So, here we go then. Straight in and no messing. Here comes the first major economic data release of the year - and it's a biggie, with far reaching ramifications.
Consumers Price Index (CPI) inflation figures for the December quarter will be released on Wednesday, January 24 and they promise to be quite a scene-setter for this still young year.
Some potted history: The CPI rocketed through 2021 and 2022, reaching a 32-year high annual rate of 7.3% for the June 2022 quarter. Inflation's been outside of the 1% to 3% range targeted by the Reserve Bank for over two-and-a-half years. That's a long time. The most recent annual inflation figure, as at the September 2023 quarter was 5.6%.
The RBNZ's response has been to crank the Official Cash Rate (OCR) up all the way from 0.25% as at the start of October 2021 to 5.5% now. Mortgage and deposit rates have risen accordingly. Good for the savers, not so good for the homeowners.
So, what are we expecting for the December quarter 2023 CPI?
Well the annual inflation figure should be down. But that of itself won't necessarily be good news - not if there's elements to it that don't please the RBNZ. And it's the RBNZ's attitude to the CPI outcome that will matter. More of that in a minute.
The RBNZ in its latest set of forecasts in the November 2023 Monetary Policy Statement (MPS) forecast that the annual inflation rate will have fallen to 5.0% in the December quarter from 5.6% as of the September quarter.
I didn't have all the economists' previews of the CPI in front of me at time of writing this, but I can say that the economists from the Big Four - ANZ, ASB, BNZ and Westpac - are all picking 4.7%, well under what the RBNZ has picked, while Number Five - Kiwibank - is going even slightly lower with 4.6%.
Even though a 4.6% or 4.7% figure would be the lowest since June 2021, it would still leave inflation well outside of the RBNZ's 1% to 3% target range. The central bank's most recent forecast of when inflation will fall back under 3% is in the September quarter of this year.
So, we do really need to see a decent fall in inflation for the December quarter 2023 in order for that RBNZ forecast to be on track. But as indicated higher up this article, it's possible that the 'headline' CPI will show a good sized fall and yet the RBNZ still won't be happy.
This goes back to the question of where the inflation's actually coming from. There's the so-called 'tradable' inflation, which comes from imported things such as petrol and there's 'non-tradable' - or domestically sourced - inflation. The RBNZ can exert control over the domestic inflation - with the OCR - but hasn't got much control over imported inflation.
If we look at the breakdown of the annual inflation figures for the September quarter 2023, this had a 'non-tradable' rate of 6.3% and a 'tradable' rate of just 4.7%. For the December quarter the RBNZ is forecasting a non-tradable figure of 5.7% and a tradable figure of 4.0%.
Given recent international pricing patterns it is eminently possible the tradable figure will come in under that 4.0%. But what if the non-tradable rate is above 5.7%? It's possible we could see a situation in which the 'headline' inflation figure drops a lot - but non-tradable figure remains 'sticky' at high levels. If that's the case the RBNZ might be unhappy.
The ANZ, ASB, BNZ, Kiwibank and Westpac economists are all in fact picking that tradable inflation will come in well below the RBNZ's forecast. As for non-tradable inflation, Kiwibank are picking it will come in some 0.3 percentage points below the RBNZ annual figure pick, Westpac and ASB are picking that it will come in just under the RBNZ's pick, while ANZ thinks it will be the same as the RBNZ pick. But BNZ economists believe non-tradable inflation will be HIGHER than the RBNZ expects.
In his CPI preview, BNZ head of research Stephen Toplis had some interesting things to say on the tradable/non-tradable inflation issue.
"We continue to question the value of the non- tradables\tradables split," he says.
"We think the difference between the two is too blurred in many instances. Even in the non- tradables sector, tradables prices can have a substantial impact on non-tradables prices. Moreover, a significant proportion of non-tradables prices are unrelated to the domestic demand conditions that the RBNZ can influence. And here’s an interesting stat for you, since the beginning of the century non-tradables inflation has averaged 3.4% while tradables has averaged just 1.4%. Surely there must be some acceptance that non tradables will tend to remain stickily high?
"Now we are not arguing that the RBNZ should ignore the price pressures from this sector, nor are we suggesting it should be comfortable with inflation at current lofty levels, but we do believe it should focus less on non-tradables. As an aside, we don’t see many central banks around the planet talking about the importance of this split. Indeed, we can’t think of any that have made much of it in the recent past," Toplis says.
