By Bernard Hickey
Inflation was weaker than expected in the June quarter, piling yet more pressure on the Reserve Bank as it struggles to deal with both surprisingly low CPI inflation and double-digit house price inflation.
Statistics New Zealand reported the Consumer Price Index (CPI) rose 0.4% in the June quarter, which was weaker than the 0.5% consensus forecast by economists and the 0.6% forecast by the Reserve Bank in its June 9 Monetary Policy Statement (MPS).
The CPI was up 0.4% from the same quarter a year ago, which extends to seven consecutive quarters the period when annual inflation has been below the 1-3% band targeted by the Reserve Bank.
The result is expected to ramp up extra pressure on the Reserve Bank to cut the Official Cash Rate (OCR) again at its next decision on August 11. The New Zealand dollar fell more than half a cent to 70.7 USc immediately after the result and short term market interest rates fell by 3-4 basis points as market expectations of a rate cut rose from around 50% to closer to 70-80%.
The central bank is seen as squeezed between a rock of below-target CPI inflation and a hard place of double-digit house price inflation that it worries is increasing risks to financial stability. Further rate cuts could add fuel to the ‘halo effect’ spreading out from Auckland’s housing market, but leaving rates unchanged would make it harder for Reserve Bank Governor Graeme Wheeler to achieve his Policy Targets Agreement (PTA) target for CPI inflation of around 2%. CPI inflation has been below 2% for five years. The bank is scheduled to issue an unscheduled statement on its economic assessment on Thursday morning.
Tradables inflation rose 0.6% in the quarter, due largely to a 5.3% rise in petrol prices, but this was below the Reserve Bank's 0.8%.
Non-tradable inflation, which is what the Reserve Bank can influence most directly, rose 0.3%. This was about half the consensus forecast and influenced partly by a 9.9% fall in domestic airfares in the quarter and a 9.4% seasonal fall in car rental rates. The non-tradable rise of 0.3% was below the Reserve Bank's 0.4% forecast.
The cost of newly built houses, excluding land, and rentals were the biggest drivers of non-tradable inflation, particularly in Auckland. The cost of building a house in Auckland rose 2.9% in the quarter and was up 7.6% for the year. The cost of renting a house in Auckland rose 1.0% for the quarter and 3.5% for the year.
The contributions of new housing costs and house rentals combined to be 0.5 percentage points for the year, meaning that without those contributions there would have been no inflation.
"Prices were influenced by several factors, including strong demand and the increased cost of componentry and labour associated with building a new house," Statistics NZ said of the rise of the cost of new housing, adding that changes to health and safety regulation had also influenced prices.
Prices to buy new houses in Wellington rose 0.3% in the quarter and rose 1.4% in Christchurch. Rents rose 0.2% in and 0.4% in Canterbury in the quarter.
Economist reaction
Economists said both overall and non-tradable inflation was lower than expected, with the surprises coming from a falls in domestic airfares and rental car rates. They said the result increased the chances of another OCR cut on August 11.
ANZ's Philip Borkin said he still thought cutting the OCR again posed risks given the backdrop of a strong domestic economy and growing capacity pressures.
"However, given low headline inflation, already soft inflation expectations and the strong NZD, it does look like the RBNZ will be dragged back to the easing table once again," Borkin said.
First NZ Capital Economist Chris Green said he now expected the Reserve Bank would cut the OCR by 25 basis points to 2.0% on August 11.
"In the absence of a near-term sharp downward move in the NZD, we would assess around a 65%-70% probability of such a cut," he said.
ASB's Nick Tuffley said the underlying picture was of weak inflation once the effects of higher house building costs and rentals were stripped out. He saw a cut on August 11, before another cut to 1.75% at a later date.
"With the NZD lifting strongly over June and July, tradable inflation will remain very weak for some time and further prolong the return of inflation back to the middle of the target. Meanwhile, beyond construction costs and Auckland rents, there was very little evidence of broad-based increase in domestically-sourced inflation pressures," Tuffley said.
Infometrics' Gareth Kiernan said the door was now open for another OCR cut, but that Thursday morning's assessment would be important, particularly on the currency.
