Think about it. We are sitting here confidently expecting the Reserve Bank (RBNZ) will hike the Official Cash Rate (OCR) by a massive 50 points for the THIRD interest rate review in a row - and we won't bat an eyelid when it does.
You can get used to anything I suppose. That's one thing the crazy last two and a half years has taught us.
So, for the record, it's virtually guaranteed that the RBNZ's Monetary Policy Committee (MPC) will raise the OCR to 2.5% on Wednesday, July 13.
Remember that the OCR was dropped to an emergency setting of 0.25% on March 16, 2020 as the pandemic gripped. It wasn't till October 6 of last year that the RBNZ started to hike the rates again (after a false start in August due to, er, the pandemic).
So, this means, come Wednesday, we will have seen our key official interest rate hiked by a mind-boggling 225 basis points in little more than nine months.
And more to come, by all accounts.
To give some historical perspective, the OCR was introduced on March 17, 1999. I suppose as you would with any new toy, the RBNZ 'played with it' a bit and did do three 50 basis point hikes at various stages between the introduction of the new tool and May 17, 2000.
But after that we didn't see a double-jump increase in the rate again till April of this year. And now we're going to have three such jumps in a row, with very short odds on a fourth to follow in August.
(Of course, the OCR has been DROPPED in much bigger chunks at various stages, including a couple of epic 150 basis point cuts in the wake of 2008's Global Financial Crisis. And the emergency cut in March 2020 was 75 points.)
The real questions for Wednesday that we might get some clues on are: Will there be a fourth double-banger in a row at the next review in August? And just how high will the OCR go in this 'cycle'.
On the latter point the RBNZ in its last Monetary Policy Statement at the back end of May suggested the OCR could be pushing 4% by the middle of next year.
Economists doubt that will be necessary and there's a reasonable consensus forming that the OCR will likely max out at 3.5% either late this year or early next.
The 'markets' have tended to have a somewhat more excitable view, with wholesale interest rates at one point suggesting a 'terminal' OCR of over 4.5%. The important thing about this is that the banks have been hiking their mortgage rates in direct response to the rising wholesale interest rates (a key source of funding), rather than the upward moves in the OCR, which have been lagging what the wholesale rates have been doing.
However, said wholesale rates have in more recent days now been taking some chill pills and have retreated to more in line with what the RBNZ has suggested will happen to the OCR.
The last time I looked the wholesale interest rates were pretty much 'pricing in' 50 basis point rises in the OCR at the reviews on Wednesday and in the following one on August 17. But the current pricing now sees a peak of around 3.8% early next year.
The easing in wholesale rates has seen some downward tweaking of bank mortgage rates in the past week.
Personally, I would caution that those out there hopefully picking this might now be the 'top' of the mortgage rate cycle are likely being a bit optimistic. I hope I'm wrong. But inflation will decide. And I don't think it's finished with us yet.
Much will hinge on what the RBNZ says on Wednesday and then in its next full Monetary Policy Statement in August.
Any backing away from the full-speed-ahead, let's kill inflation at all costs, talk of the most recent public pronouncements from the RBNZ and you would expect to see those wholesale interest rates ease more.
Which is why in a nutshell the central bank will go ahead with the 50 point rise in the coming week and will likely, for now, retain its 'hawkish' language. And, for now, the presumption must be that there will be another follow-up 50 point rise in August, which would take the OCR to 3%.
But the populace is getting pretty grumpy. Last month the long-running Westpac McDermott Miller Consumer Confidence Survey produced the lowest reading since the survey's inception in 1988. ANZ's long-running Business Outlook Survey saw business confidence at near record lows. And this week's latest NZIER Quarterly Survey of Business Opinion showed business confidence at its weakest levels since those mind-swimming days of March 2020.
These surveys, however, were bad news in two ways. They suggested a big downturn is coming for the economy, BUT they were suggesting that inflationary pressures are still really strong as well. Double trouble.
As at the March quarter, our annual inflation was running at 6.9%. The figures for the June quarter are due for release on July 18. Economists currently see the June quarter as being the peak, at around 7% - which is exactly what the RBNZ itself is picking for the annual rate to June. But regardless of whether this is the peak, there's growing questions around how long inflation will remain at elevated levels for, with a reasonable amount of scepticism that the RBNZ will be able to get it down below 3% by the end of next year, as it currently forecasts.
