After three and a half years of fighting, the Reserve Bank (RBNZ) has finally defeated inflation and may move quickly to cut interest rates to a neutral position.
The Monetary Policy Committee said on Wednesday it believed annual consumer price inflation (CPI) was converging on the 2% midpoint of its 1% to 3% target range, and would stay there in the medium term. The RBNZ thus cut the Official Cash Rate (OCR) by 50 basis points to 4.75%.
Statistics NZ will release the official CPI number in the middle of next week. All forecasts expect it to land in the target and likely very close to the midpoint. Price stability has been achieved.
Readers should keep in mind that annual inflation printing at 2% actually represents the one year anniversary of price stability, and prices haven’t been increasing quickly in the past year.
If you still feel grumpy, that is understandable. Prices have increased more than 19% over the past three years, significantly higher than the roughly 6.5% that would have occurred if inflation had stayed on target.
A brief history of inflation
It was in June 2021 that the consumer price index first rose above 3%, as fiscal and monetary stimulus exacerbated pandemic supply constraints. The RBNZ halted its government bond buying programme the following month, but kept the OCR at 0.25%.
It would have hiked interest rates at the August 2021 meeting, except the country was returned to Level 4 lockdown on the eve of the decision. It wasn’t until October, when annual inflation was at 5%, that it began to raise interest rates.
While this looks tardy in hindsight, the RBNZ was still one of the first central banks to react to what would quickly become a global inflation crisis. From there it lifted the benchmark interest rate another 500 basis points across the next dozen meetings.
Annual inflation peaked at 7.3% in June 2022 and remained above 6% for the next year. It began to fall quickly in mid-2023 and is expected to touch down on target next week.
Tough times
But we can’t call it a soft landing. Economic activity per capita has been falling faster than after the Global Financial Crisis and unemployment could hit 6% — up from 3.2% in 2021.
Households had to redirect spending money to their mortgages, and businesses have been shedding staff to stay afloat as demand dried up. It has been a difficult couple of years.
The RBNZ has played a role as both arsonist and fire-fighter. It first pumped demand into the supply-constrained pandemic economy and then aggressively tamped it back down.
Some level of inflation was likely inevitable but mistakes were made. An independent review said policy should have been tightened earlier, although the ultra-loose pandemic settings were “largely warranted”.
Lower-for-sooner
There will be more time to assess the totality of the response once the dust has settled. But for now, it looks like the central bank wants to move quickly to avoid another mistake.
Brad Olsen, principal economist at Infometrics, said there was “real potential” for the committee to consider a 75 basis point cut in November ahead of the summer break.
“[RBNZ] appears to have realised that the economy is weaker and doesn’t require as much interest rate restraint, and that it needs to cut faster to normalise interest rates — a clear, if only implied, omission that it may have been too slow to act,” he wrote in a note.
Most economists expect the central bank to deliver another 25 or 50 basis point cut in November, as larger moves have only been used in crisis situations.
Stephen Toplis, head of research at BNZ, said the summary of the meeting clearly acknowledged that the looser monetary policy settings were still slowing the economy.
“When put alongside the fact that, ‘members agreed that increasing excess capacity is leading to lower inflationary pressure’, it can only mean the Bank expects to lower rates further,” Toplis said.
“Moreover, the Bank goes on to say that, ‘an OCR of 4.75% is still restrictive and leaves monetary policy well placed to deal with any near term surprises’. This is a clear signal from the Bank that there would be no need to raise interest rates from current levels even if it got a near term inflationary surprise”.
BNZ believes there will be another double-whammy cut in November and regular size cuts at each subsequent meeting until the OCR hits 2.75%.
Toplis said it would not be enough for the RBNZ to move rates to a neutral position and then stop there. It will need to stimulate the economy to prevent deflation and instability.
In May the RBNZ said it had increased what it describes as the long-run nominal neutral OCR by 25 basis points to 2.75%. The neutral rate is the level at which the RBNZ deems the OCR would neither stimulate nor constrain the economy.
