By Gareth Vaughan
Reserve Bank Governor Adrian Orr says he's "extremely confident" the world is heading back to a period of low inflation, saying the central bank is prepared to do "whatever it takes" to achieve its mandate of low and stable inflation.
Speaking in the latest episode of interest.co.nz's Of Interest podcast, Orr talks about the reaction from financial markets to last week's Reserve Bank monetary policy review, what its Monetary Policy Committee members will be watching between now and when they next review monetary policy on February 28, and what the Reserve Bank would need to see to be more relaxed about inflation.
"We just need to repeat we are willing to do whatever it takes to achieve our mandate, [of] low and stable inflation. If we get further inflation shocks there may be more work to do. So we're in a holding position, but we've made it clear where our nerves sit," Orr says.
"Basically we need to see more spare capacity in the economy to have the real confidence that the inflation pressures are coming off. All the indicators are moving in the right direction, but there's a lot of news still to arrive on the table."
He also talks about "historically significant" immigration, noting countries such as Australia, Canada and New Zealand, with strong net inward migration are "having the highest core inflation challenges."
With the new National-led government set to remove the Reserve Bank's requirement to "support maximum sustainable employment," from its monetary policy remit, Orr discusses how different monetary policy might have been over recent years if that hadn't been part of the Reserve Bank's mandate.
Orr also says profit-led inflation, businesses pushing through price increases under cover of news about a major shock to the economy because there'll be less pushback from customers at such times, has been happening in NZ as it has overseas.
"We just used to call that inflation expectations and generalised inflation," Orr says.
"Whenever you've got high inflation people can hide price rises even though it's not something specific to their good or service. They can get away with high or variable inflation, they can start shifting relative prices around, and then that leads to more generalised inflation as input costs rise and wage costs rise and so on."
"And it's that scramble and mess that causes long-term inflation problems. And so I would say all of those things have been happening in New Zealand as they have been everywhere else," Orr says.
"This is the challenge for monetary policy, we have to lean against that desire to tuck a little price increase in behind generalised inflation hoping no one notices. Consumers have to be laser-like focused and think 'is that right, should I be shopping somewhere else?'," Orr adds.
In the podcast Orr also discusses the degree to which Official Cash Rate (OCR) rises are responsible for reducing inflation, inequities involved with monetary policy, whether price controls could be used to help fight inflation, whether the Reserve Bank's monetary policy should be required to support sustainable house prices, what he expects to see from the Commerce Commission's market study into retail banking competition, the level where he'd consider the OCR to be neutral in that it's neither stimulating nor constraining economic activity, his ideal scenario for monetary policy a year from now, and how he's "fully convinced" the world is heading back to low and stable inflation but there may be higher interest rates on average to achieve that.
*You can find all episodes of the Of Interest podcast here.
43 Comments
During late 2021 and 2022 when the data clearly showed that companies were profiteering, social media was full of wise economists shouting down the very idea that profits could be contributing to inflation. It is just not cricket etc... our models do not suggest that can be a factor etc. I remember Gareth V calmly interviewing the Econ Prof from Waikato who tied himself up in knots contesting the very concept of profit-led inflation (or sellers' inflation as the hero(ine) Weber calls it).
So, as much as it pains me to say it, thank you Adrian. Of course companies take the pee when they can. They are profit-orientated machines.
Now, perhaps, next year you will be back on the podcast recognising that those input costs you talk about above - you know the things that put upward pressure on prices and make inflation sticky - include the cost of credit. You know the cost you increased to 'tackle inflation'.
In essence Orr is basically saying they are powerless to do anything about greedflation in a reasonable time frame.
Their only option is to strangle households by limiting their disposable income. This can only be seen as a massive monetary policy fail as it enriches those with spare disposal income and existing wealth while impoverishing those without it, typically younger and indebted and with families.
But does Orr acknowledge this failure? No. Instead he talks up the role the RBNZ's plays - bludgeon the young, enriching the already wealthy, enriching business while taking years to effect change.
This is the problem we face in the western world. Politicians have handed over the hard decisions about how to control inflation to unelected officials with limited tools (who talk up their ability to do the right thing while in effect they're mostly doing it wrong).
Orr knows government can help fight inflation more equitably.
Is he allowed to say it? No.
Does he want to say it? Probably not. He is handsomely paid say nothing.
Government can - at very short notice - use regulation and taxation to assist the RBNZ.
Other countries do this. Most countries in fact. Windfall taxes? Yes. Capital Gains Tax? Yes. Special interest rates for specific economic activities? Yes. Special government banks to support specific sectors. Yes. (China's growth story is built on these special banks.) But NZ? Nada.
Like I've said, Kiwis aren't that bright. We get everything we didn't think we were voting for.
