The Reserve Bank (RBNZ) wants to keep some pressure on domestic inflation, even as it moves quickly to bring the Official Cash Rate (OCR) closer to a neutral level.
Policymakers have cut the benchmark interest rate by 125 basis points over the past three meetings to 4.25% and are signalling another 50 point cut to 3.75% in February.
The neutral interest rate—which neither stimulates nor restrains growth—is estimated to be between 2.5% to 3.5%, meaning the OCR will remain restrictive until at least April next year
Paul Conway, RBNZ’s chief economist, said this was necessary as domestic inflation was still simmering at 4.9% in the most recent data released and still needed to be tamped down.
“We're confident that it's going to keep coming down, because we've got excess capacity in the economy, but … the reason we've got that is because of the OCR track that we published yesterday,” he said in an interview.
“If we were to just go huge and cut the OCR to neutral yesterday, it becomes more likely than not that domestically generated inflation flares back up”.
RBNZ forecasts non-tradable inflation will be 4.7% in the December quarter and drop to 3.2% by the end of next year. It averaged 2.7% in the 10 years prior to the pandemic.
While rates will remain somewhat restrictive for a few more months, Conway said they were falling enough to restart economic growth after two years of stagnation.
“Having interest rates 250 basis points above neutral is quite different to having them 50 or 100 points above neutral,” he said. Lowering real interest rates does affect GDP growth.
“Straight away, you can almost feel it in the streets. When I go out after we've done a 50 [point cut] you can just feel a little buzz. Because, it's affecting people's perceptions and projections of where the economy is going”.
Future growth would be at a “typical New Zealand, mediocre, muddling along, she’ll be right” annual rate of about 2.4%, Conway said, and going faster would require economic reform from the government and a change in Kiwi business culture.
He said now was a good time to be talking about structural reform with the Covid crisis and its economic hangover moving into the rear vision mirror.
“Inflation's in the band. Interest rates are going down, and growth is recovering. So from a cyclical perspective we're in good shape.”
“But I fully acknowledge it's been hard work [for New Zealanders] to get us into this position where inflation is sustainably back at target.”
Conway said the nearly three-month gap until the next policy decision would be useful, as it allows time for a full set of new data releases and to see the effects of earlier decisions.
Shadow boxing
Earlier, at a hearing with Parliament’s Finance and Expenditure Committee, RBNZ policymakers said it wasn’t known how President Trump’s policies would impact inflation.
Deputy Governor Karen Silk said the new administration’s trade policies as well as geopolitical tensions had been discussed by the Monetary Policy Committee.
“It probably has a net inflationary impact at global level and potentially a net negative impact on growth,” she said, however that may not be the case in New Zealand.
“Those that are selling into economies that are imposing tariffs may well seek substitute markets, and so we could see dumping of goods.”
An example of this occurred in 2021, when COVID lockdowns led to a drop in demand for potato chips in Europe, causing one supplier to dump excess frozen fries into the NZ market.
Silk said tariffs in the United States could mean cheaper electric vehicles becoming available here, as an example.
Conway said none of these possible outcomes had been modelled and it was not really possible to predict how these dynamics would play out.
“President-elect Trump, he talks a lot, but what will actually be put in place?" he asked.
"It would be remiss of us to be reacting. We'd be boxing at shadows currently, if we were to incorporate it, I don't even know what it would mean — lower interest rates or higher interest rates?”
Markets and politicians have had a taste of things to come this week, after Trump threatened 25% tariffs against Mexico and Canada on his own social media platform.
Mexican President Claudia Sheinbaum responded on Wednesday with a promise to retaliate with measures that could cost the United States hundreds of thousands of jobs.
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32 Comments
They are underestimating the sickness in the economy, at least publicly. Probably they privately acknowledge it, but are playing smoke and mirrors to manage expectations and to not drum up too much bullishness that might reignite inflation.
I am pretty confident the OCR will drop to 2.5, or even lower, by Spring ‘25.