Double-happy
Finance Minister Nicola Willis took to Twitter to celebrate the interest rate cuts.
“Double-whammy, double-happy. The Reserve Bank’s decision to drop the OCR by 50bp today is great news for all Kiwis: mortgage holders, business owners and workers alike.”
“It’s clear the economy is turning a corner and brighter days are ahead,” she wrote in a post.
Also on Twitter, Prime Minister Christopher Luxon seemingly took credit for the interest rate decision and claimed the Labour Government “oversaw” the Reserve Bank’s previous hikes.
The central bank operates entirely independently from the government and the Coalition has only just begun to cut spending — this means its impact on inflation, if any, has been minimal.
Politicians will be keen to get credit for falling interest rates, as this will have a much greater impact on households and the economy than even the largest central government policies.
But with rates still throttling economic activity, a whole-hearted recovery will likely have to wait until the middle of next year at the earliest. The sooner we get there, the better.
96 Comments
It may just be the end of the beginning. Look at the US 10 year bond yield on full time scale. We’ve broken out of a 4 decade down trend. Inflation may temporarily be tamed - the cost of which is yet to be fully felt and the next round of inflation may just be around the corner.
Many things may be just around the corner, but for now, I do think inflation is beaten…was it the RBNZ winning the war…maybe, also maybe the extreme supply pressures easing might deserve a fair chunk of the credit. They have however successfully stamped out domestic demand pull inflation by stomping hard on the economy…now let’s get to the NIR quickly & let’s ensure lending tools are used wisely to cap house prices…but, you know what I thinks going to happen anyway 🤦🏻♂️🤦🏻♂️
My view is that most of the inflation was either imported, unavoidable or due to temporary supply constraints and labour shortages. It was always going resolve itself with time. A faster modest increase in the ocr would have resulted in a better outcome. The delay has caused capacity to drop due to business closures and downsizing. Some of the inflation will have been caused lower volumes of custom and trying to cover the overheads.
Fundamentally, I say NZ should revert to higher interest rates, which for some time now have been artificially distorted lower by the state (by the rbnz acting in accordance with the law made by parliament).
Like all price fixing, this policy has created flow-on distortions throughout the economy. An important second-tier effect has been that our too-expensive houses discourage family formation. Quite apart from social factors, young families are very helpful for dynamic growing economies.
As well as dropping the price of assets habitually bought with borrowed money (eg houses), raising rates would ensure money available for productive investment was invested more prudently (or at least would reduce imprudent investment).
@ Macroview
Higher interest rates ruin the economy, I think that's pretty clear to see. Mr Orr deliberately caused a recession by raising the OCR, so are you suggesting that we remain perpetually in recession? If house prices are your concern, there are other ways of controlling price increases such as DTI and LVR.
A neutral rate of around 2.75% would keep the economy moving forward, and would not stimulate surges in asset prices if other tools are used, as mentioned above.
House prices would be out of reach regardless. If interest rates were higher the prices would be lower but the repayments the same. Houses are in short supply so the price is set at a level that just enough people can just afford to pay. DTIs etc just lock people out of the market altogether and make houses only for the rich. The only real solution is more supply (or less demand)
Oh but if that were correct! But the maths and the risks don't work that way. Lower rates create, first, the need for a higher deposit (in circumstances where saving is harder because returns on savings are lower), secondly the greater risk of taking on debt at rates that have a materially greater risk of going higher (than if you had a higher starting point), and thirdly somewhat greater repayments over time (because the principal is larger on which interest is charged albeit at a lower rate).
He warned that that would be the result. However the US also raised a lot, but they didn't go into a recession. But NZs economy is very much based around the housing market. But historically NZs interest rates are still neutral to low. 2.75% is very low historically. NZ is addicated to cheap borrowing and it results in housing price bubbles and many younger people being completely priced out of buying a house.
