Statistics NZ data showing below-forecast inflation will be the Reserve Bank’s gift to the incoming National Government, as economists begin to rule out further rate hikes.
Party leader Christopher Luxon made bringing down inflation a key part of his winning campaign but, of course, the Reserve Bank (RBNZ) has already been on the job for two years.
Prices in the New Zealand economy were 5.6% higher than a year ago, having increased 1.8% during the three months ended September, but were well below most expectations.
The annual rate last quarter was 6% and many economists expected it to increase to 6.1% as petrol prices and local taxes increased. The RBNZ itself expected another 6% print.
Analysts at UBS got the fall almost spot on. They said global pressures had eased, goods consumption was below trend, the labour market had loosened, and food prices fallen.
The RBNZ would look through the “large lift in petrol prices” and choose to hold the Official Cash Rate (OCR) at 5.50% in the August meeting, UBS said.
The RBNZ’s monetary policy statement, released that month, warned petrol prices would be higher in the September quarter and were “projected to decline” in the medium term.
It had forecast headline inflation at 6% annually and 2.1% in the quarter. Non-tradable inflation was expected to be 6.2% and 1.7%, respectively.
Instead, those headline numbers came in at 5.6% and 1.8% and non-tradables at 6.3% and 1.7% - roughly as expected.
The central bank doesn’t forecast core inflation but does watch it closely. In September, the rate of consumer price increases excluding food, fuel, and energy fell from 6.1% to 5.2%.
Sharon Zollner and Henry Russell, economists at ANZ, said the data showed domestic-driven inflation was still a significant problem.
“Even stripping out all the noise from sharply higher fuel prices, the unwind of transport subsidies, and bumper increases in local council rates, the data continues to show that domestic-driven inflation pressures are still very strong”.
“However, clear progress was evident, and that takes pressure off the RBNZ to move the OCR any time soon,” they said in a note.
Still in the woods
The bank’s research team now expects an increase in the base interest rate in February, rather than in November as they had previously picked.
Zollner said the RBNZ was “not out of the woods yet” with non-tradables inflation still persistent. The central bank revised its forecast up in August and may do so again next month.
“Today’s data hardly screams ‘job done’ but it does give the [Monetary Policy] Committee a little more breathing room to wait and see whether domestic inflation pressures dissipate quickly from here”.
Food prices rose less than 1% during the September quarter, and make up almost one-fifth of the Consumer Price Index (CPI).
Cyclone disruptions and global prices have been easing and bringing down prices in the supermarkets. This trend will continue and be supported by seasonal price drops.
Another quarter of the index is made up of housing-related costs. These have been rising faster than forecast and were the second biggest contributor to headline inflation.
“Local council rates rose a whopping 9.4%, symptomatic of broad-based inflation pressures across the economy,” ANZ’s Zollner and Russell said.
But the number one culprit was petrol prices. Transport costs make up just 13.5% of the CPI basket but were responsible for a third of all inflation during the quarter.
Petrol prices jumped 16.5%, domestic airfares rose 10.4%, and public transport prices were up 10.2%.
These three groups contributed 1.6 percentage points of the headline 1.8% inflation during the September quarter. Heath and household contents groups deflated it by 0.1 points.
RBNZ’s game plan is working
Short-term interest rates and the NZ dollar fell after the release of the data, which was below the forecasts of almost all domestic economists.
However, market pricing still indicates some risk of future rate hikes as core inflation can be sticky. Labour market data, released in a couple of weeks, will be the next key indicator.
Stephen Toplis, the head of research at BNZ, said the September inflation data should “extinguish any talk” of a rate hike in November.
The risk of prolonged inflation had “diminished markedly” while the labour market was “easing aggressively” and economic activity was “under extreme pressure”.
Plus, some of the inflation pressures in this quarter were not things the RBNZ could easily control: Household rates were up 9.4%, insurance costs up 3.3%, rents up 1.2%.
“[The central bank] can’t stop local government from hiking rates, it can’t prevent climate change and natural disasters from impacting insurance and rates. And it can do little to improve the supply of rental accommodation,”Toplis said.
Market traders were now pricing in a roughly 10% chance of a rate hike in November, down from around 34% prior to the data release, while the chance of an increase in 2024 fell from 84% to 40%.
“Monetary policy is set with inflation roughly 18 months ahead in mind. With inflation behaving at least as well as the RBNZ has forecast it should see no reason to raise rates further,” Toplis said.
“The [Reserve] Bank will not yet be in any greater hurry to lower rates but it will certainly be feeling very relaxed that its game plan is working”.
