By Gareth Vaughan
Although the war on inflation is being won, there are still battles to come and it's too soon to expect Reserve Bank interest rate cuts, says Kiwibank Chief Economist Jarrod Kerr.
Speaking to interest.co.nz for the first 2024 episode of our Of Interest podcast, Kerr says the cost of living crisis is improving for households and businesses.
"We are winning the war on inflation but there are a few battles ahead and a few wins that we need over this year. We think inflation will fall to 3% quite quickly, but the move from 3% to 2% might be a bit awkward later this year and into next year," says Kerr.
On Wednesday Statistics New Zealand's latest Consumers Price Index (CPI) showed annual inflation down to 4.7% in the December quarter from 5.6% in the September quarter. Hot on the heels of the latest inflation data, Reserve Bank Chief Economist and Monetary Policy Committee member Paul Conway is due to give a speech next Tuesday. This will include comments on NZ data released since the central bank's last Monetary Policy Statement in November.
These will be the first public comments from a senior Reserve Bank figure this year.
"I think we have to have an acknowledgement [from Conway] that the overly hawkish commentary from November is no longer. When you look at what they told us in November, they basically told us they've got no tolerance for upside surprises. We've had nothing but downside surprises since that statement... The GDP report came out much weaker than what the central bank [expected]," Kerr says.
"They gave us a clear indication that if everything goes wrong to the upside that they will hike [the Official Cash Rate] again, and they gave us a 60% probability that they would hike again. I think that was wrong at the time and it has been proven wrong now. And I think Paul may hint that suggestions of another hike in this cycle have evaporated. But equally talk of rate cuts, I think they'll be coming out and say that's premature, that's a conversation for later in the year."
A key area of concern remaining for the Reserve Bank will be non-tradeable inflation, relating to inflation from domestic goods and services. This came in at an annual rate of 5.9% in the December quarter versus the Reserve Bank's 5.7% forecast. Kerr notes much of this is coming from housing related costs such as rents, helped higher by record net migration levels, insurance, and construction costs. In reality the Reserve Bank doesn't have a great deal of influence in the areas of insurance, rates and rents, Kerr says.
In the podcast he also talks about the next OCR review on February 28, whether the Reserve Bank's Monetary Policy Remit to; "achieve and maintain future annual inflation between 1% and 3% over the medium-term, with a focus on keeping future inflation near the 2% mid-point," may need to change in an era of climate change and other challenges, when he expects the Reserve Bank to cut the OCR, the US interest rate outlook, the outlook for the NZ dollar, the inflationary threat from Middle East conflict, and concerns about China.
*You can find all episodes of the Of Interest podcast here.
69 Comments
I would like to see an article on why NZ should move away from the reserve bank in its current structure completely. They created the funding for lending program. They gave our money to foreign banks for free so that they could lend it back to us at now 7/8%. How can anyone be allowed to stay in the role having done such a stupid thing? It's corruption,, plain and simple.
It's all good, just keep on r*ping the mortgage holders and young homeowners, she'll be alright... RBNZ/Orr has got our backs...
It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong. — Thomas Sowell
I mean to be fair, what do you do if you're in your late 20's / early 30's. Your rent's just gone up again, the wife is nagging at you that she wants to start a family. Your best friend's family had to leave their rental and battled immensely to find another place with the kids having to move schools.
At family gatherings older relatives smugly ask why you haven't bought yet, and ramble on about the struggle of 20% interest rates in the 80's. All a hypothetical of course.
Unless you're referring to leveraged multiple property owners?
I don't think there's enough cheap dumps in crap areas to go around personally. They generally come with good upside, which is attractive for our no-money down Landlords/speculators.
This is coming from someone who actually bought a cheap dump in a crap town as a step onto the property "ladder" in 2017. But I'm not deluded into thinking that everyone can "just do it".
Well yeah, new carpet and flooring, new hot water cylinder, even put power out to the garage with proper RCD. Fixed the leak in the front lawn. Hell, we even moved the bathroom door because the light & fan switch was installed in the hallway, about 2 meters from the door.