At time of writing the wholesale interest rate markets are pricing in an 80% chance of a cut to the OCR as soon as May of this year. And the markets are expecting there will be nearly 100 basis points worth of cuts by November.
The RBNZ's most recent forecast is that there will be NO cuts at all in 2024 and the first cuts won't start till next year.
The markets' belief that the RBNZ will be forced to cut much earlier than it has said was strengthened enormously by the September quarter GDP figures, released in mid-December 2023. These showed a 0.3% fall for the quarter - going very much against the RBNZ's expectation of a 0.3% rise.
It's fair to say that the markets and the RBNZ don't appear to be on the same page at the moment when it comes to the future movements of the OCR.
With the central bank's first major set piece of the year - the next Monetary Policy Statement - not due for release till February 28, it was incumbent on the RBNZ to 'say something' in order to guide the markets somewhat on its thinking ahead of the release of the MPS.
And it will be doing that, with RBNZ chief economist Paul Conway now set to make a speech on January 30 that will, according to the RBNZ, include "brief comments on domestic data developments since the November Monetary Policy Statement".
We shouldn't expect too much detail in those comments. But clearly, something that closes the gap between market expectations and the intentions of the RBNZ itself will be necessary ahead of the February MPS. Conway will be armed with the January 24 inflation figures by the time the speech is delivered, so, how those figures turn out will be crucial in deciding what sort of tone the RBNZ takes.
Fingers crossed. We aren't going to be seeing meaningful relief from high interest rates till the RBNZ is totally confident it is getting inflation under control. A significantly lower inflation figure for the December quarter therefore would do a lot for the RBNZ's confidence that it is on the right track.
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76 Comments
The comments from Stephen Toplis reinforces my opinion that the RB should base its monetary policy on a Personal Consumption Expenditures Index. A PCE strips out all the noise from the likes of exchange rate variations and the ups and downs of food and energy.
Instead, the RB can base it's decisions on what consumers are doing with their money - or lack thereof which is currently the case.
The RBNZ needs to get the yearly figure under control, but it doesn’t need to rush. If the RBNZ is happy that inflation is under control it could cut rates now.
However just because inflation is under control, that doesn’t mean interest rates will be cut. For a start that would destroy the dollar and create inflation. Also the RBNZ is meant to only be worried about inflation, the fact they could create a massive recession by leaving rates high is not of concern to them (by design). They should only drop rates if they are concerned they will fall below 2% CPI.
I am starting to believe we may not see rate cuts this year, and if we do they will be small.
The RBNZ trying to be clever is what has caused our mess.
Once inflation is safely inside target zone and starting to look like it might go too low.. the RBNZ can think about cutting rates. And only then.
Other matters like house prices, jobs, exports.. are the concern of the government.
If everyone understands what the rbnz does and how it responds to what - then it will create a more balanced and effective economy. Tinkering causes bubbles and unforseen consequence.
national are right to simplify the rbnz target and tools..
Good to see more people questioning the usefulness of the tradable vs non tradable split on inflation. The whole method is a dog to be honest - created in 2003 in a different era. RBNZ discussed this in detail in their Feb 2023 monetary policy statement - pondering on why the non tradable data correlated so strongly with overseas prices. It's not rocket science to be fair. For example, ask people in NZ who grow fruit and veg what their key cost drivers are - i.e. the things that shift in price the most and have the most impact on their cost of production. They will tell you that the volatile / impactful input costs are fuel, fertiliser, and packaging (all imported). They will then say that, recently, you can add insurance and interest rates to that. In fact the cost of credit held production cost inflation up through 2023 as fuel and fertiliser costs fell away. Higher costs for longer so to speak.
The other big problem with harping on about domestic inflation is that commentators rarely look at which components of domestic infation are pushing the figure up. Topliss references this above to his credit. For the last 6 months or so the main drivers of domestic inflation have been:
- property rates (big increase in Q3)
- rents (went bananas due to massive inward migration)
- public transport costs (subsidy removal)
- climate-related increases in insurance
Now ask whether higher interest rates, which add costs to businesses and basically shift money from mortgagors to wealthy savers will help tackle any of the above. In other countries that have squashed inflation, Govts intervened to hold rents down temporarily, ensure local govt had the money needed to keep rate increases low, and maintained subsidies to prevent price increases spreading through their economy.
Govt and RBNZ have handled this inflation episode terribly - not helped by shallow analysis and the 'hike rates to tame inflation' chorus line of most of our economics commentariat. In future years, NZ will be a well studied example of how not to respond to an imported price shock.