64 Comments
Well since the RBNZ wants to stop me spending to get inflation down I won't pay my rates since that has contributed to inflation. Also insurance oh that's right I have to pay those maybe the RBNZ should take into account things that I can control rather than what is pushed onto me by central and local govt
Am not sure why there is virtually no mention in the media of the fact that once the Specials and Overseas Votes are counted and added into the numbers, there will be a redistribution of the so called ' wasted votes' .That total is currently approximately 120,000. These are votes cast for parties who got less that 5% of total votes cast. They are redistributed proportionately amongst the 5 parties who received more than 5% of total votes cast, plus the Te Pati Maori Party. National will get about 40% of these votes ( that's 48,000 ) which will give them, in all probability, another 2 seats. Add on the extra seat from Port Waikato anomaly, and the need for Peters is greatly reduced.
Incorrect - https://www.electionresults.govt.nz/sainte_lague.html
THis was explained on Newshub as a redistribution as it can impact no. of seats a party gets
The minor parties votes stay under the heading minor. The division by odd numbers only start with the party with the largest vote and continues until there are enough quotient to allocate the required number of list seats. If you voted TOP on Saturday then your vote stays with them it is never allocated to another party!
Your vote isn't reallocated, however the % for those parties that qualify is recalculated. Hence the seats can change.
Example (extreme yes, but it shows the point)
There are 20 parties. Party A gets 24%, the other 19 parties get 4% each.
Using the electoral commision process, Party A gets recalculated as 100% meaning that party gets all 121 Seats.
OK. But that is due to maths. Total number of votes minus the votes of the minor parties will be a new total. A lower one, so yes percentages change. But the point I am trying to stress is the votes do not shift to another party. It just really irritates me that people, including journalist say so. It's maths. Keeps everything proportional or as near as is possible.
Call it what you want reallocation, dogs bollocks, or cunning ploy by the major FPP players come MMP implementation time. Your individual vote does not shift. The proportion your vote represents does. So the outcome is as per OP, Seats can and do change.
It may be just "Maths" but clearly no-one here understands it.
not so, the proportion does not change the parties elected make the 100% and it is worked from there. so if you vote for TOP as an example your vote is not then split amongst all the remaining parties but is removed for the total. the 5.29% of votes is removed for the 100% and the new total becomes the 100%, so what you see allotted on election nightstands.
the only way it would change is if more people voted for the remaining parties in specials which tends to favour the left as it is made up of people who rent so their address has changed and they need to do a special vote, or people outside their house area ie students and people on holiday or visiting someone.
But all the other parties below 5% – their votes are removed – or “wasted”. They are taken out of the make-up of the Parliament. And all their votes go with them.
This would only happen if the percentage of wasted votes in the special votes is significantly higher than in the general election. I find that unlikely, if anything I reckon overseas voters would stick to the main parties more.
Normally the specials vote more left. Some have a theory that Covid will change that, the specials were locked out of NZ so will vote National. However the opposite could also be true, they could have seen NZ with a much better Covid response than where they live and vote Labour. I feel the most likely outcome is that NACT lose 2 seats and are dependent on Winston.
There's no subsequent or delayed redistribution of wasted votes. The list seats are distributed immediately as we see now based on pro-rated share of votes cast for parties making it into parliament. Naturally this all has to be updated for special votes once they are counted and reported on Nov 3.
I am tired of media seeking and quoting the views of the bank economists. They keep getting it wrong (except Jarrod Kerr). Sharon Zolner for example was just yesterday forecasting 6.1% and an almost certain raise to the OCR in November. Of course now she has pushed that out to February.
Zollner in Oct 2022 "This takes the OCR to a peak of 5% by February..."
Zollner in May 2022: "Zollner expects an OCR peak of 3.5% in the current cycle early next year."
... I could go on.
I'm not so arrogant as to claim I could do any better, but I'm not being paid hundreds of thousands of bucks a year to do it. I wonder what the point of ANZ doing these predictions is when they're completely all over the show and consistently wrong.
The bank economists have consistently underestimated how far the OCR will go - I don't place much on what they predict. E.g. from this time last year's CPI results, reading the Interest article on it, ANZ was predicting a max of 5% and BNZ said of a 5.4% terminal rate (which we have exceeded already): "At rates approaching anywhere near that level the economy would be well and truly buried".
Have any of their predictions come true at all over the last couple of years?
Back went interest rates were low (but had to rise) - bank economists had a vested interest in ensuring people kept borrowing so they said rates will stay low.
Now when interests rates are high (but likely to fall soon) - bank economists have a vested interest in saying "higher for longer".
Take whatever these "economists" say with a grain of salt - they work for banks and banks pay them. They are neither impartial, nor are they paid for providing lenders with information that benefits anyone except the people that pay them. It's an Australian thing that even Australians haven't figured out yet. (I understand that 'Mericans started this con. But I don't know for sure. ;) )
Pretty simple really.
But you must remember economists are intellectually closer to the proverbial gypsy fortune-teller than real scientists which are giants in comparison.