Problem is, a) we get a limited selection of who to vote for, and b) they do their own thing afterwards anyway, whatever we vote for.
And those currently in power, by a very large majority, benefit from the status quo, so only candidates who agree with the status quo make it through to being put forward for election.
re ... "we get a limited selection of who to vote for"
We actually don't. We in fact get a good selection.
The problem is ... Kiwis aren't that bright so they vote the way they always do thinking something will change for the better. It seldom does because people don't understand the changes that are necessary.
The other problem, and from whence I believe your comment comes were I to be honest, is that Kiwis are probably too damn lazy to bone up on some economics and then really think about which parties are offering real change. Thinking long and hard to find good solutions is not a common trait in Kiwis. We like to solve immediate problems with immediate but dubious solutions.
Ergo ... Our politics is simply a reflection of our collective psychology.
I agree with almost everything you say Chris. The only thing I would add is that there is massive profit to be made from the status quo. That means those who benefit are willing to pay megabucks on marketing and advertising and paying off politicians (not outright fraud, but soft favours a la Chris Bishop and tobacco industry and John Key and ANZ). It's hard for your ordinary Kiwi to wade past the false narratives that are being peddled by those with lots of money. But yes, Kiwis aren't that bright, great fixer uppers but really poor strategic thinkers.
That "cost of credit" was also historically used to create inflation, then it became "borrow and spend", leading to aggregate demand via the wealth illusion. Yet all it really led to was demand for more property, more capital gains, more illusory "wealth".
Buying and selling houses at ever increasing prices in the belief one becomes wealthy, and the associated debt, is the crux of the problem. Land and property prices and servicing the bank debt is the underlying driver.
Bank economists will never admit to this causation and correlation.
Add the profit model, add the human conditioning of fear and scarcity, and we have what we have.
What are the solutions?
I think it is worth remembering that mortgage payments have been stable at between 36% and 39% of income for decades. But, as you note, when the cost of borrowing reduces, people can afford to pay more for their house. Now add in the fact that every house sale is basically an auction, and buyers will typically spend up to their limit - it is not hard to see why house prices rise in proportion to changes in mortgage affordability. In fact, right now, with mortgage rates relatively stable over recent months, house prices are creeping up at a similar rate to household incomes.
Since the 1990s, the main flow of credit money into the economy has been through the mortgage channel. Every chain of house sales ends with someone cashing out and spending that money (eventually) into the real economy - keeping people employed, helping money move around etc. Without this flow of credit money, our economy would quickly collapse (it's happening now!) You can model this pretty easily and show that net bank credit has to stay around at around 6% to 8% of GDP to keep GDP growth around 2% - 3%. Our economy relies absolutely on house price growth and household debt staying at around 100% of GDP.
I could rant on, but the solutions seem pretty obvious to me. For example, we need to:
- Direct private credit away from housing and towards more productive endeavours - projects that create things that improve our quality of life, help people and businesses live and produce stuff more efficiently etc
- We also need to stop being concerned about GDP. We have enough stuff.
- We need to stop playing with the interest rate - changes in credit costs create volatility and encourage gambling and arbitrage on the financial markets.
Thank you again for another insightful and interesting post Jfoe!
I think it is worth remembering that mortgage payments have been stable at between 36% and 39% of income for decades
I'm guessing that these mortgage payments were over shorter terms than today's 30yr, and the income would also tend to be smaller (i.e. a single earner)
I tried searching for the average NZ mortgage length vs year, to no avail.
This is all true. What is stopping us from doing this?
Obviously the debt creation model is no longer working, creation via mortgages and a bottleneck at the top is the problem. We know trickle down is actually syphon up. When it's all tied up in servicing the debt, borrowing more for the home, the mcmansion, the property portfolio, asset speculation, storing value, it's no longer flowing through the economy.
There's an underlying narrative, conditioning, fear, behind it all. Without visionary leaders nothing will change. All we have are rulers stuck in the past and an outdated economic model that can't provide solutions. So the change must come from the people, in a form currently unknown.
Good points...
Where did u get the mortgage payment number of 36- 39% ?
My "go to"...is the RBNZ household debt/income ratio...which has declined over the yrs... until post 2021
https://www.rbnz.govt.nz/statistics/key-statistics/household-debt
A point I'd make is that interest rates determine the "time preference" of money. OR... one could say that Time preference determines the "natural rate" of interest.
Changes in credit costs have an impact on ,.. deferred consumption vs bringing consumption forward..
I like Fred Foldvarys' ideas on Time preference .. https://www.progress.org/articles/about-interest
Of course companies take the pee when they can. They are profit-orientated machines.
'Profit-orientated machines'? You ever run a company or business Jfoe? They don't exist as a natural phenomenon. Why start and run a company if there's no incentive or pay-off? You might as well just sign up for a cushy desk job in the public sector and enjoy all the free time / lower accountability / financial risk.