"Having hit a 14-month high on a TWI basis last week, the exchange rate remains uncomfortably high for the Reserve Bank, and the persistent lack of inflation suggests another cut to the OCR is likely next month," Kiernan said.
"The housing market will still be a concern for the Bank, but macro-prudential tools appear to be a more appropriate means than interest rates for addressing the housing market’s current problems. Strong building cost inflation is an unavoidable byproduct of the supply response that is necessary to try and address Auckland’s housing shortage."
We yet again find ourselves in the somewhat hypocritical position of calling for the RBNZ to cut rates, from a consistency perspective, while we think that doing so is not optimal for the long term stability of the economy.
If the RBNZ does not push ahead with a further rate cut, the NZD will reverse its recent depreciation in the blink of an eye. Indeed, we think the RBNZ will not only have to cut rates in August but leave the door wide open to one more cut thereafter if it wants to (a) gain some traction over the currency and (b) to maintain its own credibility.
BNZ's Stephen Toplis said the Reserve Bank now needed to follow through on Thursday and correct the market's mis-interpretation of Deputy Governor Grant Spencer's speech on July 7 as indicating the bank cared more about financial stability than inflation.
"We yet again find ourselves in the somewhat hypocritical position of calling for the RBNZ to cut rates, from a consistency perspective, while we think that doing so is not optimal for the long term stability of the economy," Toplis said.
"If the RBNZ does not push ahead with a further rate cut, the NZD will reverse its recent depreciation in the blink of an eye. Indeed, we think the RBNZ will not only have to cut rates in August but leave the door wide open to one more cut thereafter if it wants to (a) gain some traction over the currency and (b) to maintain its own credibility," he said.
(Updated with reaction, details)
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56 Comments
Yes, and weighted accordingly. When you weight the different components as to how they impact each individual, housing costs are relatively benign on the CPI. I'd imagine imagine if you removed all the old codgers from the equation (the bulk of "paid up" home owners), the CPI would be relatively high. Same in all monetary policy-driven bubble economies.
Given that the majority of properties in NZ were owned prior to the recent increase in prices, the impact on housing costs are relatively benign. For example, if a house was purchase prior to 2012 (or 200-08), those purchases do not represent the recent "costs" we have seen.
Yeah, unfortunately you and many others don't really understand the simple economic fact that house price inflation has on the value of currency. Extremely high house price speculation DEVALUES the buying power of our currency significantly. The buying power of our dollar is significantly diminished whether the housing stock being bought & sold is new or old, along with anything associated with...."housing".
ANYTHING that devalues the strength of a local currency is ......"inflationary". Banks creating funny money to create 90% of all mortgage loans for example. INFLATIONARY
There's more to actual "inflation" than the fudge grocery basket of the CPI. Thus the CPI and OCR do NOT reflect the 'real' inflation figures by a long shot. They in fact serve only to hide the real inflation pressure.
Every single minute of everyday our $ is worth less, primarily.....due to the associated new costs of having/wanting/needing a roof over ones head. Capital Gain is illusionary in this regard, because all it is based on is the next group of suckers borrowing more 'funny money' for the same existing housing stock in most cases. Capital gain is inflation by just another name.
Do you really think house price inflation of 15-20% pa has no impact on the cost of living? You think a CPI of .4% actually captures that? Or a record low OCR?
So these Forex markets we have - they're all wrong?
Well, they are by your logic...
I don't know how you can go from "Extremely high house price speculation DEVALUES the buying power of our currency significantly." to "Capital Gain is illusionary in this regard, because all it is based on is the next group of suckers borrowing more 'funny money' for the same existing housing stock in most cases." in less than 5 sentences.
First you say housing speculation alters the real value of the currency, and then go and say capital gain in this context is not real. Which is it?
