The Reserve Bank (RBNZ) has announced that its chief economist Paul Conway will be making a keynote speech on January 30 that will address recent economic developments.
This is very significant as the speech will follow on closely from the latest inflation figures to be released on January 24 and will come well before the RBNZ's first scheduled set piece of the year, the Official Cash Rate review on February 28.
The context to this is the shock GDP announcement in mid-December, which showed that for the September quarter our economy shrank by 0.3%. This was hugely contra to the RBNZ's expectation that the economy would GROW by 0.3% during the same time.
But more than that, Statistics NZ revised earlier GDP figures as well and these revisions showed that, in fact, New Zealand had a 'technical recession' - two consecutive quarters of negative GDP growth - earlier in 2023.
The upshot is that the economy has been slowing far more than the RBNZ believed.
The markets have responded to this news by doubling down on the sentiment that interest rates will be cut sooner and harder, much more so, than the RBNZ has been forecasting.
Wholesale interest rate markets are currently pricing in a full 25 basis point cut to the OCR (presently at 5.5%) as soon as May this year. And those same markets are now pricing in a whole 100 basis points of cuts to the OCR by November 2024.
In contrast, the RBNZ's most recent forecast in its November Monetary Policy Statement was for the OCR to NOT BE CUT AT ALL until 2025.
Much will depend on next week's inflation figures, but the RBNZ is unlikely to be pleased with current OCR market pricing and it will not want to see further falls in retail mortgage and deposit rates - as we are already starting to see - until it is happy that inflation is and will remain under control.
The RBNZ's problem is that in recent years it has been having its last OCR review for the year in November - the last one in 2023 was November 29 - and then not having another OCR review till late February. It's a three month gap and means that if something significant happens in the meantime then the RBNZ may have to act to 'guide' market sentiment.
And that appears to be what's happening now.
This is the RBNZ's advisory of Paul Conway's forthcoming speech on January 30:
Chief Economist Paul Conway will deliver a keynote speech at 9am, Tuesday, 30 January 2024 via webinar, to be hosted on the RBNZ website. A link to the livestream will be added to the events calendar a few days before the speech is delivered. The text will also be published.
About the speech
The speech will focus on how significant changes to the global economy since the COVID-19 pandemic have created new uncertainties and challenges for monetary policy. High quality research and data will be needed to understand these changes.
Investing in data that is more frequent and more accurate is critical for informing policy decisions that have implications for future economic wellbeing and prosperity. High-quality data is also necessary for effective research. Our research agenda at the Reserve Bank is based on findings from our recent five-year Review of the Formulation and Implementation of Monetary Policy and the need to deliver on our monetary policy Remit objective of low and stable inflation.
In this speech, Mr Conway will also make brief comments on domestic data developments since the November Monetary Policy Statement.
It's the last paragraph above that's significant. Generally if the RBNZ is NOT making comments that might be market-moving then it will say so. The fact that the advisory explicitly says Conway WILL be commenting on developments is clearly intended to guide the market ahead of the February 28 OCR announcement.
The RBNZ will presumably need to address the question of the economy currently performing much worse than it expected - and what, if any changes this makes to its view of where interest rates should currently be sitting, and whether it now sees the possibility of earlier cuts to the OCR.
At this stage it would appear - depending on what the inflation result is like - that the RBNZ will hold the line and probably indicate it is NOT comfortable with the current market expectation of how soon there may be OCR cuts.
For sure, all eyes will be on that speech on January 30 as it gives us an early heads up to the RBNZ's thinking of where interest rates will be going - if anywhere - this year.
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Oh come on….
If you look at his other posts it appears what Harvey would like to imply is that rate cuts will automatically equate to a housing boom. Be QWik!
Up or down is likely irrelevant in terms of the final destination at this point.
The fabled soft landing is a pipe dream and people like Harvey are selling the next lot of FHB’s down the river so they can either dump on them before it’s too late or hopelessly keep the casino going.