So, despite grumbling consumers and businesses, it's the inflation that the RBNZ will keep focusing on - for now at least. Kick the economy again, it's still breathing!
It does of course very much open us up to the prospect of the dreaded Stagflation, which I hardly need remind anybody would see us having a stagnating economy, but with prices still going up. The worst of all worlds. The currently still super strong labour market provides hope against such a scenario. How long it stays strong, with unemployment at just 3.2% as of the March quarter, will be absolutely crucial.
For now though, what will the RBNZ be saying and doing in its OCR review? Over to the economists:
ANZ chief economist Sharon Zollner says the RBNZ "is on a roll with its 50-pointers", and the data-flow since the May Monetary Policy Statement has not provided any compelling reason to diverge from that strategy.
"At some point, assuming things continue to evolve smoothly (quite a big assumption in these volatile and unpredictable times, to be fair) the RBNZ will feel comfortable transitioning to a slower pace of monetary policy tightening (ie 25bp hikes) as the balance between near-term growth risks and medium term inflation risks becomes more nuanced than it is currently.
"We are predicting that will occur at the October Monetary Policy Review, as we are picking the RBNZ will get traction on cooling both household spending and construction activity a little faster than they are currently assuming."
She says, however, that a slowdown in the pace of hiking does require there to be no more upside inflation surprises.
"...The RBNZ won’t be expecting to see inflation indicators retreat meaningfully yet – monetary policy typically operates with a 12-18 month lag in that regard. It’s likely that both the housing and the labour markets will need to take some heavy hits before the RBNZ will feel comfortable the job is done. In the absence of a miracle growth spurt on the supply side of the economy, waning demand will have to be a large part of the transmission towards getting inflation and the economy back on a stable and sustainable path.
"Overall, we expect the RBNZ to strike a similar tone to the May Monetary Policy Statement – ie overwhelmingly hawkish. There will be a time for nuance and balance, but with inflation yet to peak, cost indicators still skyhigh, and inflation expectations yet to turn downwards, this isn’t it," Zollner says.
Westpac's acting chief economist Michael Gordon said that for now, the RBNZ will need to carry through with the interest rate hikes it has signalled, "or risk undoing its good work so far on bringing inflation pressures under control".
"But at some point in the coming months it will be appropriate to signal that the end of the tightening cycle is near."
Gordon said looking further ahead, the evidence for a softening in economic activity "is more anecdotal than definitive at this stage".
"Certainly there needs to be some kind of slowdown in order to bring inflation pressures into line. But the lags involved with monetary policy – many borrowers are only just starting to feel the impact of the OCR hikes to date – mean that the risk of overdoing it is genuine."
Gordon expects a fourth 50 basis points hike at the August review, which would bring the OCR up to 3%.
"That’s getting much closer to the RBNZ’s projected peak of 3.9% (and our forecast of a 3.5% peak), and is more plausibly in the range of ‘tight’ monetary policy settings. At that point, we think the RBNZ could signal that it’s getting on top of the situation, and that further OCR hikes are likely but will be data-dependent."
BNZ's head of research Stephen Toplis said domestically, leading economic indicators "are looking plain ugly".
"At the top of the list is the record weakness in consumer confidence. This must surely portend future softness in consumer spending, which accounts for almost two thirds of GDP."
If the BNZ economists were "in charge", they would probably argue for the RBNZ to be taking a cautious approach given that rates are now around neutral (mortgage rates arguably well above), leading economic indicators are "increasingly worrying" and uncertainty continues to reign, Toplis said.
"This being so, 25 basis point licks would seem an apt response," he said..
"However, we would be gobsmacked if the Bank did anything other than 50 [basis points] this time around, especially when market pricing is so convinced of such a move, largely because the RBNZ intimated that would be the case.
"What will be of most interest to us will be any sign that the Reserve Bank might be contemplating softening its stance down the track. In some ways the Bank has been given a get out of gaol free card in that it won’t be required to print a forward interest rate track at this meeting. [These only appear in Monetary Policy Statements, with the next of these to be issued in August.]"This will buy itself time before it feels pressure to clarify its medium-term intent."
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96 Comments
.... and rampant inflation, misallocation of resources, the ever over-inflating housing Ponzi and other asset bubbles, the explosion of debt and corresponding increase in financial instability, mispricing of risk and growth in social inequalities. Yes, let's keep the current fool's paradise of reckless ultra-loose monetary settings for the sake of the well-being a minority of housing specufestors, at the expense of the longer term interests of the overall NZ society .
