced inflation. That is the one the RBNZ can control.

The RBNZ had forecast the domestic inflation to fall from 6.6% as of June to 6.2%.

The actual figure has come in at 6.3%.

Okay, that's technically a 'miss' for the RBNZ, but it's close enough to give our central bank a lot of confidence that things are now tracking in the right direction.

So, with Tuesday’s figure for domestically sourced inflation falling pretty much in line with what the RBNZ had outlined in its last detailed forecasts in the August Monetary Policy Statement, the pressure goes off the RBNZ to consider a rate hike at its last OCR review for the year on November 29.

Remember that in the corresponding review coming up to a year ago, RBNZ Governor Orr and his fellow merry Monetary Policy Committee members smacked us with a 75-point jump to the OCR. Merry Christmas. Orr followed that up with comments to Parliament’s Finance and Expenditure Committee that the RBNZ was explicitly seeking to engineer a recession.

Well, that recession still hasn’t arrived, but these latest inflation figures do suggest that sufficient heat is coming out of the economy that the RBNZ can maintain its ‘on hold’ stance that it took up after raising the OCR in May to 5.5%, the highest level it has been at since 2008.

Indeed, the decline in domestically generated inflation is sufficient that it now raises the strong possibility that 5.5% will be the peak of this interest rate cycle.

After that November 29 meeting the RBNZ doesn’t meet again to consider the OCR till February 28 next year. The summer gap is a long one. I have complained about this many times in the past.

It means the RBNZ has to be very confident it has all its ducks in a row heading into the summer break - because if economic events get away on it during that three months it then has a bit of catching up to do.

The RBNZ took out insurance last year by hitting us with that 75-point hike before the break, ensuring that matters were in control over summer.

What the latest inflation developments mean is that the RBNZ can now sit back and somewhat relax, in what it terms as its ‘watch, worry and wait’ mode and see what develops over summer.

A change in Government is obviously a wild card, but to this point economists are seeing reasonably ‘balanced’ risks around the impact of the new Government on inflation. Very early thoughts are that fiscal policy will be tighter - so something of a dampener on inflation - but housing policies are likely to be inflationary.

Either way Governments never tend to move as quickly as they might suggest they will, so the summer break could be a comfortable one for the RBNZ.

It then becomes a question of, if we are deciding that 5.5% is the peak for the OCR, when will it fall? The RBNZ’s most recent forecast has the OCR not reducing till early 2025.

This inflation news is an unexpected present for the incoming Government.

And it may well be an unexpected gift for the pre-Christmas housing market.

Consumer prices index

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Source: Statistics NZ

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83 Comments

by Iceman | 17th Oct 23, 12:58pm 1697500689

Grabs popcorn, awaits gloomy outlook from the DGMs. “this time it’s different” “another 20% crash incoming” "10% by Christmas"

PS - I forgot the main one “Guaranteed”

by Pragmatist | 17th Oct 23, 11:53am 1697496831

Buttery, or salty?.. Oh wait, its the DGMs that are Salty :)

by rastus1 | 17th Oct 23, 1:17pm 1697501845

by rastus1 | 17th Oct 23, 1:17pm 1697501834

Biggest driver of inflation is oil. So you think oil prices are going to hold?

Good luck with that.

by Colin Cameron | 17th Oct 23, 2:45pm 1697507137

Yeah iceman old HB has disappeared I was hoping for that 10 percent guarantee as well

by redcows1 | 17th Oct 23, 11:38am 1697495895

Thank you labour

lmfao

by Pa1nter | 17th Oct 23, 11:40am 1697496049

What the hell am I going to do with this pallet of "higher for longer" t-shirts I bought?

Spose maybe I could sell them at a rave.

by Iceman | 17th Oct 23, 11:43am 1697496230

Haha love it!

by Blackbeard | 17th Oct 23, 1:24pm 1697502259

Cross out the higher and put harder, sell them to a sex shop.

by Mr_Jolly | 17th Oct 23, 2:53pm 1697507609

"Higher for longer" can now refer to house prices :D

by Piggy | 17th Oct 23, 11:41am 1697496110

Geez the commentary and hype on this site was well off leading up to this result. The article the other day didn't even contemplate the idea of the figure coming in below expectations - perhaps there is a real scenario of cuts in the short-term. The economists again failed with their predictions.