Great comment as always.
something I have been wondering this morning is how much nuance is in some of the data, most especially I am thinking of rents? Is it just the crude price movement, or is there some indexation?
At least in Auckland, new housing supply has been large. There’s every chance that this is pushing average rents up, as all things being equal the average rent of a new two bedroom house will be higher than an older one. If a HPI index was applied to rents, we might find inflation more like 3-4% rather than say 6-7%
Thanks. The rental component of CPI comes from MBIE's tenancy bond dataset. I think they use the geometric mean data, which corrects for some of the variation, but does not factor in whether properties are new or not. I have looked at the rental bond data quite a bit - and it is clear that there is no realistic chance of new supply keeping up with demand in Auckland, and that's before you consider the latent demand from people sharing houses who would rather be in their own apartments etc. Thus, rents just track household income - i.e., they rise to the maximum that the rental population can afford to pay. At the moment in Auckland, four Indian guys coming over for tech jobs are prepared to cram into a small apartmnt and will easily outbid a young family looking for somewhere to live in their community. So, rents are genuinely going nuts.
I think my point is quite significant.
If, for example, one year ago 2 out of every 10 two bedroom townhouses were new, and now it’s 4 or 5 out of 10, then that’s going to almost certainly distort the inflation figure higher.
Like for like, new is typically 15-20% higher.
Perhaps it doesn’t make as much difference as I say above - maybe 6-7% rental inflation then becomes more like 5%.
Still, it’s not trivial.
Perhaps - there are a lot of unknowns here. The number of active rentals in Auckland has increased by around 500 per month in the last two years while new build completions are running at around 1,500 per month. The unknown variable here is how many of the new builds are going to rentals vs owner-occupiers vs social housing tenants? My guess is that owner-occupiers are taking the nice new places and the weatherboard shacks they leave behind are being rented out. But, I am probably letting my bias show!
Does it matter though? Currently there is a shortage of older cheaper houses due to investors not buying them as there is zero interest deductibility. So if renters have no choice but to rent a brand new place because there are no older places, then that is the current price of rent. The tax treatment is driving rent inflation higher by removing cheap homes from the marketplace and replacing them with more expensive ones. That wont change until the tax situation is reversed, but it makes no sense to fiddle with the inflation numbers to correct for something that no longer exists (ie. availability of cheaper homes). In the meantime, renters will just have to "suck it up buttercup" as Paula Bennett likes to say.
"Certainly hope not."
It is absolutely guaranteed.
NZ's unique economy makes it a perfect study on the effects of covid, how government and the RBNZ responded, and how government and the RBNZ responded to the after effects of wildly loose monetary policy.
Alas, history will not be kind to the RBNZ while the government's response will be panned by the right and applauded by the left (as per usual). The RBNZ will be bludgeoned from both left and right. Fair enough. It is richly deserved.
If you've ever wondered why NZ's retail interest are higher than US rates, it's because overseas lenders demand a 'risk premium' above US rates to lend to NZ Inc. The recent and current actions by the RBNZ are probably going to result in the risk premium being higher for quite some time. Sorry about that folks.
Even just looking across the ditch shows a sharp difference between the competancies of the central banks, even though Australia did most of the same things NZ did like lockdowns and border closures. Take the RBA equivalent Funding for Lending programme for the banks - they closed that facility in June 2021, while the RBNZ continued pouring money unnecessarily until December 2022, a full 18 months longer than Australia. That right there is the reason why NZ's housing market is now in so much trouble compared to Australia's.
As Chris says, it is absolutely guaranteed.
We started with a macho RBNZ dizzy with self-importance and suffering from serious saviour complex - not recognising that they were way behind the curve on their understanding of how modern economies and pricing actually work. We married 'shock and Orr' with an impotent Labour Govt too timid to do anything to intervene, who were then voted out (not coincidentally!) and replaced by a bunch of tory nutjobs with an austerity-fetish. The next year will be horrific.
Rbnz's big problem is there are too many profiteers and rentiers in NZ all getting rich off the backs of the poor.
My landlord called out the plumber on a Saturday afternoon and the bill was $495 plus gst for labour charges only, for a job that took half an hour. The plumber said he had been busy on callouts since 6am. So he could have taken in 5k in labour charges for the day. Its totally nuts
Some people need to seriously upskill and do the job themselves. What we have nowadays is people that when faced with a problem is "Who can I call" rather than "I am able to fix that myself". Plumbing work is hardly rocket science, how many people cannot even change a tap washer ?