He's made plenty off of property, which I don't hold anything against him for. It's done, he has a good life now so power to hm for doing so. He doesn't spruik heavily like many, and we need to focus on the future and way forwards now. Like many who have made, and continue to do so, money on property, they will already be well set and won't likely lose out on much if further changes are made at policy level such as CGT, it will only mean that the profits will be less than anticipated. The core of the issue will be how to prevent wealth further accumulating if or when changes are made, else those with capital will simply use to hoard even more.
Broadly correct but your hypothesis is incomplete. Higher rates are damaging to those who took out debt at lower rates. Such rates depress economic activity because of the debt already taken out. Thus, as other posters have said, the core problem was the lower rates to begin with.
Higher rates only ruin the economy when you are carrying a large debt burden
Let's assume for a moment that all existing debt is gone and interest rates are 200% per annum.
How many new houses would get built? (Considering it takes ~2 years from buying the land, design, construction, completion).
How many factories would get built?
New businesses?
Infrastructure?
It can all be done on a cash basis but growth would be very slow.
As a thought experiment. If interest rates are 200% per annum, I think you’d find everyone would put all their money into term deposits. If you could save 50% or your salary, you’d be able to retire after 1 year of working and live off the interest. So no construction at all, but not only that the supply of workers would fall but the dollars chasing the falling number of goods would increase so inflation would shoot to the moon and we would be Argentina
How many new houses would get built?
We only need to build them due to immigration at this point. Due to our location, we can choose the level of immigration.
It can all be done on a cash basis but growth would be very slow.
Which is perfectly fine if the population is growing slowly too (or static/falling).
"Look at the US 10 year bond yield on full time scale. We’ve broken out of a 4 decade down trend."
With respect, I_O, I think you're looking at shorter term changes while overlooking the bigger picture.
We've just been through an exceptional event. Time will tell if 'we’ve broken out of a 4 decade down trend' but I think it unlikely.
If you can find a serious structural change to the global economy to back up your musings, believe me, I'm all ears and will listen intently. Climate change might be one. But everything I'm reading suggests a fairly 'normal' situation.
I guess what I'm saying is, be cognisant of Recency bias.
Haha I’m the one looking at the US 10 year bond yield over a period of decades while everyone else here is getting hard over one movement of the local short term rates that happened today…but you claim I’m the one who is guilty of looking at shorter term changes and not the bigger picture?!
Sometimes I really value your comments and other times there’s a lot of cognitive dissonance which seem way off the mark.
Increasing fossil energy costs and their increasingly expensive externalities are the big structural changes driving everything else. We have used finance to try to stimulate our way out of this but this only leads to the accumulation of debt which will not be paid off.
Great, this is the market signal that all Kiwi’s have been waiting for. Quick, buy more houses before it’s too late. What you need is a house for every occasion. One in the city, a lifestyle block for your horses, a tiny home, and of course the crown jewel: the good old kiwi bach in Mt Maunganui for 2 million dollars. Come on guys leverage those kids into one as well.
"Politicians will be keen to get credit for falling interest rates, as this will have a much greater impact on households and the economy than even the largest central government policies."
Uhh hasn't the US been proving this untrue recently with their massive fiscal stimulus?
I have enjoyed the social media posts from political parties today claiming merit for their hard work beating inflation 😂😂
Chris Bishop might be sweating…he has another 6-12 months to ride the property price decrease wave, unless he can actually do something to achieve this himself of course
The war is over folks - it was fought offshore! NZ prices have moved in line with global prices... Import and export prices are up about 25%, our domestic prices are up the same. Whoopie-doo. We were along for the ride. Would it have been any diferent if RBNZ had done absolutely sod all? I seriously doubt it. Although, we wouldn't have had a stupid housing boom / bust, I guess.
"Would it have been any diferent if RBNZ had done absolutely sod all?"
I'm inclined to agree.