The carry trade is based on....'speculation' also. Fiat currency has no intrinsic value AT ALL other than its "speculated" value of buying power. what does "Fiat" mean? Look it up. I'll help you, its value based on a sanctioned decree only. Government normally. A piece of worthless paper/ (plastic these days) that only has value placed upon it by authority. A value that is diminished by each new one created whether by treasury or by a bank via punching zero's into someone's account for a mortgage
Ask yourself, If no one continued to borrow 'fiat' from the banks tomorrow onwards for a bigger mortgage where would the perceived future 'capital gain' come from? If no one borrowed, then there's no guaranteed future interest payments for banks, investors or depositors. No 'interest payments' means no 'inflation' cause no new money is being created. Game over, the monetary pyramid scheme we all live by just fell over. Ridiculous outdated CPI indicators completely disregard that fundamental economic reality of our monetary system
I have read the above piece several times and it still makes little or no sense. Thus, recently, the NZ$ has risen against the US$, while at the same time, house prices have continued rising sharply. By your logic, our $ has somehow been devalued, but the fact remains that I could buy more US stuff for the same outlay than a few months ago. The NZ$ has also been rising against Sterling and I have taken advantage of that to buy some.
Why is it 'funny money'? this is what banks have been doing for a long time. They create money by ;lending it. Are you harking back to some form of commodity based currency?
I think you are just confused.
A house is an investment? I though it was all about location location location (i.e. the bit of dirt it is on gives it a possible appreciating value) Our house provides us shelter and somewhere to store our stuff. But other than that I just look at maintenance due and maintenance to come on a depreciating asset myself.
Rents up 3.5 percent?
Well somebody must be asleep at the wheel.
My rents have increased 5 percent minimum and will go up another 5 percent in the next twelve months.
It's no wonder there are empty houses in Auckland with the average net return is 2 percent. It makes sense to leave them empty and not have to pay out a fortune after some slob tenant had done a runner.
Ive spent the last 8 years renting over two properties. Never had a single rent increase.
We also leased a building from Auckland City council for 90 a m2 PA due to it being in the path of the new train tracks from britomart (Eden Terrace). 600m2 warehouse and office. You guys keep subsidising me with those rates thanks
I figure by the time the lease is up in 2 years the market will have resumed some normality.
My point is, 3.5% is an Average, obviously you are dragging that average up.
"The contributions of new housing costs and house rentals combined to be 0.5 percentage points for the year, meaning that without those contributions there would have been no inflation."
There would also have been no meaningful GDP growth without housing either.
Makes you realise why our do nothing PM of Parnell maintains that there is no crisis with housing, immigration, foreign trusts, Chinese pressure re steel imports and the like.
In my next life I want to come back as a National party PM. You just have to BS your way thru the day. Kiwis are so dumb they just lap it up.
JKEXIT.
Yep, also true.
It comes down to perspective, though: It depends on whether you believe houses to be as 'affordable' now as they were previously - current evidence suggests that this may be a valid point purely because of a shift towards longer term loans and low interest rates. Because monthly/weekly repayments are still of the same proportion of net income as they were previously, propensity to consume in the short term is thus relatively unchanged despite the growth in long term debt.
In my experience that is not really correct.
Sure the weekly interest amt paid to a mortgage is affected by the low interest rates but the ability to pay off the capital part of the loan is affected by the larger amounts in today's mortgages as is the ability of getting a significant helping hand from the bank of mum and dad. They are still out there helping but their sums can make little dent in the McDonald sizes mortgages of today. Jobs are not so secure in today's era also so I would imagine there are plenty of couples out there having trouble sleeping with the knowledge of the size of the outstanding mortgage. Anyone who is keeping an eye on things will realise for example that our whole rural export market is reliant on people keeping their fingers off the trigger button in the Sth China Sea and however much JK denies it we are still totally reliant on those outside Auckland.
True. There will be people worrying about lifetime consumption.
However, I doubt that is the case for the majority. I would say that the majority are simply budgeting for debt in the short term with their net incomes.
i.e. as long as home ownership and their monthly income minus loan repayments offers an optimal level of short term utility, they are indifferent between this and an extra 5 years of repayments. We see evidence for this in all financing options among a variety of distinctions. Remember, financial literacy is not the norm of the majority.
Effect on consumer spending of the bubble could be, on balance, more the other way. Sure, there are people running up the mortgage and going on a spending spree because they feel rich. But do they outnumber the masses of potential consumers who aren't spending because so much of the income is now going into inflated rents and/or mortgage payments?
So without low interest rates, high housing inflation and immigration, we would have deflation. Does make me think that raising interest rates, slowing housing and immigration, isn't going to be on the agenda anytime soon... Will we ever (front foot) a shift away from this? Could the average house price really be 5mil in 10 years time?