Do the RBNZ have access to stats.nz? Can they ask for the CPI figures in advance? It feels like there have been several times in the past where the RBNZ announce something out of the blue and then the stats come out a few weeks later that back up that announcement. Maybe for example they found out that the last quarter's CPI was negative and they will look stupid waiting until 2025 for a rate cut.
This could go one of two ways:
1) We were wrong, the data is worse/better than we thought, we will cut rates this year
- or -
2) The data is suggesting that we should cut rates this year, but we are still not going to, you need to price in no rate cuts, we won't change our mind again honestly.
There is a third option, which I think is the most likely one:
3) the economy is slowing a bit quicker than we projected, and inflation is moderating but still higher than what we want. On this basis we will continue to carefully monitor trends
ie. A bit of a nothing statement, other than acknowledging some trends that have departed a bit from RBNZ projections
they won’t make any comments on OCR track
Either way we have already seen lack of competence over a term now and it will be interesting to see their approach. They tend to shoot first and ask for forgiveness for their sins well after the fact. My pick is subtle influence for market expectations to prolong peoples mentality that inflation is the key metric above all else as per their mandate and they aren't here to save peoples houses or businesses.
Yes including 2020-2022 with special reference to their removal of LVR restrictions and then, coupled with the LSAP proceeding, failed to start ticking the OCR up until the economy was practically on steroids from all the cheap debt that had flooded the country. We are still seeing the effects of the delay in the increases, and the large hikes given the preference of fixed rate mortgages in NZ.
Granted they now have the employment mandate removed, I'm hopeful they will do what is necessary to get the inflation down as quick as possible, as any falter in this could see another tick up in inflation down the line and distort the economic cycle longer than is necessary, and we have already distorted the natural economic cycle since 2008 from QE, and again 2020.
I think 2 is more likely!
There's a real possibility that all of the major macro data points will be weaker than what was forecasted in the November MPS. Q3 GDP already in the books (-0.3 vs 0.3), Q4 CPI looking odds on based on the monthly partials, and BNZ Job ads and suggesting we could overshoot on unemployment as well (less confident about this one, but we'll see).
The RBNZ might be right to want to keep a lid on rate cut expectations, but it's going to be hard work when they're essentially arguing that they need to keep rates unchanged until 2025 because prices in November 2023 were too high relative to those in November 2022.
"Their work is far from done" - how far? Let's say the next two quarters have below target CPI, shouldn't that mean a rate cut in the middle of the year?
Its an interesting question - how long do they keep us in recession to ensure inflation is dead? They could argue that their only mandate is inflation so they don't care about recession. Or they could argue that recession is bad for bank stability.
"Their work is far from done"
The work of destroying the NZ economy? Oh, I think it's well underway, and at the snail pace we're getting data in NZ, GDP, unemployment and business failures will be terrible by the time we get said data, for the RBNZ to react. That's why I commented yesterday, that I think OCR cuts could well come in greater increments than 0.25%.
Do the RBNZ care about GDP, unemployment and business failures? With no employment mandate they only need to lower the OCR if they feel they may go under their CPI target. I think inflation is going to come in lower than expected, but I doubt there is a big risk of the RBNZ being below target any time soon.
At this stage it would appear that the RBNZ will hold the line and probably indicate it is NOT comfortable with the current market expectation of how soon there may be OCR cuts.
Disagree, even if the RBNZ wants to "talk tough", the only right thing to do will be to change course, and admit that they were wrong about their prediction to hold the OCR until 2025. (without admitting that the market, and many of us on Interest, were right predicting OCR cuts in 2024)
A lot of factors at play. NZ was the first to raise rates why couldn't we be the first to cut? The lag effect is finally biting. Every day more households are facing up to higher rates. Some are already on their second round of increases since 2020 with apparently no relief in sight. No choice but to clamp their wallets shut and hang on. Job security of senior RBNZ officials and MPC committee appointees depends on a controlled decent. SPI for December comes out in a couple of days. 4th Quarter CPI is next week. What is the chance that one or both could be negative? Then we get another negative GDP print for Q4 2023 on March 21st. Yes it takes the standing army of Stats NZ nearly 3 months to calculate the GDP of a country of 5.5 million people and they will probably revise it in the following months anyway.