Sounds a bit steep and like the plumber isn't a huge fan of your landlord, but also sounds like an easy job that could have waited till Monday. We charge a weekend callout at $250 which includes the first hour of labour time and a half every hour after. Also add in mileage charge on top. for a 30 minute job depending on travel time we would be around the $300 mark ex parts.
I don't want to work weekends or have my staff work weekends so make the charge high to deter non emergency work that can wait. I also have to pay my staff to be on call whether there are zero call outs or 50, you win some you lose some. I would rather have my weekends uninterrupted to spend time on things I enjoy than make the additional money but that is just the service we have to offer to be competitive.
It is not cheap to run a business, wages, fuel costs, RUCs, Tyres, vehicle maintenance, interest payments, down time, advertising, compliance costs, administration, rent, legal, insurance, tools, uniforms, training, sick days, stock and parts, public holidays, annual leave, kiwisaver and still make a reasonable margin.
In this case it sounds a little like over charging, but people who complain about "he was only here for 30 minutes" don't understand what goes into getting that guy to your house and through your front door, particularly on a weekend. You're lucky he had the parts required to do the job without having to make a special trip as it is impossible to have everything you need in your van.
Perhaps the plumber has a landlord who paid to much for his "investment", and if gouging him o. Rent. Perhaps he also shops for food at a place with the same, causing food and staff to be more expensive. Increased rent and greed is just being recycled into the service economy. On on and on it goes.
Get the root cause yet...?
Well said. Totally agree. By making after hours work available, you are offering an additional service. Non core business is not desirable for most people. So it must come at a premium to clients.
That additional charge is largely passed on to the poor people who are on call (unable to have a beer or leave town) who must make themselves available even in the small hours.
Any reasonable person calling a company for immediate service should expect to pay a premium, if that request for immediate service is outside of work hours said premium should be exponentially more.
Good on Topliss for calling out the non-tradables \ tradables split.
110% agree it is far, far, far too blurred to be meaningful albeit the intent is well founded. Once again, the RBNZ is using old tools of dubious accuracy to justify bludgeoning areas of the economy that do not need it while only partially hitting (missing entirely?) areas that do, i.e. greedflation and those who are spending in ways that drive up inflation.
Further, the commentariat has picked up on this split being somehow extremely meaningful when in truth it's value is extremely dubious. (I've posted on this before using insurance as an example.)
re ... "... but I can say that the economists from the Big Four - ANZ, ASB, BNZ and Westpac - are all picking 4.7%, well under what the RBNZ has picked, while Number Five - Kiwibank - is going even slightly lower with 4.6%."
No surprises that the retail banks are picking higher inflation figures.
Is it in their best interests - while new lending is so depressed - to keep people believing that rates will be 'higher for longer'? (probably a rhetorical question lol)
If the RBNZ's MPC comes out with any statement that even suggests there will be no cuts in the OCR until inflation is sub 3% they must be castigated by media, economists, academia, and the public, to such an extent that government is forced to remove RBNZ leadership.
I say that simply because for the RBNZ to say anything of the sort is a clear indication they do not know enough about inflation to do their primary job - price stability - without failing in the other primary job - maintaining financial stability.
Inflation, once it starts trending down, will continue to trend down way after (sometimes years after!) central bank rates have normalized. Further, there is ample evidence of the 'economic friction' that comes post peak rates lasts for quite some (again, it can be years) after central bank rates first start to fall.
A classic example of this economic friction can be found in boardrooms through to bedrooms with questions that start with, "But what happens if interest rates go up again?" Investment & spending decisions get delayed and often put off indefinitely. True investment - where money is spent to create something new - is the lifeblood of an economy. Without it, the downward spiral continues.
We've had enough jawboning (is misleading actually lying?) from the RBNZ.
Time for some frank empirical analysis, boldness, and above all, honest words.
That seems a bit strong! They only need to cut rates if inflation will go below 2%. It’s pretty hard to know what will happen but at the moment that’s not by any means guaranteed. The RBNZ is insulated against everything else by design. Yes they have financial stability but that is not in question at the moment. The RBNZ shouldn’t care about recession, only inflation.
If they still had the full employment mandate they may start to consider rate cuts. But without that they have no rush.
re ... "They only need to cut rates if inflation will go below 2%."
Et tu, JJ?
I see you too have been indoctrinated by the repetitive rhetoric.