Did you ever stop to think that your comment may be offensive to:
- underpaid/struggling but hardworking teachers;
- underpaid/struggling but hardworking nurses;
- renters who are trapped on the [seemingly] endless treadmill of working to make their landlords richer;
- aspirational first home buyers, who want to break out of serfdom and own a house.
- anyone who is struggling to feed their family while paying exorbitant rents (NZ has the highest rent to income ratios in the OECD).
- savers, elderly people, and anybody else who has been trying to survive on ultra low term deposit rates.
- anybody who genuinely wants a fairer, more egalitarian society, like the one that Kiwis used to enjoy.
There are many people in this country who have been harmed by the ultra low "emergency" OCR setting. If raising the OCR to a slightly more sensible level causes an inconvenience to professional lords of the land such as yourself, then so be it.
I can want all those things and not to be plunged into negative equity or the financial stress of a huge increase in mortgage payments for recent FHBs as well.
If you're going to lecture others about the downsides of the status quo then let's not pretend that there won't be any others losers just because you want to see investors take a pounding.
Most of the above did vote Labour:
- PM Ardern did say she wanted house prices to increase.
- Students and Teachers have terrible attendance at their places of 'learning'/business.
- The under pressure nursing profession have expelled hundreds of their "unvaccinated" colleagues.
- Food prices; well take a look at Government Spending, then RBNZ Policy, then the NZD, then Fuel Prices!
As for renters, I rent - it is what it is. I'm responsible enough though to not vote for either Labour or National. Hopefully the woke are enjoying their Aotearoa Paradise because they seem to be the ones in charge at all levels.
Zack,
Interesting comment. The under pressure nursing profession have expelled hundreds of their "unvaccinated" colleagues. Presumably you disagree with the requirement to have fully vaccinated nurses. Why? Is covid fake news?
I have cancer and would certainly feel very uncomfortable if I knew that some of the nurses at the clinic were unvaccinated.
There are many people in this country who have been harmed by the ultra low "emergency" OCR setting. If raising the OCR to a slightly more sensible level causes an inconvenience to professional lords of the land such as yourself, then so be it.
The people don't set the rules and nudge tactics. The govt, central bank, and commercial banks do.
You live in a command economy.
I would say they should not raise it at all. In the last month oil has dropped a lot, and oil was a bit contributor to our inflation.
With a policy of least regrets now is a time for a pause to see what is happening, not a time to keep on trying to fight inflation that may not be a problem any more and then causing a recession.
Inflation does not lead to recession. Inflation leads to a faster circulation of money, as people are trying to spend it before prices rise. This is not recessionary.
In contrast, deflation is recessionary. In fact, another 50 bps OCR hike may trigger a deflationary collapse. The housing market is showing signs of this, and our economy (like it or not) is housing market-dependent.
They reduced the petrol tax, so this counteracted the inflation otherwise it would have been over 7%. Food is one of the big things that have increased in cost. As did just general services. Everyone seems to be using inflation as the reason to put up their prices.
High interest rates will kill the economy and banks will stop lending. Banks have already stopped lending below 20% deposits. This is NOT good for youngsters. Youngsters will not be able to buy property without bank lending, even if property prices dropped 50%. Youngsters are also more likely to become unemployed or stay unemployed as they lack professional experience.
The NZ economy is houses, with a few other bits tacked on. I guess if the rising interest rates slow down NZers from borrowing huge amounts to buy overly inflated houses, it is going to help. There is such thing as money being too cheap to borrow, as it causes unsustainable asset price inflation
Yvil's comment is simply truth, whether you like it or not. I must say I am also surprised how many here are in favor of further interest rate hikes - this is supposed to be an economic forum.
Can't people see the obvious, that we are at the brink of a massive collapse?
Suck it and see at play here methinks. Won’t be any great rethink until the RBNZ can safely declare inflation has peaked, plateaued and is under control. Therefore what happens next is a very open ended question to which both the RBNZ & Finance Minister will undoubtedly respond to in similar open ended fashion.
If X% is "priced in" does that mean there will be no impact from this change?
i.e. the 'tightening' an OCR rise would aim for has already happened. Therefore if inflation still above target, the rise must be above target?
How far is the RBNZ from being run by an if/else statement?
It just means that the bank hikes are smoother and in smaller increments.