Seems more like a plug for the RBNZ's funding from Government to be increased rather than slashed as the NACTF want to do.
Possibly also an opportunity to offer a mea culpa for their vastly off estimates about this cycle. Possibly also a chance to say, "Sorry. The OCR just doesn't work like we thought it would. It's past it's use-by date and is a thoroughly inequitable tool and we have to look for better tools. Oh, and we're bring forward DTI implementation."
Oh well. I can live in hope that frankness & honesty will return to central banker speak and they drop the easily-seen-through jawboning.
Been there done that already
https://croakingcassandra.com/2023/08/24/spending-lots-more-with-no-par…
two things for me
1. A Reserve bank that didnt see the negative GDP numbers coming is not up to the job - especially given the resources they have available to them - and this impacts on Orr's credibility - so announcing his resignation on 30th would be a good move for the NZRB
2. They could easily amend their reporting cycle so that they dont wait for 3 months over summer - I know it will impact their holiday break but tough they get paid mega salaries to do the job properly
Judging Adrians personality I'd guess a double down on last years final MPS statement given we are currently seeing banks dropping fixed term mortgage rates following the move lower in swap rates. However if that's the path they want to tread they need to look at the years leading into 2008 when Bollard just kept hiking yet the market largely ignored the moves and the hedge fund fraternity kept receiving 1year swap out of 1 year, a commonly traded derivative product in swaps markets. Every 25 point hike used to move the 2 year swap rate up only about 5 basis points. They were effectively trying to pull the train along with a piece of dental floss. It proved pretty ineffective, they lost credibility and created needless volatility. I'd hope not to see that again as our longer maturity duration rates are now being driven by offshore impacters.
Hi Paul, few thoughts for your speech mate...
Well, friends, if the last few years have taught us anything it is that we need to be humble. We need to accept that our broken models of how the economy works are deeply flawed. We need to reflect on how our saviour complex blew-up the housing market in 2021 (with little other benefit) and our blind faith in monetarism crushed the economy in 2023 without impacting that darned imported inflation much at all.
We need to recognise, and I say this with a heavy heart, that trying to control a complex economy by wiggling the OCR up and down is like trying to manually land a helicopter with a 1970s Atari joystick. An apt analogy given that our whole operating model became fashionable in the late 1970s when Milton Friedman et al managed to convince the world that punishing workers to greater or lesser degrees was the very best way to control inflation. A convenient conclusion for the Reaganites of course as they attempted to set capitalism free. 'Freeing the tiger' so to speak. You know, the really hungry tiger in a playground full of school kids.
So, let's cut to the chase. We are giving up on this whole monetary policy nonsense. We are going to broadly track the Fed rate from now on - while directly offering discounted credit for productive enterprise like we did in the days we actually built stuff in NZ. We will also be lumping a penalty premium on credit used for speculative gain. We have also said that if Govt don't tax capital gains properly we will give up on the whole thing.
Thanks, any questions?
My dream scenario would be that with this announcement the RBNZ is committing to easing the interest rate burden on home owners and businesses alike with a series of OCR cuts starting in February taking our base rate back to pre-covid levels. Recognising and accepting that the pain caused by current higher rates is not (and never will be) addressing the residual components driving inflation.
Simultaneously with the rate cuts, I would wish to see the introduction of; an effective DTI policy (stalling house price growth), a stamp duty on the purchases of all property (to invest in reducing local council rates), rent freezes for ALL tenants and a comprehensive CGT (with tax takes on all gains from purchase to sale going back to Kainga Ora to invest in making sure all kiwis have access to shelter).
Yeah, not going to happen, but that's my dream scenario.
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