The 'headline' news from Wednesday's inflation figures looks sensationally good. But there's a catch.
And it's a catch that means we may not see interest rate falls just yet. However, I would say right now there's still a better than even chance that we will see rate cuts before Christmas.
While the annual inflation figure as measured by the Consumers Price Index has come in at 3.3% for June - a three year low and below both the forecasts of the Reserve Bank (RBNZ) and some economists - nothing in life is simple.
The RBNZ had forecast the 'headline' inflation figure to be 3.6%, so the actual figure is a pleasant surprise for our central bank. But the arguably most significant thing is the figure for domestically generated inflation. And that came in at 5.4% against an RBNZ forecast of 5.3%. This domestic inflation has been very 'sticky' and has kept coming in above RBNZ forecasts.
Wednesday's inflation figures were always going to be hugely important, but the RBNZ actually upped the ante with some very unexpectedly 'dovish' remarks in its Official Cash Rate (OCR) review on July 10. According to its latest forecasts made in the May 2024 Monetary Policy Statement (MPS) (see page 50) the RBNZ hasn't seen the OCR being cut till the second half of 2025.
Till its marked shift in stance last week the RBNZ had been indicating that there would be no OCR cuts till the second half of next year, but increasingly economists have been suggesting November THIS year as the likely starting point.
Many mortgage customers have been 'going short' with their fixed mortgage rates - as short as six months - in the belief that rates are coming down sooner rather than later.
At the moment the OCR is sitting on 5.5%, where it has been since May 2023 after an intensely aggressive cycle of hikes by the RBNZ that raised it up from just 0.25% at the start of October 2021.
All this is happening against a backdrop of a teetering economy. While GDP grew by an anaemic 0.2% in the March quarter after contracting in four of the previous five quarters, it is already widely expected to have fallen again - and possibly quite substantially - in the June quarter. Recent high frequency economic data has been painting an increasingly dire picture of the economy.
The RBNZ is charged with maintaining inflation between 1% and 3%, with an explicit target of 2%. But inflation has been above 3% for three years now. As of March 2021 annual inflation was 1.5%. Twelve months later it was 6.9% and then peaked at 7.3% in June 2022. Getting inflation back down has taken rather longer. In March 2023 annual inflation was still at a very elevated 6.7%. However, as of March 2024 the annual inflation rate was down to 4.0% and has now of course fallen to 3.3%.
The May MPS forecast was for annual inflation to get to 3.0% in the September quarter and then 2.9% in the December quarter. Interestingly in its OCR review in the past week the RBNZ talked about inflation getting back under 3% "in the second half" of the year - which suggests it's thinking this might now happen a bit earlier than it thought - probably in the third quarter. A number of economists think sub-3% WILL be achieved in the September quarter.
The RBNZ has three more reviews of the OCR planned this year before a three-month summer break. The reviews are scheduled for August 14, October 9 and November 27.
At time of writing - and bear in mind these things move quickly - the financial markets were pricing in a better than 50-50 chance of an OCR cut at the August meeting, a cut is more than fully priced in for October and nearly THREE cuts are priced in by November.
Before the RBNZ has its next OCR review on August 14 it will have the labour market figures for the June quarter to look at. These are to be released on August 7 and will also be important in the OCR setting process. The RBNZ is forecasting that the unemployment rate will have risen from 4.3% as of March to 4.6%. Based on the swathe of recent, frankly dismal, high frequency economic data that's been released, it would not surprise if the figure on August 7 comes out at higher than 4.6%. Such an outcome would help demonstrate a need for OCR cuts.
One more thing for the RBNZ to consider prior to its August 14 review will be the RBNZ's own Survey of Expectations in which business leaders and key economic forecasters give their views of the path of future inflation. A favourable outcome in this survey - and I suspect it will be - will add further downward weight to the OCR expectations.
But right now the RBNZ is likely to continue to watch and wait - just for the moment.
Could it just 'ignore' the relatively high domestic inflation figures and cut rates now anyway? There's certainly a few economists out there who reckon the RBNZ should stop being pre-occupied by the domestic inflation readings. But really, it's not likely the RBNZ will change its stance right now. Probably not.
So, as I say above, my best guess is that we will see rate cuts soon but not just yet. A likely scenario would be for the RBNZ to prepare the ground for rate cuts in its August Monetary Policy Statement and then if the September quarter inflation figures, due for release on October 16 do perhaps show the inflation rate dropping back below 3% then a cut to the OCR may follow in November.
What will the banks do in the meantime? Well, that will be very interesting. There's probably every reason to believe that the banks will pre-empt future OCR cuts with at the very least some pruning of term deposit rates - particularly those for longer durations.