I spent many years running my own businesses and doing event-based promoting. I was absolutely profit-motivated - nothing wrong with that. I do think though that big corporates (which I have also worked in) are a different beast. Their governance and accountability arrangements, ability to manipulate markets, and influence on political decision-makers, makes (some of) them downright dangerous.
Yes. What changes in a price / supply shock scenario is that the risk of passing costs through to customers reduces - even where there is reasonable competition. For example, if all transport companies are dealing with a 50% increase in the cost of diesel, then they know that their competitors are going to have to increase their prices or go bust, so they feel more confident doing just that.
Studies have shown that during COVID, companies that did raise their prices before others (or by more) didn't actually lose their market share by anywhere near as much as they thought they would. For example, when Pepsi got out of Russia to protect their brand value, they tried inching up their prices everywhere else to cover the revenue / profit shortfall. The loss in market share was miniscule and their profits actually went up! So they did it again. What did Coca-Cola do in response? Go after Pepsi's market share? Nope. They increased their prices and profits too. Kerching!
I have spent a good chunk of my career in pricing - it's fascinating and often counter-intuitive.
Some would suggest that the incentive is to serve the customers needs/wants first, the passion for what one does, and the profit follows. Of course I get it's not that simple. When profit and greed becomes the goal all sorts of downstream consequences happen.
The corporations are not human and therefore do not see others as human... all they see is numbers hence we're back to staff being treated as slaves and a cost and not an asset to develop. The community and customers are there to serve the corporation. It's evident everywhere in the issues with remote working, environmental consequences, unhealthy products/services, deliberate obsolescence, lower quality etc. Economists argue it must be what the people demand yet they fail to realise that supply must come first and it's the propaganda machine that creates demand.
"The corporations are not human and therefore do not see others as human"
This is the reason why psychopaths tend to do well in corporate structures. They have the right skill set to succeed. Psychopaths tend to get to the higher echelons of the corporate structure.
Some prices are driven by demand and capped only by how much the customers that can be satiated by available supply can afford to spend. See auction-like environments like housing rent, or when a limited supply product becomes uber-fashionable. My point in the other post (I am guessing) was that the dominant driver of prices in NZ is input costs - labour, cost of imports, debt servicing costs, shareholder returns. For example, our wholesale sector is our biggest - they buy stuff and sell it on with a remarkably consistent margin.
The real elephant in the room is that mortgage holders and business owners are now fronting the cost of the removal of LVR and LSAP, after which the businesses piled on with the profiteering. Personally I can't palate Orr's drivel around profiteering as we arguably wouldn't have been in this situation if they had not flooded the country with cheap debt via enabling the banks to lend and profit excessively. I'll give him credit for stumping up for the interview, however it is grossly inequitable that those with mortgages who pay the brunt of tax via PAYE having their disposable income funnelled into retail banks for the lack of competence of the RBNZ, and then for him to come out emphasising everything they are doing to bring inflation down, as if it weren't largely of their own making, is in essence, disingenuous.
How can 2 yrs of data alone show that price increases were simply ...."profiteering" ( this word has such a negative connotation... )
Jfoe...U talk as if you know... ??
Explain to me why it was "profiteering" rather than , say, cost driven price increases..??
Businesses , over the years, might well have simply absorbed cost increases ( eg. minimum wage went from $15.75 in 2017 to $21.20 in 2022 ) , and suddenly with the inflation "climate change" .... were able pass all those costs on. ?
The price of a coffee comes to mind..... https://www.stuff.co.nz/business/300672433/takeaway-coffee-prices-risin…
You seem to assert as a fact.... that it is simply ..."profiteering " ??
The idea of "profit-led" inflation is as correct as the idea of "wage-led" inflation...or "cost driven" inflation... as is the idea of the declining purchasing power of money...
My view is that the causes of inflation can be manifold, (and complex enuf that there are many views on it.).... and that simplistic cause/effect reductivism....."profiteering" is kinda mischievous...
Different business sectors can make extreme profits in different times.... eg. inflation/deflation/disinflation....etc.
ps... Jfoe Ive read thru the whole thread and I better get what u are saying... thou I still have an issue with labeling it "profiteering".
cheers
Enjoy cheap oil for xmas. Opec members agreed to cutting supply to raise prices in Q1.
