Paul Conway, the chief economist at the Reserve Bank of New Zealand (RBNZ), says the downward revisions to economic activity data does not mean less inflation pressure in the economy.
Market participants have been eager to hear the RBNZ’s perspective on the December quarter gross domestic product (GDP) and consumer price index (CPI) data, which were both below expectations.
Statistics New Zealand significantly revised its historical GDP data alongside the December release, which resulted in the economy being almost 2% smaller than previously thought.
In addition, last week’s CPI data showed headline inflation was falling faster than the RBNZ had forecast, although it was largely driven by cheaper imported goods.
In a closely watched speech on Tuesday morning, Conway suggested the recent data releases would not cause the central bank to significantly rethink its strategy.
He said capacity pressure—or the balance between supply and demand in the economy— mattered most for inflation targeting, rather than the overall size of the economy itself.
“Yes, lower GDP indicates weaker demand, but also that the productive capacity of the economy was lower than previously assumed. That is, the recent GDP revisions do not necessarily mean that capacity pressures in the economy are much lower than previously assumed,” he said.
The reasons for the revisions were due to weak inflation adjusted government expenditure and some methodological changes, such as how school attendance is measured.
Private demand, which was more interest-rate sensitive, had mostly been revised upwards, while consumption and investment levels in the third quarter were “almost exactly as estimated” in the November Monetary Policy Statement, he said.
On the most recent CPI data, which was below forecast, he said that non-tradable inflation was higher than the RBNZ had estimated at 5.9%.
“To sum up, monetary policy is working, with the economy slowing and inflation falling. But we still have a way to go to get inflation back to the target midpoint [of 2%],” he said.
The Reserve Bank's monetary policy committee will make its next policy decision on February 28 and is widely expected to hold the Official Cash Rate at 5.50%.
'Hawkish'
Conway’s speech was interpreted by economists as a rebuttal of recent commentary and market pricing which suggested interest rate cuts should come sooner rather than later.
Satish Ranchhod, a senior economist at Westpac, said the tone was “hawkish” and seemed to push back on expectations of policy easing in the near future.
“Overall, we view today’s comments as being consistent with our forecast that any easing in policy is still some way off. Market pricing for easing in the first half of this year still seems premature,” he wrote in a note.
Sharon Zollner, chief economist at ANZ, said the data commentary was “factual” and “played with a straight bat” but couldn’t be described as “dovish”.
“The speech did … clarify that the weaker GDP data is not a slam dunk for an imminent dovish ‘pivot’,” she wrote in a note.
“We are not anticipating a hike next month, but unlike current market pricing, would not rule one out”.
Brad Olsen, the principal economist atInfometrics, wrote on Twitter that there was no hint in the speech the RBNZ was laying the groundwork for a change in policy.
“In fact, he emphasized a number of factors that seem to support a strong stance on interest rates … Nothing forceful either way, but I’d say [it was] a gentle pushback on expectations of cuts soon”.
50 Comments
Means strength and resilience I believe.
Makes sense. His own strength and resilience or that of the hoi polloi? Perhaps he's smoke signaling that if you don't have strength and resilience, you're going to be toast in the looming economic maelstrom they're fearing and for which they play a key role in designing.
Yup. Actually a tad more than 2%. And its been that way for about a year and a half now. (The next one might drive in just how bad it is. These guys are pretending they're not destroying NZ Inc. but they clearly are.)
https://www.stats.govt.nz/indicators/gross-domestic-product-gdp/
Ask you asked...
"In these projections, we expect close to zero quarterly GDP growth in the December 2023 and March 2024 quarters, as global growth slows and high interest rates dampen domestic demand. However, quarterly changes in GDP are highly uncertain. For the March 2024 year, annual GDP growth is projected to slow to 1.2 percent."
Page 42 ... https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/…
so...
Q4 = 0%
Q1 = 0%
But annual growth for '24 of just 1.2% ???
On a per capita basis, 'sub-par' would be a poor description. Even 'anemic' doesn't work. I guess that level of growth will help reduce our greenhouse gas emissions though. Good work from them. I didn't know that was one of the RBNZ's targets.
Really? Here's a thought experiment for you. Would it have made any difference if NZ's OCR rate was 5%, or even just 4.5%?