Or put another way - Because you believe its is a truth that it is 'pretty hard to know what will happen', then that is all the justification the RBNZ needs to keep destroying lives and what wealth the younger members of NZ's society have accumulated, while making the rich even richer.
Other people who have studied the effects of central bank actions have a different truth. We know this time won't be much different to previous times and the results are therefore entirely predictable. Please re-read what I wrote about 'economic friction'. It is critical to understanding why central banks constantly overshoot and hold interest rates to high for too long.
Also, the 'full employment mandate' is a red-herring as it is a part of the 'financial stability' remit. (Just another example of people being indoctrinated by the repetitive but erroneous rhetoric.)
On the plus side (lol) if the RBNZ does hold interest rates to high for too long (and that point is fast approaching) - it is the NACTF that will get blamed and they're virtually guaranteed to be a one-term government. (We'll soon see if Luxon and his FM are up to (lol) the job or whether it's all been another con.)
No. Not far out at all. Case in point.
https://www.stuff.co.nz/money/350153904/i-cant-make-enough-live
This is the exact scenario that the full employment mandate was meant to clarify. If the RBNZ could probably cut rates without causing inflation but avoid recession then the full employment mandate would encourage them to. But without that mandate they are better off taking the lowest risk which is leaving interest rates until CPI risk is gone. Considering the government just took that mandate away, they have basically told the RBNZ to only worry about inflation. I know what I would do if I was Orr, unless the CPI figures are really low.
NZ needs to be weaned off the mindset the excessive use of debt is the only way to "make it". Using it as a tool to step on the back of you fellow man should not be rewarded like it has been.
The ideas of a land tax has been soundly defeated several elections in a row. Accordingly the implementation of DTi is the last chance to stop us competing the transition to Victorian England, where one part of the population exploits the other by controlling the basic need of shelter.
The Govt should be the one responsible for employment, not the Reserve Bank. In this case, full employment could be easily restored if immigration was halted. We have imported 285,000 people on work visas, while sending 25,000 people on to welfare benefits. That is the effect of Govt policy not interest rates.
Here we go again, looking at inflation only, to try to guesstimate where interest rates are going. The NZ economy MUST be considered when trying to predict the OCR. Because of our delayed data reporting, many don't understand what bad shape NZ is really in, and this won't be made obvious until mid 2024. By this, I mean, business closures, layoffs and fast rising unemployment. Only a fool can believe that the RBNZ won't pay any attention to this malaise, and keep destroying the NZ economy with our current OCR level. I can only reiterate what I stated multiple times before, inflation will drop, but it will NOT reduce to 2%, Central Banks will have to reduce their interest rate, and learn to live with 3 - 4% inflation, in order to prevent their country from entering a long-lasting recession, especially NZ.
gnx, I'm all for taking responsibility for our own actions. How do you get to "some commenters still blame the RBNZ" and " borrowing for loss making investments" my comment? I'm talking about ordinary people (maybe you) losing their jobs because of businesses going bust due to the high interest rates.
Exactly! It seems all that people can understand is higher interest rates hurts people with debt only. Folks, higher interest rates = LESS SPENDING = less profits for your average business. If this continues long enough, some businesses will have to close down which means THEIR EMPLOYEES WILL LOSE THEIR JOBS. It doesn't matter if they have debt or not, they will hurt !
You need to look at where we are in what was a very low interest rate environment and who is paying.
High inflation and a lifetime of debt for our children, mass immigration and crumbling Infrastructure. Don't forget those of us doing the lending pay tax on their interest.
Yvil the very reason we have an independent reserve bank is so they can focus on inflation and not the short term pain. Only the likes of Argentina and Turkey would accept inflation to stop a recession, it’s a very stupid thing to do.
Recessions are normally short lived, inflation can be very sticky.
I wonder if there is a bit of confusion over the reserve banks role? Here is an extract from their website (although looks a bit stale due to maximum employment)
Our role
By maintaining a sound and efficient monetary and financial system, we give people, communities and businesses the confidence to spend, borrow and save money in their daily lives. We do this by:
- managing inflation to keep prices stable while supporting maximum, sustainable employment
- regulating banks, insurers and finance companies
- producing New Zealand’s banknotes and coins
- operating effective wholesale payment and settlement systems.
We have statutory independence from the government. This means we have operational autonomy to achieve our long-term objectives for the financial system.
"I wonder if there is a bit of confusion over the reserve banks role? "
You think?
https://www.rbnz.govt.nz/about-us/tane-mahuta-and-our-financial-system
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