Councils are burning money ... still overspending on nice to haves, and bloated staffing whilst their debt servicing costs are rising. I predict sweeping cost cuts and job cuts in the sector driven by the next local govt elections which will be decided on cuts to rate bills... joe public will feel broke and go after anyone wasting his hard earned cash
The way they manage costs is mind boggling
I've watched auckland council spending years replacing perfect kerbs. And seen how council spends hundreds of millions on simple projects. One million for a playground,, fduck off
Central govt is also atrocious. 600k for a simple children's slide and one million for new grass in front of parliament. Farmers don't spend one million regrassing paddocks, they HAVE to make the numbers stack up. They should have asked a farmer if they wanted one million dollars to redo the grass at parliament and it would have come in under budget
Orr: "Basically we need to see more spare capacity in the economy to have the real confidence that the inflation pressures are coming off. All the indicators are moving in the right direction, but there's a lot of news still to arrive on the table."
Sounds simple when you say it fast, doesn't it? And there's the "we need to" again.
But what does "seeing more spare capacity in the economy" actually mean?
Does it mean businesses rush out and invest more capital to increase production? No.
Does it mean businesses invest in innovative ways to use substitute inputs? No.
Does it mean that businesses, knowing full well their exposure to climate change, invest in solutions? No.
Does it mean that businesses run two or three shifts to increase production while providing further employment? No.
And what of businesses that already have unlimited production because they import a tiny fraction of global production? How are they going to show spare capacity? By reduced profits?
And what of businesses that are constrained by physical limits (e.g. the farm size or location)? How do they magically create spare capacity?
This is where monetarism fails. Hammering the economy doesn't create healthy investment in creating further capacity.
It does the absolute opposite.
It forces contraction. Lower profits. Less jobs. Less investment.
It doesn't create spare capacity. All it does is take existing capacity (invested capital) and make it idle.
And while other more enlightened economies are not bound by stupid economic policy they continue to grow ... while NZ Inc goes backwards.
But guess what? The wealthy love it. They get to hoover up destressed and "under performing" assets. And the banks love it too. Helping the wealthy is the bank's raison d'etre (French for "reason for being").
So where has monetarism come from? From businesses that actually produce goods and services? Nope. It comes from the banks realisation that by controlling money ... they can control entire countries.
Have I mentioned that Kiwis aren't that bright?
Enjoyable comment. I would argue though that the origins of our current brand of medieval monetarism are the openly shared desires of 60s and 70s neoliberal economists to crush unions (labour) and shift power permanently to employers (capital). They misused (kiwi) Bill Phillips' 1958 Paper to argue that the very best way to prevent inflation was to constrain the economy so that where was always a buffer stock of unemployed people who could be relied upon to compete for work and prevent wage growth and unionisation (thus preventing the wage / price spiral).
I don't disagree that crushing unions hasn't been a goal. All suppliers of products and services would like to ensure unions (the workers) stay well clear of their profits. But when banks control the economy, and to major extent the government through direct access and "advice", crushing unions is child's play. Like I said, the bank's raison d'etre is to help the wealthy.
The problem is that the fix is to stop importing cheap labour and increase productivity.
But the govt donors and voters cant (or cant be arsed to) do that.. but still want more money.
So to keep the economy moving and get reelected we carry on with the wrong strategy.
One day we wake up to the unavoidable mess.. the rich will leave or build security walls round their fortresses.. and the rest of us simply fight it out
Is it more productive to have one person doing a 12 hour shift or 2 people doing 6 hours? A person will be more productive if they're able to apply productivity to their personal lives as well - their health, their leisure, their arts, their family, their personal growth.
One would then have to address the main issues being the price of necessities including homes, adequate wages, and the hoarding of "wealth" at the top.
Most productivity change would come from increased competition in big markets. Noone has to improve productivity here as customers have no choice but to buy from them anyway. Then invest heavily in eductation and encourage innovative expkrt led businesses over traditional ones.
It wont happen as the old rich brigade are in control.. but eventually they will become like dinosaurs and wither away.
Eg
Force supermarkets to split up causing 4+ chains to battle it out on price, experience and efficiency.
Force competition into building material supply and change laws to allow less qualified tradies and homeowners to do more themselves...
Force banks into a maximum profit environment. or break up banks into organisations with different offerings and encourage more into the market.
Stop immigration of low skilled workers and force industries that employ them to improve productivity.
Offer massive tax advantages to export led businesses for the first few years of their life.
Make it attractive for manufacturing and tech businesses to base here and bring staff... we need a pool of high skilled workers
Smash our education system.. divert money from roads to education and become the highest payer of teachers in the world. Remove most the rules on how schools operate and simply give the principals kpis based on student outcomes. Like a business if teachers or principals fail lto achieve them ..they go.
TK.... One of my favorite economists has a mantra..... " the mortal enemy of inflation is productivity".
The productivity wave of the late 30 odd yrs has basically been "Cheap Chinese labour + Wester technology/innovation = cheap goods. "
I'd say that "tailwind"...is now over.... and we are short on ways to accelerate productivity.
In a low productivity world.... I'd suggest Growth rates of the Money Stocks ( credit growth ) , does matter....
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