When the OCR was cut to 0.25%, I thought, "Good move. Show you're here to smooth this out". But then they scrapped LVRs and threw money around. And I started to wonder.
By the time it was clear global supply chains were rooted, I became nervous. And when NZ Inc was safe and large unscathed, I got very nervous. And as inflation started to reflect supply constraints - and NZ Inc. hadn't collapsed, mainly thanks to government action - it was clear, nay very clear, the RBNZ was way, way out of step.
The rest, as they say, is history.
On balance - if the RBNZ had done absolutely nothing at all, we could well be better off now.
One notes many other countries did much the same - i.e. government support with their central banks sitting on their hands but saying comforting things - and all those countries have done way better than us post-covid.
Yes, I'd agree with that. The two big 'macho central banker in a small country' mistakes were (a) crazy stimulus in 2020 and 2021 - FLP, LVT, flooring rates etc - completely unnecessary, and (b) the brutal rate hikes in 2022 and 2023 seemingly without any understanding of what those rates would mean for NZ given our sky high, short-fixed private debt levels.
"The central bank operates entirely independently from the government..."
Dan, I don't agree with your statement. Section 125 of the RBNZ Act 2021 says the minister can tell the bank what "economic objectives" it should direct its monetary policy towards. The minister can override all those objectives already in the Act (see section 9) one of which is medium-term price stability (ie inflation targeting).
Such an arrangement is not independent of political control. To the contrary, the ability of the minister to control monetary policy is patent, all encompassing, and direct.
Dan, the word "operate" doesn't appear in s.125. There is a very broad discretion under that section for the minister to set objectives which the bank must then follow - and what objectives the minister may set is not trammeled by the Act.
This leaves it free for a minister to set objectives which leave the bank little or no substantive discretion about what to do.
MacroView,
We have seen the OCR fall to almost zero-0.25% and then rise to 5.50%. Are you saying that under that Act, the Minister of Finance could at any time, have intervened to stop some or all of these rate movements? If that is what you are saying, then I disagree.
You need to 'read the Act as a whole'. (Law School 101. Yes, I have a few law papers under my belt.)
Quoting s.125 out of context gives the wrong impression of what powers are available when the 'Act is read as a whole'.
And even that is not enough.
The Act uses other phases and titles that are defined in other Acts. Take an 'Order in Council' as example. Does the Act define exactly what one is and how one is created and by whom? Nope. You need to look elsewhere. And further to that, the actual process itself may not be 'codified' in any Act as the process itself is defined by history, convention and/or simply by 'that's how it has always been done'.
An order in council, which under this section is secondary legislation, is just mechanical. The governor general will issue/sign such an order if requested (read: required) by the duly elected government.
As for your other point, what precisely do you say is the relevant context, and how precisely do you contend it detracts from or affects the very clear words of s.125 which stipulate what the minister can do?
s.125 "The Governor-General may, by Order in Council, on the advice of the Minister, direct the MPC to formulate, and the Bank to implement, monetary policy for 1 or more economic objectives for a period not exceeding 12 months that is specified in the order."
I read the keyword here as may. Ministers can advise the RBNZ if hey so choose, it is at the discretion of Governer-General, not the minister. Although the definition of order in council would be more helpful to better interpret this clause. It doesn't specify that they will enact what is advised by the minister, or we couldn't have the RBNZ independent of government and pushing back against foolish policy and expenditure choices to keep inflation tames, however I'll admit that independence has, at least appeared publicly, strained.
If the government (the minister) so requests, then the governor general will do it. In reality the GG doesn't have discretion - or indeed anything to do with the policy behind it. To have effect all legislation must be signed off by the GG as the King's representative.
Also, the word 'may' is simply used here in the permissive sense, ie to describe what the minister has the ability to do.
This can't be right!