Instead of 'higher for longer' perhaps it is more 'lower much quicker'.

by Pragmatist | 17th Oct 23, 11:56am 1697496966

Now that you have a silly slogan, you just need to spam it on every article 20 times, and slip the word gauranteed in. :)

by Pa1nter | 17th Oct 23, 11:58am 1697497096

Do the math!

by ChrisOfNoFame | 17th Oct 23, 2:18pm 1697505518

Small correction ... "The bank economists again failed with their public predictions."

Lots of non-bank economists - that we seldom hear from - were bang on the money - including some on this web site.

And I expect that at least a few bank economists got it right but they weren't allowed to publicly publish what they surmised as the "higher for longer" mantra had to be maintained so people fixed at higher rates for longer periods. We'll know soon as there should be movement in swaps over the next month or so.

by Nifty1 | 17th Oct 23, 12:10pm 1697497826

Retired Poppy has left the chat...

by Pa1nter | 17th Oct 23, 12:11pm 1697497894

He's transitioning from insufferable stirrer to being open minded and gracious.

by Retired-Poppy | 17th Oct 23, 3:17pm 1697509044

Like I said, thanks for the laughs :) You're sounding obsessed by micro reading everything I post! Try not to over-think because you'll never get that time back!

by Flying high | 17th Oct 23, 8:21pm 1697527294

I just wasted 0.5 seconds then

Now that the tables are turned, there are quite a few others who have sadly given up posting.

by General Comment | 17th Oct 23, 3:11pm 1697508701

I dunno, if s/he's locked in a juicy 3 year 6.1% TD with ASB s/he could be feeling pretty smug right now.

by Retired-Poppy | 17th Oct 23, 3:15pm 1697508903

Thanks. It's 12-months @ 6.3% with Rabo. Pa1nter will get wound up shorty, labelling it the most lazy means of investment on the planet....

Apparently, he prefers to pay 8% net. That's money working hard for you - lol!

by Pa1nter | 17th Oct 23, 6:10pm 1697519428

I actually prefer to make something like 30-50% from anything I invest in, minimum. Otherwise I'll just spend the money enjoying myself.

But we are comparing retail investing with active economic pursuits.

by Hastings | 17th Oct 23, 12:18pm 1697498310

Who can predict anything in these times?

by Iceman | 17th Oct 23, 12:20pm 1697498404

The DGMs can. They’re seldom right but don’t try telling them that.

by ChrisOfNoFame | 17th Oct 23, 2:20pm 1697505622

A better observation is: who can be trusted when making economic predictions?

by BigOldWeapon | 17th Oct 23, 12:26pm 1697498819

Really confused by the comments... Without reading the article, anyone would think inflation has been beaten. The reality is our domestic inflation is still at 6.3% which, while lower than last quarter, is still extremely high. Nothing here that would indicate a drop in interest rates any time soon, although a halt on rate hikes seems plausible. Does that make me a DGM?

by rjn1 | 17th Oct 23, 12:35pm 1697499314

No it makes you a rational analyst - no place for you here ;)

I would add that, although RBNZ can't directly affect the tradable component of inflation, it's the headline number that impacts wage demands. A significant drop in the CPI coupled with a less-tight job market should continue to do the job.

by ChrisOfNoFame | 17th Oct 23, 2:21pm 1697505687

Bang on the money!

by Independent_Observer | 17th Oct 23, 12:50pm 1697500225

People who overextended with housing debt are getting carried away because they need inflation and interest rates back at 2% pronto for their own financial gain/survival.

This need/desire warps their ability to see the world clearly.