The effects of these OCR increases are seeping through into the economy slowly and as each new mortgage is signed up or existing mortgage refixed the tightening makes its mark for the period of that term.
100 people refixing at a 2% larger mortgage rate on an average of 18 months reflects 1800 individual household months of tighter ability to spend, when that is 10,000 people refixing thats 180000 months of individual household tightening and that is how demand is controlled and inflation tamed
Hense why there is so much emphasis on forward forecasting and "pricing in"
Given that rents are running at 4%, local govt rates are up 6% - 8%, insurance costs are through the roof, petrol prices have been on fire, and food prices are going well too, another bumper read on inflation is baked in for next week.
Thankfully, RBNZ are going to keep hiking rates to look macho and purposeful. These hikes obviously *increase* the cost of living and add to the general malaise, but what else can they do? They only have the one lever.
Incidentally, NZ corporate profits are currently trending at $200m per day ($70 billion per year).
RBNZ acting tough on inflation by hiking rates will not change the oil price, persaude Putin to get out of Ukraine, stop local Govt increasing rates, or prevent insurance companies pricing in more extreme weather events (whilst they make $1bn in profits per year every year forever). What hiking rates can do of course is increase unemployment by killing demand in the economy.
So, what would I suggest? Simple. RBNZ should just (a) hold rates at 2% and be prepared to defend that position and (b) focus on using their wider toolkit (bank risk ratio, LVR etc) to stem the flow of cheap credit into speculative activity.
> (a) hold rates at 2% and be prepared to defend that position and (b) focus on using their wider toolkit (bank risk ratio, LVR etc) to stem the flow of cheap credit into speculative activity
I don't see how (a) could possibly be squared with their mandate, or how (b) could possibly work.
On (a) RBNZ and just about every central bank across the world took action to hold rates at or near zero % - they can use exactly the same tools to hold rates at 2% (or wherever they want). On (b) RBNZ already set tolerable risk thresholds for bank borrowing, liquidity, LVR etc, and other central banks are using additional critieria to stem the flow of credit into speculative / undesirable investments (e.g. ECB making fossil fuel investment more costly).
If we hold rates and Fed/Aus raise rates further our currency will tank.
Good for exporters - crap for most of the voting population and RBNZ who will struggle with bigger inflation (if the NZ dollar is worth less we have to pay more for everything we import), which is bad in turn for the government who need votes. Probably worse than sinking house prices in fact.
Nice theory. Also, matching the Fed is complete madness. Their interest rate rises and aggressive posturing work very slowly through economic expansion channels (allegedly slowing down business investment), NZ interest rate hikes hit disposable incomes very quickly through mortgages.
*If* money does flow out because the return (free money) we are offering on our financial assets is low compared to other countries, we should tackle the root cause (our trade deficit). However, there is very little evidence that rate spreads drive currency spreads in the medium-term.
Economies actually perform better with higher unemployment rates than we have now - so actually it is a good thing for the majority over time.. like house prices dropping is actually better in the long run. i also reckon the tight employment market is causing employers to overpay and accept less than optimum productivity so contributing to inflation.
Unfortunate for some agreed - but those that work hard and choose good career paths tend to do well whatever.... those that dont tend to get buffetted by the storms, its another incentive to study and work hard and contribute more to society and nz
you can research it, talk to business owners whatever - its bang on.. business owners at present struggle to find good staff - where they do they have to pay over the odds and they are having to be careful not to work people too hard to ensure they retain the good ones. so their prices go up with their costs
2 second google search shows:
https://www.newsroom.co.nz/too-many-people-have-jobs-say-employers
https://www.investopedia.com/insights/downside-low-unemployment/
doesnt bother me as i am in tech outsource everything overseas as NZ doesnt want to import good developers as much as other countries... but sad for local economy as the money and decent jobs flow out
off for a surf.
I don't doubt that high unemployment suppresses wages. But, the reverse is not true. The lower quartile wage per week in NZ was $770 at the start of January 2022 and it was still $770 at the end of May 2022 (last available data).
What you have to ask yourself is this: On what mad, dystopian world would an economy 'run better' with less people working? Imagine going to a village a few hundred years ago and telling them that they would live better lives if they stopped a few people working in the fields and got them to sit around all day instead... begging for scraps whilst everyone else worked away? It makes no sense. The big steps forward in our quality of life have come during periods when involuntary unemployment was almost non-existent (1% to 2%). We just lost the plot over the last 50 years when the reckonomists took over.