TradeMe says property prices are bouncing back. Where's the DGM's?
https://www.1news.co.nz/2024/10/08/property-prices-bounced-back-last-mo…
@Adam, fair call, if the ME kicks off & oil spikes &/or climate events create ongoing insurance cost increases then it could bump up…but surely continuing to choke the domestic economy with a highly restrictive OCR isn’t the fix to that situation anyway?
Let’s say we do see an inflation bump I’d doubt it would be created from domestic demand pull pressures so higher lending will only cripple NZ Inc more…unless I’m missing something?
Lol. "Normalised interest rates"? On what evidence and time scale do we have any indication of what is normal? What about normalised debt levels, credit creation, market fundamentals?
The "war" is ongoing, it's only the size of each battle that differs. Apparently the biggest war is against deflation.
In attempts to smooth the boom/bust cycle, ie prevent busts, central banks are simply protecting the interests of the financial system and instead enable it to become the beast it is. Note it was the banks calling for others to suffer hardship to fight inflation. While the people fought inflation what were the gains to the banks, big corporate profits, Wall St, etc.
“The RBNZ appears to have realised that the economy is weaker and doesn’t require as much interest rate restraint, and that it needs to cut faster to normalise interest rates — a clear, if only implied, omission that it may have been too slow to act,”
Something that most Interest readers have understood for some time.
Edit: "something that some Interest readers have understood for some time". I forgot about the HFL commenters and the 10% by X-mas.
Of all the Spruiker posters Yvil, you have been the most accepting of them that house prices have been and may continue to drop from current levels over the last year, what's your call here, how many % are we away from the bottom or via REINZ HPI where we at the bottom last month?
for what its worth I think we are going to see a weak summer season with no gains but clearance , and the true bottom will become clear once global markets decide 2025 will bring in there summer (our winter2025). if things are rosy we may be 5% away from the bottom from today, If things are not rosy, we are probably only half way to the bottom from the top.
“[RBNZ] appears to have realised that the economy is weaker and doesn’t require as much interest rate restraint, and that it needs to cut faster to normalise interest rates — a clear, if only implied, omission that it may have been too slow to act,” he wrote in a note.
I'm not sure how much faith to place in an economist who mixes up "omission" and "admission." Or at least I think he did, I can't read his mind. It's not as if he's just been misheard either, he wrote it in a note.
Do I admit I stole something, or do I omit I stole something? Choices, choices...
You're blaming BO for Interest's typo?
https://www.rnz.co.nz/news/business/530320/how-soon-will-ocr-cut-lift-e…
"A clear, if only implied, admission that the Reserve Bank may have been too slow to act. It still could be too far behind, if inflation is already close to the mid-point of the bank's target and interest rate settings are still quite restrictive."
normally I do not look at the volume in a share trading day to indicate too much, sure it shows turnover, price action is many times more important.
I imagine the agents will cheer increased commissions, but the vendors are looking at the price they can achieve.
lately I have not really joined the comments as I believe in the data being presented not the spin. QV REINZ and Barfoots all seeing increased turnover but dropping prices... and the spruikers keep pushing we are at the bottom last month, right now the smart investors are either driving a smashing bargain or larfing at the rookies.
The RBNZ could begin to fix the economy with the following
- Drop the ocr to 2%
- Mandate that owner occupied borrowing is stress tested at 10%
- Mandate that property investment borrowing is stress tested at 15%
Thus allowing productive enterprises access to cheaper borrowing, all the while ending FOMO.
It would have hiked interest rates at the August 2021 meeting, except the country was returned to Level 4 lockdown on the eve of the decision.
So we had to have a 2 year recession because some CRL dickheads thought it was a good idea to put a public walkway through the Crowne Plaza Covid Hotel outdoor exercise area?
It feels close to Pyrrhic victory, and might a better strategy have caused fewer casualties?
Perhaps replacing the repeated OCR rises and expecting the market to fix everything, with a range of more subtle measures?
Yes, it would be more complex, but we live in a complex world and expecting simple, blunt-instrument solutions to solve everything is just beginning the feel like magical thinking.
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