The economy wouldn't prefer that.
And whether or not we would prefer that is of no consequence.
The only reason you receive interest is to adequately remunerate you for the risk incurred by you supplying it to an institution.
If you don't want to put it in the bank, don't.
Ironically, you'd be facing more risk putting it under the bed or burying it, though. And, you're not remunerated for that.
It is..... if it's taken from your daily cheque account where all your wages are compulsory directly paid.
That's not an "investment". That is the mandatory system we are pretty much forced to use for our daily lives to continue.
And any employment of the OBR will lead to bank runs regardless so the country will not be saved, It would be burnt to the ground bank by bank, house by house.
No one will ever trust the banking system again...just like Greece.
Yeah, you can do that..... After all the bills and expenses that require direct debit have been paid eh. Not so simple. Why not just get your employer to go to their bank and withdrawal your wages/salary in cash eh? Yeah, simpler again. Some of us live in the real world is why.
Caleb - basically the likelihood of interest rates ever going up again is zilch. Because they cant. The reason is we need debt growth to prop up commodity prices so producers don't go broke. But all the money printing to assist in debt creation is going straight into asset price inflation (rather than spendable wages) so its having less and less impact. Pretty soon the dam will burst as commodity producers start a wave of bankruptcies.
At this point, theres only one last temporary option, "free money" into bank accounts for people to spend to buy commodities. And then we will know its all been a Ponzi.
The central bank is seen as squeezed between a rock of below-target CPI inflation and a hard place of double-digit house price inflation that it worries is increasing risks to financial stability. Further rate cuts could add fuel to the ‘halo effect’ spreading out from Auckland’s housing market, but leaving rates unchanged would make it harder for Reserve Bank Governor Graeme Wheeler to achieve his Policy Targets Agreement (PTA) target for CPI inflation of around 2%.
Let's face it the RBNZ got it wrong in respect of targeting CPI inflation and agreeing to wealth redistribution tactics embodied in the consequent, repressive interest rate policy outcomes. What coincidentally worked on the way up, failed miserably on the way down.
Time for a reset.
A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening. Borio page 12 of 38.
Furthermore:
More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability, when combined with some of the previous elements. Working with better representations of monetary economies should help cast further light on the aggregate and sectoral distortions that arise in the real economy when credit creation becomes unanchored, poorly pinned down by loose perceptions of value and risks. Borio Page 17 of 38
CPI measure does seem a little dated .... record low inflation at times where rents are growing at record pace
Largest single expense for those without a home is rent. The group of people without their own homes is only growing.
Time to revisit the cpi allocation to rent
I found the following on statistic nz page
Less than 7% for rent.... is this reasonable? Does the average person renting spend 7% of wages on rent. Taking into acxount only 40% of the population rent lets double that figure to say rent is 14% of take hime pay. This also seems fairly light. Perhaps its time to reasses the cpi to take into account where people are actually spending their money with more real world weightings.
"Actual rentals for housing had an expenditure weight of 6.87 percent of the Consumers Price Index (CPI) as at the June 2006 quarter, making it the highest weighted class within the CPI. By comparison the purchase of new housing, with a weight of 4.66 percent, ranked third, behind petrol (5.38 percent)."
Not sure if they have revised these
CPI low? so.....to stimulate the economy let's drop the OCR....again.... And encourage more spending via bank loans and lending which a MAJORITY are not made part of the .....CPI .....cause money/credit is apparently NOT a "consumable" per se.
That sound like a logical solution to the overall problem??
No, what it is infact is an utterly flawed economic model that the RBNZ apply.
Why will the RBNZ economists or any other politicians not acknowledge that low rates lead to more private debt, and under those circumstances there is a transmission mechanism which siphons money through the economy from workers to the finance sector which is GDP deflationary and asset price inflationary. The transmission mechanism that conventional economists would have us believe is that low rates lead to GDP growth and more prosperity for all, but it's just fantasy, it doesn't work that way. My own eyes tell me that, my gut tells me that, and history tells me that, Steve Keen tells me that.
Isn't it time we tried something new. Like lowering the price of money by dishing out helicopter money and perhaps raising rates at the same time?
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