Two better options for you.
1. Buy long debt at current rates and sell in a few years when rates have come down and your long debt is worth much more.
2. Buy shares in previously (pre-covid) high yielding companies that have been missed by rush.
The latter option requires a bit more nous and hard work but the rewards are far greater. Both would be better options than buying back into residential property which is still overvalued while further supply continues to be built around it thanks to new high-density zoning rules.
The Reserve Bank of Australia ended their similar bank lending programme in June 2021, when it was apparent there was no "emergency". The RBNZ continued blindly handing out billions of dollars into an obvious asset bubble for another 18 months - even choosing to rollout the second tranche of it in June 2022.
I would say the majority of the population doesn't know or understand that this occurred. Their justification for continuing it longer than they should have also made little sense, because they should have been able to pivot on a dime for covid related schemes they brought in. Taxpayers shouldn't have essentially been subsidising banks imo
$12 billion of taxpayer money in welfare handouts to the property sector and banking, at massive expense in multiple ways to younger generations. One of the crimes of the century in NZ, so far. To then see speculators plaintively mewing only about "give landlords back their dignity" (don't tax us!) was quite the follow-up spectacle of deeply entrenched entitlement mentality.
The densities enabled by the Unitary Plan mean diddly squat for supply until one or both of the following occur:
- Interest rates drop a lot
- House prices start rising significantly
Neither is likely this year, at least. Perhaps 2025-2026?
Residential construction will slump this year. Next construction boom circa 2026-2028
All the builders I know are still building. With land falling in price, significantly in some places, picking up developable sections is no longer hard, nor expensive. What they're building now is less costly than 2 years ago so the sale prices are less. I.e. a different product mix is being supplied now when compared to 2-3 years ago. In many cases the consents were received in previous years. They're not flat out as they were. "Back to 2019" is how they describe it. I think you're perhaps overestimating how bad the shakeout will be. Time will tell.
Hardly. Kerr is among a very few honest bank economists.
Banks have access to data that will show the effects of a high OCR way before it becomes apparent to everyone else. (I've programmed some of these dashboards. They combine near real-time data with recent historical data while plotting similar events from the past, while allowing what-if analysis to test the future.)
I suspect Kerr is simply giving everyone a heads up that the real situation is not anything like the RBNZ and other retail bank economists are saying (or pretending). The RBNZ is wrong IMO to keep jawboning the way they are (whether they believe what they're saying or not).
Using the OCR to lower the cost rates, rents or insurance premiums is like trying to make ice in a microwave. Microwaves have their use but I’ve making isn’t one of them. Mortgage costs are excluded from the CPI for a similar reason. More targeted action is required to address those issues and it is out of the RBNZ’s control.
You seem to be saying the RBNZ can cause inflation via the OCR but can't kill inflation via the OCR:
"And they added significantly to inflation in the process and destroyed the many lives by facilitating a massive housing bubble like we've not seen in many, many decades"
My personal view is that if the OCR was left at 0.25% we would have a lot more inflation right now, so therefore the tool worked. Granted I have no proof of that, it may have been a fluke.
re ... "You seem to be saying the RBNZ can cause inflation via the OCR but can't kill inflation via the OCR"
Almost what I am saying. The OCR will kill inflation but the massive collateral damage it causes to NZ Inc simply isn't worth it. Consider the following:
When the OCR is low SOME people (a number far fewer than many believe) will spend up big and pick up more debt.
When the OCR is high ALL people with debt get hammered (including those that never spent up big and took on more debt when the OCR was low).
Meanwhile, people with sufficient disposable income and little debt just keep spending and have no idea they are contributing to inflation and probably don't care either.
This latter group btw has been growing significantly over the last 30+ years and is one of the reasons the OCR is a crappy tool (if was ever a good one) that doesn't work as quickly as it used to.