Will they move quickly on mortgages? That one's harder to tell. Substantial moves are probably unlikely until the banks have a clearer steer on just when the RBNZ may move.
People will have to grimace and bear those high rates for a while longer, I fear. But we are getting there.
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Whats so great about lower interest rates. The current rates are about long term normal. Lower rates encourage borrowing and discourage investment. (edit: aka saving)
We would be better as an economy if we worked from the power of ownership rather than crippled by debt.
However you could argue that as debt is a bet on future resources, that you are speculating with future resources with the goal of profiting from your activities. the resources of yonder times was the energy of horses, humans, wood etc, the only difference is that we currently have the use of very energy dense resources.
Distinguishing between borrowing and investment is interesting, and I think quite right. Looking at decision-making processes within corporations it is seldom companies change their investment hurdle rate for what is obviously a short term interest rate. Low interest rates inherently say that confidence is lacking but with the hope that confidence will return in the long-term. Best to invest capital (improving productivity) with a view to long term interest rates applying, and only speculate with lower interest rates when you certain you are the first in the queue to buy existing assets.
One of NZs biggest hurdles is access to capital.
In order to have large export industries, you need significant capital investment which can take decades to get up to any decent ROI.
This is why we have foreign multinationals come and eat our lunch.
So you likely need some debt, so the more expensive it is, the harder the path to profitability.
If we cut sooner rather than later, how likely is it that it will lead to non-tradeable inflation taking off again? We are still well above the neutral OCR. I can't see that dropping the OCR by 25bps is going to cause rent, rates, insurance or tobacco price increases to get any worse!
The longer the RBNZ sits on the fence the deeper the damage to our economy and the flight to Aussie and other countries will only continue. We are already at record levels of our young and talented leaving. Pity the poor families who bought on Orrs recommendation of "borrow ,borrow, borrow" who are now trapped in their negative equity homes paying ever increasing insurance, rates and electricity.
More recently its averaged around 2.5%. Same target band as tradeable inflation.
https://www.ceicdata.com/en/new-zealand/consumer-price-index-jun2017100…
It should be within the government's mandate to manage non-tradable inflation IMO since tinkering with money supply isn't as effective here as the policy levers in the hands of our politicians. However, there has been widespread policy failure in keeping a lid on rents, council rates, insurance, power, food, medical bills, etc.
When a Christchurch entertainment venue advertised for an “enthusiastic and versatile all-rounder”, it got more enthusiasm than it expected.
Logan McMillan - who co-owns CodeBreaker escape room, Serve Ping Pong Club and Duel Darts - was astonished at the rate applications flooded in for the customer service role.
“It’s insane. It was right from day one. Normally you’d get between 40 and 80 for a job like this - it’s almost up to 1500,” he said.
The position is for 30 to 40 hours’ work a week, including evenings and weekends. It pays between $26 and $30 an hour.
Or alternatively, it may surprise on the upside.
I disagree, the much lower inflation figure than the RBNZ expected is very good news for the fight against inflation and the domestic inflation is held up by rates, power, insurance, all items which are not responding to a higher OCR. If the RBNZ has any brains, it will realise how much pain it is inflicting on the economy, how many people are about to be made redundant, how many more businesses will close down, and drop the OCR by 0.25% in August.
The rbnz has one inflation target.
If some items aren't affected by the ocr then in order to get total inflation down then the ocr has to have more impact on other items to compensate.
It's how it is and has to be.
Ideally we would put pressure on local govt and anything else under govt control to reduce rate rises... pressure or talk with the insurers about solutions to stop their rises.
The only real way to reduce rate rises is not through the OCR, but through legislation, that is an imposition by law of a yearly cap on rate rises at national level (set at the inflation level, or maybe 1% over it as a temporary exception).
Many councils have been wasting way too much money on non-core areas, such as cycle lanes. Time to stop all this wastage and force councils to re-focus on efficient spending concentrated only on core areas.
Out of control councils are going to ruin the country.
How about new greenfield developments that the council decline, but are then successfully appealed to the environment court, and council are lumped with billions of extra debt. Hardly councils’ fault.
Or how about mass immigration that places all sorts of pressure on council services and assets?
Sure councils can be a bit wasteful, but there’s also lots of stuff out of their control
Once they get back to ~2% (effectively already there based on last 3 quarters), they need to be running at about the neutral rate, otherwise they could start slipping below 2% and then have to swing the lever hard the other way. They need to get back to that neutral rate slowly, starting now.