OSE,
" where they do they have to pay over the odds". What does that mean? You appear to be saying-presumably based on nothing more than a few anecdotes-that some employers are paying new staff more than they are worth to the company? Really? why would they do that?
you are clearly a firm believer in NAIRU, so would you care to share with us just what the 'ideal' rate of unemployment should be in our low-wage economy. Are wage rises in NZ running ahead of inflation? The answer-no.
At the very least, the RBNZ should wait until the recent rate hikes take effect in the wider economy. Mortgages mature slowly, leading to a cascade effect.
If you pull up an airplane too quickly, you create a stall. This leads to the plane dropping like a stone, and crashing, with passengers and pilots dying.
We have printed and have spent billions in ‘our response’ to Covid.. now we have the situation where too much money is chasing too few goods!
ignoring this fact will not remedy the situation… there must be a correction.. that is, goods/services must be priced accordingly to a nation’s ability to produce.
those who jumped in knee deep thinking rates would remain ultra-low have a lesson coming
Yes, we have printed too much money. But you can't take that out of the economy again without triggering collapse, much like you can't take a vaccine out of a patient anymore, once injected.
How many on this forum have been in favor of the COVID-'vaccines'? What good have they done?
How many are now in favor of interest rate hikes? It is time to start considering the long-term side effects.
Much as i love a good coffee one might say that hospo will always lose out in the (inevitable) recessions. As its the easiest thing to cut back on.
Unfortunately we cant run a country on rising house prices and coffee shops - we need a productive economy that makes innovative stuff
If only someone was smart enough to design an FLP program that was limited to underwriting cheaper lending for refixing owner-occupiers instead of just residential property in general after it had been sent to the moon by unwinding LVRs for investors for some sodding reason.
Nah, they will not stop increasing the rates until they see two cpi drops from the top in two CPI releases in a row. Couple of crucial data to look at, CPI, inflation expectations and unemployment rates. If none of these changes, we are not even close to be out of woods yet.
That is what they should do. I just don't see it happening.
The world (and the size of the mortgages) are not the same as last time we had this sort of OCR rate. Increasing rates now adds to inflation as the corporate world also have to pay their debt back somehow.
"it's virtually guaranteed that the RBNZ's Monetary Policy Committee (MPC) will raise the OCR to 2.5% on Wednesday, July 13" - I wouldn't mind a bet on that. I don't think there is anywhere near the inflation pressures that were around just 1 month ago. Look at the price of oil, it has been very deflationary last month. The RBNZ has to look at future inflation, not past inflation.
"I don't think there is anywhere near the inflation pressures that were around just 1 month ago. Look at the price of oil, it has been very deflationary last month"
Everywhere I look, I still see petrol at $3.10 a litre...
Although is has stopped going up further, it will still be maintaining the elevated levels of inflation, at least for now.
The currently still super strong labour market provides hope against such a scenario.
Is there any historical evidence that a strong labour market will mitigate a stagflation?
Wouldn't rising unemployment reduce consumption most effectively leading to receding inflation?
Oh yeah! Unemployment is at 3.2%? Arrh nah!
Try 11.2%. Real unemployment. So that being the case, we're in a stagflation loop already.
All MSD do is invent another type of benefit that then isn't considered as 'unemployed' and hey presto! The magical low percentage of the unemployed.
Statistics NZ. Who really believes anything that they put out?
Yes they need to go 100bps and back it up with another 100bps .. lets crash and burn the NZ Property market ... we sailed past the GFC with barely a hiccup(few developers going under... fire sale Qtn apartments etc )
Its time kiwis understand we can't sustain such high property prices to incomes ....
But this would need to be backed up but a HUGE devaluation in land prices in turn lower prices sections (unlikely as Govt+councils have jacked up costs to create sections +greed RICH land bankers) locally I've see section values go from $100-$200per sqm to $900-1000sqm+ in 6yrs!!!!!!!! talk about JACKED UP!!
Build costs are in many ways the reason why property prices have keep at nose bleed levels ....can't see that coming back much while tradies are leaving in droves overseas... and we export timber to then have issues sourcing timber etc
IMHO going forward we will see the gap grow for new homes Vs existing homes as 7-8% rates force Morg holders to dump and run to the door and move to cheaper countries with higher incomes Vs Property costs .
will see a BUYers market return for the well off >>
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