I am not sure how much success they are going to have though. Seems like the banks are all expecting people to load up on more debt as the interest rates drop next year, restarting the ponzi and propping up the economy. I just can't see it happening though. I think people will repair their savings and pay down debt, rather than taking on more.
So if it isn't private borrowing, it isn't govt spending and overseas is still sucking more out of the economy than putting in, then where is the growth going to come from?
" I just can't see it happening though. I think people will repair their savings and pay down debt, rather than taking on more."
Many will do exactly that, but how many does it take who are willing to gamble on the ponzi continuing to fuel those increased valuations?....probably a lot less than we realise, especially when you consider that there were only approx 120,000 'investors' during the recent surge in values.
https://www.propertyinvestor.co.nz/face-the-facts
The question then is will the banks facilitate them?...and that I think will be a case of them (the banks) being cautious until they see if there is enough momentum for another round.
The most disappointing thing is they can pull other levers but just rely on this one. 30% of the country employees are employed by SME's, to help them out they could raise the GST threshold for SME's, reduce company tax etc etc....but seems like the easy option is always the OCR.
Maybe....in Wellington at least tenants are definitely in a renters market. Can't see rent raises being passed on successfully considering the supply/demand balance for tenants.
Too many tenants don't realize they can contest rent raises as well. Have a few friends who have done that recently (i.e. Landlords blinked first in the "don't raise rent or I'll move" game).
So...inflation pressures are a risk and RBNZ sees house price inflation of 7% next year. Which conveniently doesn't count as inflation. (By conveniently I mean politically convenient for NZ landowners and foreign banks, of course).
#BuyBitcoin #CentralBankingIsCentralPlanning #NoMoreUnearnedWinners&UndeservingLosers
#FiatNeedsCompetition
This is pretty silly stuff from the RBNZ. Consider ...
- Who benefits from high interest rates? Of course, your first thought will be 'savers'. But who are they? Those kiwis with TDs? Nope. They're a small % when compared to where the bank's lending actually comes from. Most 'deposits' & bank capital come from big financial institutions overseas. So let's shovel even more interest money offshore, ay? Further, the banks create new money for lending so the banks are clearly benefitting! Once again, as most banks are owned offshore, even more money heads offshore in the form of profits.
- Where is a sizable amount of those non-tradeable inflationary pressures coming from? Yup. High interest rates! They drive up the real cost of living. I.e. Not the RBNZ's measure of inflation - the CPI - that tries (unsuccessfully) to strip out the effects of interest rate costs, but the actual cost of living we actually see and feel in the HLPI. People are still doing it tough .... Because of high interest rates! And when workers are doing it tough ... They demand higher wages.
- Are they really serious about inflation? No. They are not. A significant amount of NZ's credit growth comes in the form private lending on mortgages. The RBNZ is okay with house prices rising beyond the rate of inflation. A WTF moment if ever there was one. But the problem is more serious. Kiwis treat their houses as ATMs. I.e. they borrow more when house prices are rising. And all that new money is circulation is inflationary when productivity doesn't rise with it (which it seldom does, and even then it lags by 6-12 months or more!)
So what should the RBNZ be doing if they were serious about inflation, financial stability and productivity?
- Drop the OCR - fast - to neutral
- Damp down credit growth in the most unproductive area of 'investment' in NZ by restricting DTIs & LVRs to the same sensible levels other OECD countries have ... especially for 'investors' buying existing houses. (Buying new ones is okay. That capital frees up the builder's investment - a real investment as new stuff was created - so the builder can move on and create more stuff.)
Why won't they do this? Put bluntly - the RBNZ is beholden to NZ's offshore owned banking cartel.
What's even more infuriating is that we saw that this could be done by virtue of not doing it when Covid hit. We dropped the OCR but also dropped the LVRs and kicked off a housing boom, and then paradoxically didn't tighten until it was clear inflation was rising and then tried to blame the Ukraine invasion for it, even though we had exceded the PTA window before Vlad rolled across the border.
Yes you can use the exchange rate to manage imported inflation pressure but if that's at the cost of the local economy grinding to a halt then it's not worth it. People who are losing jobs generally aren't going to go out and buy a house if the rates drop.
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