I don't think you can use the period since 1998 as an indicator of the neutral 'long term' mean interest rate in NZ (as the RBNZ have tried to do here in their lovely graph: https://www.rbnz.govt.nz/hub/news/2024/04/finding-neutral), because it was falling all the time since the dotcom crash (the preceding boom was the first harbringer of the effects of the boomers savings glut). You'd have to snapshot a much longer timeframe than their mean uses (perhaps the last 100 years), and I suspect the figure would be between 5 and 10% for NZ, given the country's risk profile.
The neutral rate is the point where the OCR keeps CPI consistent. It changes all the time based on current conditions. In April the RBNZ guesstimated it at 3.9%: https://www.rbnz.govt.nz/hub/news/2024/04/finding-neutral
Due to New Zealanders’ high inflation expectations, the Official Cash Rate (OCR) would currently need to be about 3.9% to neither tap the brakes nor push on the accelerator of the economy
At the end of the day, the RBNZ have a CPI target, not a domestic inflation target. If the next quarter's inflation is similar to this one, they will actually fall below that 2% target. Meanwhile they have the inflation brakes on full noise and are screwing over the economy.
The RBNZ has a sole mandate of CPI. Not non tradables CPI. They lost their dual mandate and have consequently caused a high level of pain in the jobs market so why if they have been given an explicit mandate of CPI should they not focus on it? Every lower quarterly print effectively tightens policy in theory as the real rate rises ( currently at 2.2%). 0.5 0.6 and 0.4 extrapolated forward would see the middle of the band next quarter and real rates an extraordinary 3.5%. Let’s just get rid of the unhealthy non tradable debate.
How much do people expect the OCR and interest rates to drop? Surely, they don't expect a return to the ultra low interest rate environment? Like an interest rate of 5% sounds about right. I'm in two minds about cuts, it would benefit me directly as I have a mortgage, but I despair that the property market might blast off again. Cheap debt has never been good for us.
I think we are already back to the 2% target (however it seems we need to wait another quarter for the RBNZ to also see that).
Once we are there, the RBNZ think the OCR should be 3.9%
https://www.rbnz.govt.nz/hub/news/2024/04/finding-neutral
Due to New Zealanders’ high inflation expectations, the Official Cash Rate (OCR) would currently need to be about 3.9% to neither tap the brakes nor push on the accelerator of the economy
I disagree with their view.
An OCR of 3.9% would still be ‘brakes on’, retail interest rates in the high 5’s will provide bugger all stimulus to the economy.
As I have said before the OCR would need to be 3 to 3.5% to start having a genuinely significant stimulating effect
3.9 neutral rate for the OCR would have the one year mortgage rate at about 5.5%(ish)?
I wouldn’t think that would be low enough to get house prices to go nuts, but it would be enough to maybe get some $$ back into circulation again. Plus with DTI’s I think house prices would plateau, maybe see some long term slow growth, just can’t see it going berko again unless I’m missing something?
"the unemployment rate will have risen from 4.3% as of March to 4.6%". So still some way to go until it's any concern in a general sense.
In the real world, an unemployment rate of 5% or lower is often considered full employment. This level of unemployment prevents inflation and lets workers move between jobs, but is low enough that those wanting full-time work should be able to find some kind of full-time job.
Tax cuts will also put more cash in pockets at the end of this month, what influence may this have on domestic inflation? the local body rate rises will also hit in the upcoming quarter. Restricting councils by legislation to hold rates increases to within the CPI movement may well have value - the rest of us have to earn what we spend - they just have to hold their hands out, sort of modern day highwaymen.
Yeah, sure, David.
But what about the real world?
Is anyone going to tell the RBNZ (and many idiotic pundits) that hiking domestic interest rates - and holding them too high, for too long - also takes time to trickle through the economy?
Or put another way - businesses will often hold off price increases for as long as they can - especially if they're not monopolies or oligopolies. (These are the the biggest employers in NZ Inc. i.e. small businesses). But eventually the higher costs of working capital have to be passed through.
Or put another way - just like how how OCR increases take time - 2 years - to trickle through the economy - so do the costs of higher interest rates!
Why the RBNZ is surprised - or anyone else for that matter - by 'sticky' domestic inflation - aka non-tradable inflation - simply astounds me.
Like I have said ... If they'd started the easing cycle back in November 2023, domestic inflation would have been (note the past tense) going backwards at the same rate as 'imported' inflation.
Sorry - worst RBNZ we've ever had. By a huge margin
(from another thread)
Inflation is currently running at 2%, if you are lucky, its just that we measure it by including last years data, which is crazy if you think about it for more than 2 seconds. We are in the target band.
OCR is at 5.5%, so a full 3.5% above inflation. Rates needed to drop yesterday, RBNZ should drop rates by 0.75% come August to make up for their lateness. But they won't, likely they will hold, then be surprised at how big of idiots they are (just like "transitory inflation", which they never got pinged for).
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