Even if inflation is at 2% next quarter, who says interest rates are coming down? We need deflation for that to happen, but deflation is highly destructive to employment and asset prices.

by BigOldWeapon | 17th Oct 23, 12:53pm 1697500391

Exactly. If the economy performs well (GDP growth, low unemployment, low inflation) then what incentive is there for RBNZ to lower rates?

by Independent_Observer | 17th Oct 23, 1:01pm 1697500882

They want to protect the NZD - so none for now unless we are seeing deflation/rising unemployment.

by Iceman | 17th Oct 23, 12:56pm 1697500605

Who said they need rates back at 2%? I think most will be happy with 5.

Agree with deflation, but my point is that people who guaranteed 10% by Christmas are dead wrong.

by Independent_Observer | 17th Oct 23, 1:16pm 1697501803

The self reflection for you and your housing portfolio (an ego attachment) would be to meditate for a while and ask yourself (your ego) ‘would falling interest rates next week be good for ME?’

And you would say yes and then you would become aware of an unconscious bias. Your hatred of DGMs might also then subside a little even though you find them extremely threatening to your own vested financial interest (ie your ego).

Then again if your entire existence/world view is based upon the value of your housing portfolio then meditation on such topics might be unbearably painful.

by Pa1nter | 17th Oct 23, 1:47pm 1697503674

I think the problem is higher rates generally works against most people's best interests, except those with substantive cash reserves.

by Independent_Observer | 17th Oct 23, 2:01pm 1697504481

Agree with you - but we've continually rewarded greed/risk and not prudence. (bailing out people who have taken on too much debt).

And it is prudent people that I know who are currently sitting with high cash reserves and are doing very well for themselves in the current context. They weren't greedy and just saved instead of loading up with risk.

Should we punish the prudent to reward the greed/risk takers?

I don't have the answer to that as it becomes a moral/ethical discussion which could become very complicated and emotive. And I kknow here are innocent people caught up in this - e.g. might have purchased a first home the last few years, but there are others who have loaded up with rental portfolios expecting low rates forever. Rock/hard place.

by Pa1nter | 17th Oct 23, 2:11pm 1697505113

Agreed we have created an extreme level of moral hazard. The problem is your demarcation point appears to be landlords vs anyone else, whereas it would seem like the consumer will be bailed out, no matter what. We will see that happen in the US economy.

Prudency at some level is useful to ones approach, but unless you were born lucky, you have to engage some level of risk to return a worthwhile result. Not just for housing, but any commercial endeavour.

by Independent_Observer | 17th Oct 23, 2:41pm 1697506886

But as you say we have created an extreme level of moral hazard so my argument is that we have gone too far in reward risk over prudence. That isn't intelligent behaviour and it creates an environment where people believe there is no risk at all and you end up with people taking stupid punts assuming they will always be bailed out (i.e. where we find ourselves today).

by Averageman | 17th Oct 23, 2:55pm 1697507743

Woah. Did one of the PROPaganderists just acknowledge that the tax rinse debt stacking game is a "moral hazard".

Never saw that coming.

by Pa1nter | 17th Oct 23, 5:54pm 1697518462

The whole system is moral hazard.

Also again, not a property spruiker, I am far more vested in productive activity. Which is actually more exposed to higher interest rates and economic downturn than property, because the last thing people tend to do is sell their house, far after they stop doing all other sorts of things in the economy. This is why we are currently seeing parts of the economy that aren't construction being impacted more negatively.

by KH | 17th Oct 23, 2:42pm 1697506924

The problem being we are a nation of spenders and borrowers rather than having assets. We need to change that to the other way around.

by Independent_Observer | 17th Oct 23, 2:46pm 1697507204

Savings = future investment

What we are currently doing is gambling with debt (i.e. using debt as an asset instead of a liablity that it really is) and using funny money (QE to cover over the cracks in the system - it is insane in my opinion.

by Chaosinflesh | 17th Oct 23, 7:29pm 1697524173

That's because we keep targeting a positive inflation target - to ensure that the best time to spend any money you have is now, and if you don't have it, borrow it! This has led to a world addicted to debt that relies on continually increasing prices to stay afloat.

by Colin Cameron | 18th Oct 23, 7:39am 1697567966

But remeber a couple of yrs back the Orr stated we need to be out there spending to keep the economy going. I agree with you but when you have so called leaders of your economy encouraging you to spend once it becomes a habit for alot of people it's hard to stop

by Iceman | 17th Oct 23, 1:48pm 1697503725

Ah, your true feelings surface.