I would really like to know what the CPI would be if they had done nothing. I think many of the current drivers of inflation are due to genuine increases in costs due to decarbonisation and general environmental awareness, regulations etc Not sure how the OCR helps with that other than making investment cost more.
Temporarily raising tax on those contributing most to inflation (including windfall taxes on banks) and passing the extra tax collected to Councils so they can address the many infrastructure issues they face would have had the biggest effect on inflation ... while keeping rates rises down.
Why does everyone believe a sledge-hammer can solve all issues?
A better way to tackle inflation would be to increase Kiwisaver contributions mandatorily. That way this "money" that is taken away from consumers is not gone forever.
These extra "OCR" contributions would be an adder to existing contributions rate. Those on 0% end up with 0% + x% for "OCR".
But nah, it's more exciting to whack a lever in opposing directions and risk bankrupting young homeowners from wrong time and place.
This is an interesting one.
The biggest problem is people in NZ aren't happy with compulsory superannuation schemes. (Their reasons are generally pretty frail as many other countries have them and for good reasons. In some countries government have allowed people to opt out but then tax them more on the basis that government will need to support them later on. That argument doesn't wash but it does carry the day among voters.)
The other problem is people with un-earned incomes. Since they don't file tax returns for this income (capital gain) they can't be forced to contribute. Many small businesses and sole traders and traddies are in this camp. There are other issues as well.
Government could temporarily make contributing to Kiwisaver tax advantaged (e.g. allow contributions to made from untaxed income rather than from taxed income) to encourage people to contribute more. But that too comes with inequalities.
Just raising tax rates is the quickest and easiest way. And increased over the right tax bands, (why isn't business tax using tax bands?), it's the quickest way to tame inflation. And in difficult times it provides government with added funding should they need to start spending big to haul us out of a funk.
Yeah hard pill to swallow. The whole "it's my money" mentality, which is fair to a point, but society needs to equitably share in the wins and losses.
At the moment, we have a system where, for example, a young couple borrows $600k to buy a house. Gives a huge lump sum to a home owner who "wins", tax free of course. But when the economy is cooked and people need to make losses, we reward the previous "winners" with higher term deposit rates and burden the losses onto the young couple who are already tapped out and their only "win" was owning an asset that's depreciated by 20%.
"Kerr notes much of this is coming from housing related costs such as rents, helped higher by record net migration levels, insurance, and construction costs. In reality the Reserve Bank doesn't have a great deal of influence in the areas of insurance, rates and rents, Kerr says."
Say what? What about mortgage interest rates?
It's a pretty silly rentier that doesn't have a mortgage over their rental property. (A tad harsh, but for most it is true.) They may vary in size when i-rates are high or low but government tax rules makes it a no-brainer to have a mortgage. And for many of the rentier class - when interest rates go up - so does the rent.
Talk about the 900lb gorrila in the room!
Even Australia is not contemplating cutting rates any time soon.
"The RBA forecasts that it will take until late 2025 for inflation to moderate to 2.9 per cent – just scraping inside its 2 per cent-3 per cent target band."
https://www.afr.com/policy/economy/why-the-rba-won-t-be-cutting-interes…
Yet somehow NZ is going to get inflation back to under 3% by the end of the year? That's a Tui ad.
I think that NZ probably will get inflation back to under 3% by the end of the year. But why would they cut rates in that scenario? If inflation settles in at 2% they would be silly to cut rates, you only adjust the OCR if you are not meeting your target (or if you have a full employment mandate or if you are concerned about financial stability).
By removing the full employment mandate the National party have told the RBNZ to not cut rates in this scenario.
By the end of the year we'll have seen a Recession - or still be in one - if the OCR doesn't move. Recent recessions - since central banks were created - are known for very low inflation, combined with -neg growth.
Methinks I'll be surfacing your comment and presenting it as an example of a Tui ad. ;-)
Kerr's not wrong about the RBNZ's hawkish nonsense. But in fact, the problem IMO goes way deeper.