Don't forget to factor into your response the return to normal of the tradeables component of NZ's inflation rate.
You may also like to reference past RBNZ action and what happened to the tradables and non-tradables at those time too. ;)
- And in 2009 we had the GFC. Many economists argue that central bank action both created and worsened that little hiccup.
- The RBNZ can stop retail banks from creating 'printed money' easily. They won't because they're too scared to fight that battle and government wouldn't help them. i.e. for the RBNZ it becomes an existential issue.
- The economy hasn't crashed? You sure about that? We'll know soon with the latest GDP figures.
- And the the US it is still amazingly strong? See my comment about where we are in the economic cycle on today's "Breakfast briefing: Dismantling a China giant".
Moronic stuff.
Take one example: "He said capacity pressure—or the balance between supply and demand in the economy— mattered most for inflation targeting, rather than the overall size of the economy itself."
I'd say capacity pressure is indeed a massive problem. But NOT for the reasons they say.
The primary reason is our extremely low levels of productivity and the enthusiasm by business to add labor when capital investments in plant and machinery would create greater productive capacity, and most importantly, capacity elasticity!
Until we get greater capacity elasticity into our businesses, by increasing our collective investment in plant and machinery (and management skills), we'll continue to be bound by this nonsense (while suffering slow, non-meaningful growth associated with importing more labor).
But guess what?
Will businesses invest in greater productive capacity (and elasticity) when interest rates are high?
NO - THEY BLOODY WELL WON'T.
Well the 2yr fixed mortgage rate is definitely higher than the average over the last 25yrs according to the graphs here (https://www.rbnz.govt.nz/statistics/key-statistics/housing)
Thank you.
(Just an aside. Note that steep rise in rates - echoed around the world - leading up to the GFC. And what happened? Real estate values plumeted and led to a financial implosion of real estate backed securities. And now we have mountains of cheep corporate debt rolling over and another Chinese flu. Will history repeat? Many have argued central banks caused the GFC. Are they going to do it again? If so, the mega rich say, "Thank you.")
Exactly. Even though the levels of debt are higher the current rates are not unreasonable. Especially when mortgages taken out on residential property are secured against said property. Those houses are not exactly the safest back up that everyone has been lead to believe. If things really go tits up, then banks will be in panic mode and those “securely” locked away term deposits will get a haircut. I’d be operating at around 22% p.a. on all outgoing funds.
Paul will consider himself an expert on all things productivity related. He was Grand Poobah of the Productivity Commission after all.
His understanding of technology-driven productivity of course makes sense. However, he seemed to get a bit lost in understanding why technology is deflationary. A bit too left field for him.
Hard to get excited about any announcement from the Reserve Bank. they are as woke as it comes in Wellington and appear to be led by a committee that specializes in not accepting responsibility for its actions.
Having failed to meet their targets for a number of years it is time for a new team
Hi Paul,
Mr Topliss (BNZ) is reported as observing the following:
"The Reserve Bank contests that its modelling shows non-tradables inflation is interest sensitive. This may well have been the case in the past but a significant proportion of today’s inflationary pressure will not be so. A substantial proportion of current non-tradables inflation can be attributed to four factors, which are in some cases inter-related: local and central government charges, the country’s infrastructure deficit, the impact of climate change and, increased insurance claims for natural disasters," says Toplis. Source: https://www.interest.co.nz/economy/126126/bnzs-stephen-toplis-suggests-…
I've not seen the modelling Mr Topliss refers to. I assume it has been published. Could you point me at it please? I am particularly interested in how sensitive the RBNZ believes it is to the effects of a raised OCR.
Could you also comment on why you believe the RBNZ's actions are correct at this time with specific reference to the points Mr Topliss has made?
Many thanks.
Interesting questions. By infrastructure deficit is he specifically talking about the lack of upkeep and the expenditure forecasted/needed to bring this up to scratch, or, the money borrowed and spent on bringing said infrastructure up to scratch? OCR may impact the cost of borrowing but it would be pure smoke and mirrors if it was the former of the two.
Perhaps instead of wanting to keep borrowing and spending to live beyond our means, we need to accept that we don;t have the money or means to upgrade all of the countries infrastructure in a short period.
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