So much judgement, so much time spent analysing other's existences. You're a champ mate.

by Independent_Observer | 17th Oct 23, 1:56pm 1697504165

Thank you and I wish you well on your path to riches via property investment.

Just don't let it destroy your soul in the process.

by Pa1nter | 17th Oct 23, 1:58pm 1697504309

Imagine if someone could both turn a profit and be decent hearted at the same time.

Or be broke and not a nice person.

by Independent_Observer | 17th Oct 23, 2:03pm 1697504618

Some means of profit benefit humanity more than others.

by Pa1nter | 17th Oct 23, 2:07pm 1697504860

The ultimate human benefits don't work on a P&L ledger. Well, those not related to objective materialism anyway.

by rjn1 | 17th Oct 23, 2:10pm 1697505019

Even if inflation is at 2% next quarter, who says interest rates are coming down? We need deflation for that to happen

I'm sorry, but you're showing a lack of understanding of the mechanics of inflation targeting. The rate of change (second derivative of prices) is important, and as inflation nears the target, interest rates must be decreased to prevent an overshoot, ideally arriving at or about the mythical neutral rate as we taper off near the target. Make no mistake, rates WILL come down. It may happen much earlier than you think.

by Independent_Observer | 17th Oct 23, 2:33pm 1697506393

"I'm sorry, but you're showing a lack of understanding of the mechanics of inflation targeting"

It would appear that everyone has a lack of understanding on this topic - including the experts! Otherwise we wouldn't be in the current situation with inflation outside the mandated band for years (after being assured it was transitory). If you are an expert on the topic, which you appear to be claiming to be, and I know the experts don't know what they are talking about (because of their track record), then I'm inclined to ignore your view - please don't be offended.

You might be right and deflation is just around the corner - it could be and rates could come down (this is possible). I'm just not certain of that because of all of the variables at play. Thinking oil prices etc that central banks don't have control over.

by rjn1 | 17th Oct 23, 4:18pm 1697512685

Inflation targeting using the OCR, a tool invented by our very own central bank, has proven to be an extremely good means of keeping inflation low and stable. I'm really not sure what you're on about tbh.

by Independent_Observer | 17th Oct 23, 5:20pm 1697516450

Is that why inflation is at 6%?

by rjn1 | 18th Oct 23, 8:16am 1697570191

No, that's because the rules of inflation targeting weren't adhered to and excess liquidity was pumped into the system.

by Colin Cameron | 17th Oct 23, 2:52pm 1697507549

Yes and an economist by the name of Tony Alexander was saying this while a lot on here were knocking him maybe just maybe he might be right then what will these people have to say then

by Independent_Observer | 17th Oct 23, 3:10pm 1697508645

Tony Alexander has said a lot of things because he is paid to by groups that benefit from house prices going up.

If that makes him independent, then I can walk on water and turn water into wine.

by CR1980 | 18th Oct 23, 5:38pm 1697603923

Tony Alexander talks the housing market up. He turns all data to say house prices are about to rise. I wish the housing market would be dead for long enough to make people like him go quiet

by Chaosinflesh | 17th Oct 23, 7:36pm 1697524588

You seem to have missed the bit where the rate of change of the adjustment also depends on the rate of change of prices - so as inflation gets closer to its target, the adjustments also become smaller - not simply get cut down into the floor.

It's not economics, it's control theory, and any mechanical/electrical engineer past their 3rd year maths paper could tell you that.

That's assuming we're not currently running off on the unstable side of s|z-space - where we would expect to see wild swings and overcorrections galore.

by ChrisOfNoFame | 17th Oct 23, 2:25pm 1697505910

re ... "Even if inflation is at 2% next quarter, who says interest rates are coming down? We need deflation for that to happen, but deflation is highly destructive to employment and asset prices. "

Um. No. Factually incorrect.

