Any talk by the Reserve Bank this week of increasing the Official Cash Rate would be "overkill", according to Kiwibank's economists.
The economists - chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado - say in their weekly First View publication that they were "taken aback by the power of the mighty hawk they [the RBNZ] unleashed" in their last review of the OCR in May when it was revealed the possibility of a rate hike had actually been discussed by the RBNZ's Monetary Policy Committee.
The RBNZ's latest OCR review is on Wednesday, July 10. And while the central bank is universally expected to leave the OCR unchanged at the 5.5% setting it has been on since May 2023, much interest will focus on what the RBNZ says about recent economic developments and whether there will be any hints about when the OCR may be moved - with most market expectations centering on the expectations of cuts.
The Kiwibank economists said they strongly disagreed at the time with the RBNZ's May sentiments.
"We didn’t see the need for the RBNZ to exert more pain onto households and businesses. The RBNZ simply needed more time.
"And now, well, we’ve only strengthened our conviction. Any talk of hikes now would be overkill. The [economic] data has clearly turned. Actually, it turned a very long time ago, at the end of 2022. And the economy is becoming weaker by the day," the economists said.
They say there are "still some hurdles to get through". Inflation needs to be brought back within the RBNZ’s 1%-3% target band - "a hard task that should be accomplished in the next few months".
But the economists think "the complete return to 2%" - which is the explicit target point for the RBNZ - is still a 2025 story.
"Aggressive tightening from the RBNZ has worked. And setting policy today is about influencing the economy over the next 18 months. So, the RBNZ’s sights should be set on the end of 2025, start of 2026. And with that in mind, rate cuts should be considered, not hikes.
"The weakness in the economy should quell domestic inflation pressures. And by our forecasts, we still see inflation falling back within the RBNZ’s 1-3% target band by the September quarter. That should open up the first rate cut in November."
The economists say they will be on the lookout for "a material softening" in the RBNZ’s forecasts and rhetoric when it releases its next Monetary Policy Statement in August.
"We would recommend a cut in August… but we’re more concerned about the health of many businesses and households. We shall keep up the good fight," the economists said.
The economists note that because there's no Monetary Policy Statement accompanying this week's OCR review there will be no updates to the RBNZ’s economic forecasts or OCR track forecast.
"The RBNZ should acknowledge the even deeper weakness in the economy. And they must refer to the collapse in business confidence [in NZIER's Quarterly Survey of Business Opinion] last week."
BNZ's Toplis - the economy is looking well and truly derailed
BNZ head of research Stephen Toplis says in BNZ's latest Markets Outlook publication that he expects the RBNZ this week to stick to its broad view that interest rates will need to stay elevated for longer to ensure it meets its inflation target.
"That said, it’s going to be hard for the RBNZ to avoid acknowledging that the economy is now looking well and truly derailed.
"Front of mind will be last week’s Quarterly Survey of Business Opinion which provided more evidence that the current recession will roll on for a while longer, the unemployment rate will rise rapidly and, most importantly, business intentions to raise prices are declining at pace," Toplis said.
"But it’s not just the QSBO that’s telling us this. The evidence from all quarters is now overwhelming.
"However, we reiterate that the RBNZ has made it abundantly clear inflation is its objective. It has also suggested it won’t feel comfortable letting go of the reins until such time that annual inflation is within its target band.
"Therefore, with the market now pricing a greater than even chance of a rate cut in October of this year, and the distinct possibility of an August cut, we think the Bank will be loathe to say anything at the upcoming MPR [OCR review] that might further fuel this reasoning. On this basis, don’t be surprised if the RBNZ tries to push back on the market’s current enthusiasm."
21 Comments
Fair play to Kiwibank. I wonder in my more cynical moments whether the banks are providing advice on the basis of analysis of real world data or their employers' profits. The more we go into recession, the better the banks (and offshore investors) seem to be doing. Is that how it is supposed to work? Households, businesses and Govt go into ever largers debts to offshore banks and investors, and that's how we tame inflation? Seems a bit odd.
Yes and what happens if this really is a stagflationary recession as opposed to a deflationary recession that everyone assumes? So rising rates is the cure not the disease?
ie if we start dropping and inflation roars higher again, will we have bank economists demanding for higher rates to ease the pain of inflation consumers might experience in the economy? Or do we forever live our lives under the paradigm that falling interest rates are our saviour (but never the cause) to our problems because we primarily live our lives governed by recency and confirmation bias?
I think the graph in my comment shows us where the real problem is - our economy is hopelessly out of balance. The cost of the stuff we import has gone up a lot and, as a result, our domestic sectors (private and govt) are going further and further into debt to finance our current account deficit and bank profits. Higher or increased interest rates in this scenario just add fuel to the fire - ever larger interest payments to offshore investors and banks, which increase our current account deficit (and so it goes on). Meanwhile our dominant uncompetitive domestic sectors just pass on the higher cost of some imports and the higher cost of debt, insurance, rates etc to their customers - dropping supply rather than prices to meet demand. Hence, the stagflation.
I have had this discussion with bank ecomomists and they just keep returning to the same narrow question... 'so, are you saying that we should tighten or loosen monetary policy?' Is that what our economic strategy thinking has been reduced to - wiggling rates up and down?
Banks use their economists and their announcements to communicate and coordinate their commercial business with other commercial banks. To do so subversively would be regarded as anticompetitive, but doing so in the open is apparently OK. Their is obviously a great advantage in moving together given that they collectively create more than 95% of the money in circulation.
The interest rate is only half of the equation. The other is private debt level.
If your country has low private debt, then a higher interest rate doesn't cause too much pain because the cost of servicing that debt is not too stifling. When your private debt is around 140% of GDP like NZ then a 5.5% interest rate (7.5% avg on loans) pulls around 10% of your GDP out of the economy and redistributes it to bank equity holders, savers and Govt (taxation). Your economy gets smothered by debt costs.
Here's a picture of interest payable on private debt as a % of GDP. As you can see, when the interest payable on private debt goes above about 8% of GDP, we go into recession quick sharp. Now look at the trend in private debt and interest rates (OCR). Basically, since 2009, our high private debt levels mean that we have to have interest rates lower than 3% to keep the economy moving. We're trapped.
Exactly that.
We overcooked our economy.. by dropping rates too far for too long and printing and handing out money. House prices rose and the equity made people feel even richer and they spent that too.
Businesses adjusted to the boom and now have an unsustainable demand for sales. Everyone seems to be hanging the there for 2025 expecting we can go str8 back to the boom spending levels.. we cant.
So now we have accept a massive downturn to the economy (for possibly as long as the boom lasted ) and accept massively reduced revenues and incomes.. and a lower standard of living. And rebuild our economy properly.
You can't sit and eat excess fast food for a year then take a magic pill and lose the weight to be back where u started. you gotta accept it will take a long period of dieting and exercise and change in most of how you live.
Rbnz needs to sort inflation using elavated rates. the parts of the economy that have excess debt and struggle without access to cheap credit and excess money in the system - will just need to work their way through it or bust.
Nah, Trump is going to save the world in November, making New Zealand great again. The market can turn on a dime, people will be wracking up more debt in no time. Even people with millions have stopped spending, its a mental thing as soon as the sentiment changes its away we go again.
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