By Alex Tarrant
Outgoing Reserve Bank Governor Alan Bollard better not throw incoming Graeme Wheeler an inflation-ridden hospital pass in September, BNZ economist Craig Ebert says.
That was exactly what former US Federal Reserve Chairman Alan Greenspan threw Ben Bernanke in 2006 after keeping interest rates too low for too long, and advocating for deregulation of the financial sector during his two decades heading the Fed.
BNZ economists reckon inflationary pressures in the New Zealand economy are emerging not just in Canterbury and the housing market, but right across the economy.
And people seemed to have short memories about the 2002-2007 house price price boom, Ebert said. While the Reserve Bank has accepted in hindsight it had been too slow to raise interest rates in the early stages of that boom to cool the housing market, "we can see the same things happening again," he said.
BNZ and other bank economists are pencilling in the next move in the Official Cash Rate will be an increase of 25 basis points to 2.75% in March 2013. Global economic developments would be key to this assumption, with the risk of a meltdown in the Eurozone still a possibility.
But given that did not happen, Wheeler, who takes up residency at the Reserve Bank on September 26, would likely have to raise rates pretty soon into his tenure. Ebert said Bollard needed to leave Wheeler with the view the economy was "inflationary and imbalanced."
“We hope he is conscious of the inflation risk ahead. Which we think is there," Ebert told interest.co.nz.
The Reserve Bank had talked recently about the fact it under appreciated the demand equation in the economy in the early stages of last decade's boom. It had thought the economy was meandering along, "when in fact there was a massive amount of excessive demand, because they’d basically been too generous on their supply assumptions," Ebert said.
“We can see the same things happening again," he said.
Those pressures were fundamentally across the whole economy.
“What we’ve got is an economy that is getting hot in Canterbury, but the other parts are ticking over relatively well. You cannot interpret [yesterday's NZIER Quarterly Survey of Business Opinion] numbers as saying Christchurch is the only thing growing in the economy. That’s incorrect," Ebert said.
“It’s just that [the different parts of the economy] are running at different speeds. A little bit like Australia in a way, but they’re all growing – that’s the part to be conscious of," he said.
While BNZ was not forecasting strong growth over the coming years, “what we’re saying is, it won’t take much growth to put the [inflationary] pressure on the economy.”
“We don’t have as much supply to afford it. It would be great if we could grow at four or five percent, but the fact is, if we tried to do that, demand would soon just put massive pressure on limited supply, it would all spill over into inflation, and interest rates would have to go up aggressively," Ebert said.
"We don’t want somebody to hand the baton over with this view that everything’s real soft and soggy, inflation’s not going to be a problem, and we should keep the OCR where it is at 50-year lows forever, on this threat that the global economy’s going to blow up," he said.
“It may do, and we’re all worried about that but, what if it doesn’t? You do have to ask the question: If it doesn’t blow-up, where’s that housing market going to go, for example?
Yesterday's REINZ median house price and stratified price index, which hit new highs in June, "vaulted the bubble levels of a few years ago, and no-one’s blinking an eye."
“People seem to have short memories," Ebert said.
35 Comments
"BNZ economists reckon inflationary pressures in the New Zealand economy are emerging"
Inflation pressures? You need excess debt/credit/money for that, plus supply constraints but credit demand is flat and business has massive excess capacity. How can you have inflation with credit growth at one or two percent?
Our estimed "free trade" partner - China - "is exporting excess manufacturing and industrial capacity – with an undervalued currency – into a world that is already grappling with a deep secular slump".
"It transmits a fresh deflationary impulse to a world already dangerously close to deflation. This is a greatly under-estimated risk."
The deflation has already been and has now settled, All the QE in those countries has been nulifing any further deflation, the real issue is the majority of the QE money has been hoarded in gold and treasuries, once the hoarders have confidence that money will reenter the market and there will be high inflation along with low growth in the US, UK and EU. The chinese dont want to be stuck with there weakened foriegn currency reserves when that hppens hence why they have been buying foriegn assets with avengence over the pass few years .
Mortgage Belt - you are making the same mistake continually of assuming that all inflation is pull inflation. The inflation that NZ in particular, and the world eventually, is looking at is push inflation, the type that stagflation brings. Its the worst kind because you don't get higher wages to compensate, and its terminal for those that sit floating into it when the central bank finally, and reluctantly moves to kill it - as they always eventually have to do.
Oh FFS when will the banks sack these bozos......
The external factors so outweigh the make believe NZ ones that raising the OCR in 2013 is as likely as putting a man on mars.....which is a pity because thats exactly where most of these so called economists need putting.
regards
So we agree? If they didnt put up rates, the money supply would have been larger (because people would have access to cheap money), people could have bought things and there wouldnt have been such severe deflation. Thats why I dont mind Financial Repression (and low rates in NZ), it shows at least that they learnt that from the Great Depression experience. The moral- dont save borrow and spend or you will lose the value in your money
All I can say is that right now the housing market in Christchurch is pretty crazy, and the low interest rates making it crazier still.
We're looking, and the thing we're getting sick of hearing as you walk into an open home is the agent saying "it's already under offer". This last for a property that went on the market on Wednesday - an offer went in on Friday, the day before its very first open home!
Inflation and house prices are intertwined. When one goes up so does the other...
Quite right archaeo...and the banks want a feed too...explains their gut busting efforts to talk the farmers into borrowing huge amounts of 'cloud credit'....better to get their hands on the output...works a treat cos the RBNZ and Beehive fools are happy to go along with the game.