If deflation became entrenched (don't worry, it won't) then we'd have negative inflation rates.

For inflation to be at 2% we'd need prices rises to be limited to just 2%.

by Independent_Observer | 17th Oct 23, 2:38pm 1697506686

I was suggesting above that if inflation is flat at 2% next quarter (ie not deflationary) then there are no need for interest rate cuts.

But that if we had deflation (i.e. falling prices and a negative inflation rate), then we would have a case for falling interest rates.

Perhaps my wording was misleading (apologies).

by GetFeeling | 17th Oct 23, 4:21pm 1697512902

re ... "I was suggesting above that if inflation is flat at 2% next quarter (ie not deflationary) then there are no need for interest rate cuts."

Interesting.

We'll know after Christmas when retails sales figures are in.

If they're "normal" (they won't be) then perhaps food for thought.

by timbob | 17th Oct 23, 6:22pm 1697520139

If we have inflation flat at 2% next quarter, we can hold the OCR at 5.5%. And hey presto there's our neutral OCR rate. The chances of 5.5% being deflationary are slim in my opinion.

by starrider | 18th Oct 23, 9:14am 1697573688

SHHHHHH!! Don't spoil the party for all the spruikers, they think the property market is going to the MOON!! Let them have their little party, they had almost run out of hopium and only just managed to make it to the election. They can't give up now!

Reality check - higher for longer. No such thing as a soft landing. Follow the Fed etc etc.

by Small Kev | 17th Oct 23, 12:33pm 1697499217

Mortgage wars after new years.

by ChrisOfNoFame | 17th Oct 23, 2:30pm 1697506223

For selected borrowers only.

The banks will keep their public rates ... and automated renewal rates ... as high as they can for long as they can.

Only then will we see mortgage wars. Maybe late '24?

(Take the hint about automated renewal rates. Pick up the phone and demand better. If you don't get better, shop around! Refinancing is easy nowadays.)

by Zwifter | 17th Oct 23, 12:53pm 1697500430

Inflation at least twice what it needs to be, how long do we put up with it until another rate hike ? Basically the RBNZ have already maxed out the OCR so the wait and see is going to take what another 6 months at least ?

by Independent_Observer | 17th Oct 23, 12:59pm 1697500798

It is possible we see no meaningful fall in interest rates for decades to come.

See the history of interest rates over the past centuries - what we have just lived through is an extreme anomaly.

by rjn1 | 17th Oct 23, 2:13pm 1697505208

It may be possible, but it's highly improbable. The rate of change is negative, if rates are kept where they are we'll spiral into deflation.

by Independent_Observer | 17th Oct 23, 2:44pm 1697507071

Do you have a crystal ball on where oil prices are going and what the US is going to do with the USD?

I don't disagree with you on this - I just don't see rates being dropped back to 0% in the near future (if ever). They might come down 1-2% to steady the ship if unemployment starts rising and we get back into the mandated band. But I still see a lot of inflationary forces ahead and it appears we've broken the 40 year cycle of falling rates (see US 10 year yield).

by rjn1 | 17th Oct 23, 4:29pm 1697513357

I don't see rates going back to 0% either without a massive negative shock, but there's clearly 'meaningful falls' that are probable in the near future given the restrictive setting at present, hence my confidence in disagreeing with your statement. I don't work with crystal balls, I work with weighted probabilities.

It's really not that complicated. Economy overheated/capacity constraints - rates above neutral to restrain, economy humming along with a bit of slack - neutral rates, economy shrinking/significant excess capacity - rates below neutral to provide stimulus. As I mentioned above, rate of change is also important, think steering a big ship.