Throughout covid the RBNZ's MPC showed themselves as fearful worrywarts. They displayed this - in spades - by massively overestimating the amount of stimulus required. And they added significantly to inflation in the process and destroyed the many lives by facilitating a massive housing bubble like we've not seen in many, many decades.
And now, once again, they continue the fearful behavior by overestimating how bad inflation will be. i.e. somehow this time it is different. Is it? They haven't proven that at all. I can't see any difference at all. Thus to suggest further OCR rises and / or the higher for longer rhetoric - that would result in a peak OCR rate lasting the longest period in recent memory by a factor of two! - is nonsensical.
Their recent behavior could of course be construed as central banker 'jawboning'. But combine that with their actions during covid and a whole new picture emerges.
re ... "I don't think anyone predicted the economic outcomes of Covid, particularly house price increases like that."
If by 'anyone' you mean people who didn't pass Economic 100, then you may be right.
But then lots of posters here correctly predicted the outcome. And I suspect most haven't passed Economics 100.
So, forgive me for saying so, that assertion is utter nonsense.
I wonder if anyone can dig up the Interest article on the RBNZ removing the LVRs during Covid. Let's have a look what the comments say...
Edit: https://www.interest.co.nz/news/104635/reserve-bank-eyes-removal-loan-v…
Wow. That's a startlingly good read!
JimboJones, your thoughts appreciated.
One notes however most comments are about house price inflation and not general inflation.
Not that surprising I suppose. The wealth effect is often an afterthought and nobody at that time would have been looking at the massive supply disruptions that led to significant scarcity in many products that saw greedflation rise to new heights. And we still had flooding and storms coming right at a time when supply was beginning to stabilise. Isn't economic history fun!
As I noted above. (I too did a search for 'inflation' after reading the comments in detail.)
Having passed Economics 100, I'm aware that stone thrown in a still pond causes ripples across the entire surface. Whereas a big stone travelling at absurd velocity into the pond is likely to cause far more than ripples.
Agreed.
Other countries weathered (forgive the pun) the energy shock too, but food inflation, while a major issue for them too, didn't have the double whammy we got in NZ with us a) being at the end of long supply chains and b) a storm + flooding that punched a big hole in local food production. The flood and storm also increased scarcity in trade supply (material and labor) as rebuilds got started adding even more to inflation as even outrageous pricing was accepted.
It was an unlucky period for NZ. But like any period of major disruption, a few got very rich from it.
Nice strawman argument there Te Kooti.
First time I've heard the bludgeoning of NZ Inc. using the OCR as being similar to taking a course of anti-biotics.
Are you suggesting people are like harmful bacteria that we need to exterminate?
Oh, and FYI, antibiotics also kill good bacteria as well. Just like the OCR.
And by the way, when doctors conclude the antibiotics are not needed, or are actually making the patient sicker, patients stop taking them immediately, and other treatments are used.
No. It was a strawman. The fact that you believe it is an 'analogy' simply reinforces what it is.
There is a great moment in the podcast where Gareth (basically) asks Jarod whether the RBNZ has had much impact on prices relative to global factors and other policy changes. Jarod responds with blind faith - absolutely (then goes on to talk about house prices dropping!) It is this unshakeable confidence in a single, simple, one-way transmission between monetary policy and the price level that I find so bewildering. Most of the things that are now pushing inflation up (insurance, rates, rents etc) are either (a) more likely to be pushed up by higher rates than they are to be pulled down by lower demand, or (b) have prices that are completely detached from demand.
In 2022 when inflation was averaging 2% a quarter so 7-8% per year the RBNZ was still giving free money to banks from the Funding for Lending programme right up until Dec 2022! (The Aus reserve bank stopped their funding programme in 2021)
So the RB whose job it was to control inflation was actually contributing to more inflation - So Bizarre.
The governor needed someone from another country to sense check this decision as it was poor and made no sense
Consequently NZ has higher interest rates than Australia right now. Please no more bad decisions like that - Fix your processes
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