Andrew S, the market for quality houses is always fast moving, so if you are trying to buy an undamaged house in a good part of the north west for a cheap price you may as well give up.
However if you are prepared to buy something that still needs the EQC work done or in a blue zone you can pick up a very good buy.
At the 1pm Harcourts auctions today only one out of four properties had any bids placed on it, and the one that sold would have looked cheap if the EQs hadn't happened.
It is buoyant but the flow of red zoners buying will eventually stop (not slow but stop, red zoners are finite).
the only thing generating inflationary pressure is central government and local government taxing the populous to death with stupid expenditure and nonsensical taxes.
.. and those idiots buying properties at massively overvalued prices who will presumably then be demanding salary increases to pay off the mortgage!
Taxing is deflationary, it takes money out of your pocket. Apart from the supidity of stadiums which is local Govn I see little signs there is much more spending in the Govn sector. Right now the core inflation is 2%, I'd rather see 4 or 5% inflation if it removed teh risk of a Depression...
They might demand all they want....in isolation it wont matter....IMHO.
regards
Wheeler knows how the wheels turn...spin the BS that inflation is under control just as King has been doing in the UK...tell whopping big fat lies.
Never raise the cost of the cheaper for longer lifeblood keeping the thieving banks in the property bubble game....
Rely on Kiwi peasants being too stupid to know they are victims and know that the poodle media is too greedy for banking advertising pork to ask nasty questions.
A quick chat with the Beehive puppets and Wheeler will be off to a fabulous start as Gov of the RBNZ...feet up and wait for the instructions from the Big Four and his old bosses.
Either Noddyland plods along or inflation comes with growth...no other options.
there is no "risk" about it - they already have made the same mistakes if Akld prices are anything to go by. What a joke to have an economy in the doldrums, a credit crisis, mass emigration, and at the same time a booming property market. CLEARLY THE LOW RATES AND NEW LENDING IS NOT GOING TO BUSINESSES, IT IS GOING TO PROPERTY PURCHASES. CAPICHE BOLLARD!!!!! That is not helping us to build better businesses, it is not helping christchurch rebuild, it is helping ppty speculators. And who can blame them when the alternative is to earn 3% in the bank (or 2% after tax, or -1% after inflation). The politic housing complex runs so deep in this country it makes me weep - losses have already been socialised to savers, and now it looks like profits are being gouged from them again. A DISGRACE. But what do you do? Eat your veges and get smacked, or eat sweets and get a hug. When we have short sighted policy makers intent on being the most popular at the expense of the bigger picture WE ARE ALL SCREWED.
this guys is totally wrong. we need to follow the rest of the world to stay with them. and cut rates now further. or harm fishing farming, forestry our real economy with over valued $$.
Bit of a worry this kind of thinking a walk around any shopping centre will show the hardship, house prices are becauce of council costs and a huge earthquake, no building for four years
I don't quite understand this - can you please elaborate as to how inflation is going to solve the debt problem. It may end up solving your debt problem as the currency is debased and it makes it easier for you to repay your debt but won't it just make greater problems for future generations as they are forced to take on my debt to afford the higher prices of assets, goods and services.
I don't see how solving a debt problem can be fixed purely by creating more debt which is what you seem to be suggesting. Under our current monetary system, inflation needs higher and higher levels of debt to continue and this expansion of the money supply through debt seems to be the primary cause of inflation. Sure the velocity of money also has an impact on the rate of inflation but there is no point discussing that since it tends to have a short term/intermediate effect on inflation.
I'm just interested in understanding what you think the end game is? Do you think central banks around the world can continue to debase their currencies to appease the current generations that are in debt without there being any implications for future generations? Only so much debt can be created before the currency is debased so much that the general public lose faith in it. I don't get why we should continue with a system that is designed to fail at some stage, with current generations being all to happy to pass the buck onto future generations. We should be creating systems that create greater wealth and prosperity for future generations, not destroy it.
I dont think its a great idea but they dont really have an option, the debt is unsutainable so by expanding the money supply the debt is smaller in real terms. The future generations will just pay more and get paided more, just like the difference between me, my dad and grandad. Prices will always inflate at different rates. The key with financial repression is to no go to far and fall into a hyperinflaion trap but I dont believe they are going to do that. The system isnt designed to fail its designed to rob you of you purchasing power and their not passing the buck, everyones burning right now unless you have real assets ie land, house. In the future everyones wages will apreciate and purchasing power will return to normal (ish). I know we should have a better system but we dont and at the moment the powers that be are trying to avoid a collapse.
Cutting rates in the current banking system is the wrong thing to do, proof of that is whats happening overseas. The Euro and US banks are hoarding free money gifted to them by the major central banks at 0% interest and are using this easy money to reinvest back into Euro and US govt bonds which means they are funding their govts debt instead of funding their local businesses. If they fail then the taxpayers right a cheque and cover it so there is no deterrent for them to gamble. What they should have done is lend it directly to small and medium businesses via a national publically owned bank as per what was discussed on the Keiser Report on RT last night. They did this in Mexico and in 10 years went from largest debtor nation to one of the biggest creditor nation in the world. This bank was backed by long term govt bonds and small/medium businesses. The whole problem stems from large banks gambling with easy central bank credit lines multiplied with derivative tools allowing them to manipulate price action. They then wait for the collapse to buy everything up for bugger all. Simple answer = stuff the banks.
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