Granted, the neutral rate is higher than it was, but likely only in the order of 0.5-1%.

by timbob | 17th Oct 23, 6:17pm 1697519846

You mean prices for good and services might come down to where they were last year? And that is bad how?

by Colin Cameron | 17th Oct 23, 2:54pm 1697507665

Also the pressure from Willis onto Orr and if he wants his well payed job we may see rate drops very soon didn't TA say this

by ryanjames | 17th Oct 23, 1:39pm 1697503178

Wait, this isn't what was in "the scrolls" was it? 10% rates by end of 2023 GUARANTEED wasn't it?

by Colin Cameron | 17th Oct 23, 2:56pm 1697507770

Yep Ryan been looking for Hawkes Bay to comment but he/she seem to be N/A would love to see what they would say on the matter

by Yvil | 17th Oct 23, 8:53pm 1697529191

They would probably claim that credit card interest rates are well above 10% so they were right!

by rjn1 | 17th Oct 23, 4:49pm 1697514599

What an unfortunate name.

by ChrisOfNoFame | 17th Oct 23, 2:09pm 1697504966

re ... "Indeed, the decline in domestically generated inflation is sufficient that it now raises the strong possibility that 5.5% will be the peak of this interest rate cycle."

Or maybe not.

I say this because there are many older people in NZ with significant wealth (and no personal mortgages) that have, up until now, closed their wallets. With a change in government, especially one that is so very friendly to property "investment", it is likely these people will open their wallets and go hunting for residential properties. Yes, property prices could fully reverse their downwards trend. This, given how our CPI is constructed, won't be hugely inflationary. But the purchase price is just a small part of the story. These new "investments" will attract a whole heap of hitherto unaccounted for economic activity.

The RBNZ may need to raise again to ensure the message has been heeded and Nov 29th would be the best time to do this before the chattering class head into Christmas BBQ season where property is discussed ad nauseam.

(Or they can pull finger and get DTIs in. Sadly, I don't think they'll have the time. And political pressure may even result in DTIs being scrapped.)

by KH | 17th Oct 23, 2:47pm 1697507240

Errrh no Chris. The business model of 'residential investment' was capital gain. That is far from assured and worse there is potential for downside yet. Either way there certainly won't be the outrageous capital gains of the past decade.

Old folk with cash will not be silly about getting into that.

by Harvey W | 17th Oct 23, 3:47pm 1697510849

Chris, property has already reversed it's downward trend....

by timbob | 17th Oct 23, 6:16pm 1697519768

"Yes, property prices could fully reverse their downwards trend." - um property prices just leapt at auctions in the last couple of weeks. Big time. The continuing house price disconnect with incomes will not be stopped unless DTIs get brought in. We have some very similar dynamics to Australia, with mass migration, and lack of building, and not enough homes to support the level of migration. The wealth gap is about to get wider.

by kpnuts | 17th Oct 23, 5:02pm 1697515323

yipee - prices are only going up 6.2% locally ....... STILL and so most people are gettign poorer STILL so not sure its such a success -- ok better than it could have been -- but still for a huge chunk of KIWIS yet more what can i afford to eat and thank goodness summer is here and i dont have to freeze as i cant afford heating

by Let me be Frank | 17th Oct 23, 7:25pm 1697523921

"After that November 29 meeting the RBNZ doesn’t meet again to consider the OCR till February 28 next year. The summer gap is a long one. I have complained about this many times in the past."

Fortunately(?) Central Banks have the ability to make their own rules....should the need arise they will intervene, for better or worse.

by Yvil | 17th Oct 23, 8:29pm 1697527769

After that November 29 meeting the RBNZ doesn’t meet again to consider the OCR till February 28 next year

By then, it will be abundantly clear that no more hikes are needed, and talk will shift to how soon the RBNZ will start cutting.

by Pa1nter | 17th Oct 23, 8:35pm 1697528113

Depending on headwinds. Potentially, a lot of retail will be waiting on Xmas trading results before making any big bad profit warning calls.

by EpsomArtsandCrafts | 18th Oct 23, 10:19pm 1697620743

Can someone please tell me what the inflation rate for the last quarter was?

I don't understand why the focus is on the last 12 months rather than extrapolating the current month forward to a 12 month period. Surely that would be a more accurate indication of what is happening with inflation currently - rather than including what was happening with prices in Nov Dec 2022 - that was a long time ago and there has been a lot of water under the bridge since then