For instance, in recent times we have British physicist Peter Higgs predicting the existence of a new particle in nuclear physics, a particle that gives mass to all other particles. And low and behold his prediction was proven when they verified its existence in the Hadron Collider atomic particle accelerator in Switzerland. They call it the Boson-Higgs particle. An absolutely astonishingly correct prediction.
Philosophically, economists are 'reductionist' in their theories and assumptions meaning they are overly simplistic. They can never predict accurately because they never have anywhere near enough data in their models. Thus their predictions are are more akin to horse race betting than scientific. To be charitable we should really call economics an art rather than a science. Their predictions are no better than those of the punter down at the TAB.
Of course they are amazingly quick off the mark in excusing their mistaken predictions once the real data comes in.
Amazing watching Zollner and the other hawks trying to maintain momentum towards another (profitable) rate hike. Toplis at BNZ much more sensible.
It looks increasingly like imported inflation is over unless we see a sudden increase to $100 / barrel oil again. As for our supposedly 'domestic' inflation - we have to face the hard truth that key things like insurance, local govt rates, etc are going to cost more in the coming years due to decades of infrastructure neglect and climate change. If we want the genuinely demand-driven prices like rent and house building to moderate then we will have to actually do something to achieve that - i.e., actually intervening in the precious market. People froth at the mouth at the idea of controlling rent increases but if you are going to let 50,000 people into Auckland in a year then don't act all shocked when rent spikes (it has gone up 9.4% in a year).
To add to your list, there are huge costs associated with upgrading our electrical grid to cope with electrification - even if the price of wholesale electricity stays flat (which is no guarantee), lines companies will be needing to significantly increase their prices to pay for the changes required. Nothing the OCR can do about that.
Smart load-leveling strategies means the major grid upgrade you refer to may be quite some time in the future, or even never if public transport, housing density strategies, alternative transport modes, etc gain traction. The past can be poor predictor of the future when major technological changes are afoot.
I agree there's some ways we could mitigate the issues that will face our grid going forward... The question is will we? Particularly judging by the recent election, it seems NZ's appetite for real reform in public transport and housing density is severly lacking. Either way, many regions will be facing 7-10% lines increases annually for the next few years unless something drastic occurs.
The maximum load spec to a residential house in NZ is usually quoted at 60 Amps.
When I built my current home in 2019, we put in an external 32Amp car charger (future proofing). The sparky added that to a normal days peakload & recommended that we install a seperate main feed protection to prevent overload back to the street grid connection/fuses.
I would think that there's a very small % of residential properties able to cope with NZ at 100% electric energy.
Kiwikidznz you are bang on alot of people who say go electric go electric don't realise that your house let alone a street can handle the draw without a meltdown look at Texas a few summers ago. If one family house at 5.30pm with wife preparing dinner so stove going microwave going one child in shwr so electric hot water cyclinder cranked up one child on a computer/TV with the heat pump going the husband pluging in the EV to charge so he and the wife can go out later that night to much draw then put every house on the street doing that then every street in NZ it ain't going to work also go to the vast majority of houses pre 70s that have the old black rubber wiring presto fire. Plus no RCDs
60 amps is 14.kilowatts
stove- 3kw
microwave -1kw
shower - 3k.w
tv/ comp -0.5 k.w
heat pump 2 k.w
e.v charger 7 k.w max
but the stove is on a seperate phase. 60 amps is a continuous rating , you'd have to go over 60 amps for 4 hous before the mcb would blow. But most people charge the EV off peak , so you are not even going to come close.
Yes, agreed. In the 40s and 50s Govt took over the resources to develop housing, infrastructure, energy grid etc and then made it happen with direct financing from RBNZ to pay for wages and materials. If we try and do a wartime mobilisation of resources like this using 21st century market mechanisms and private finance, things will go bad very quickly.
People keep saying this, but I want to know what they are talking about specifically? Transpower is specifically planning for the future, which is good. They don't talk about having to revolutionise our electrical grid or anything in the reports I read from them? This is the latest planning report I think which talks about upgrading some stuff being likely, but hardly revolutionary.
Usually when I see this its "buT wHat ABOuT EleCTriC CArssss??" mob who don't realise this is already being planned for or forget that the majority of charging for these is at night when we already have low grid utilisation.
" In September, the rate of consumer price increases excluding food, fuel, and energy fell from 6.1% to 5.2%."
This is the number Fed bases its rate decisions on, and the RBNZ should be doing the same. We would be leaning toward a rate cut sooner rather than later if that were the case.
One of National's pledges is to remove the Reserve Bank dual mandate and go back to the single price stability mandate. That means the OCR will then be able to be moved up to combat inflation without having to consider the effect on employment.
So a raise is more likely than a drop in OC/.
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