Penny for them, Mr Orr.
Governor Adrian Orr and his Reserve Bank (RBNZ) crew have got a bit of thinking to do between now and the delivery of the next Monetary Policy Review on Wednesday, July 14.
An already difficult juggling act has just been made even more so by the incendiary results from the latest NZIER Quarterly Survey of Business Opinion.
This is a survey the RBNZ pays a lot of attention to.
And it showed a momentous squeeze on both labour and prices.
Based on those results alone the Official Cash Rate the RBNZ sets should already be higher than the emergency 0.25% it's been at since March 2020 at the start of the Covid crisis.
However, it's not that long ago the RBNZ was actually preparing us for negative interest rates. And the central bank's first indication that it would look to start 'normalising' monetary conditions didn't come until the release of its May Monetary Policy Statement.
In that May MPS the RBNZ kept a very neutral, measured, stance in its commentary and let its forward projections of what the OCR might be in future do the talking. These projections showed that somewhat out of the blue the central bank was now looking to raise the OCR for the first time in the second half of 2022.
Since then, however, things have gone a bit crazy. Every piece of economic data has come out way stronger than expected - most notably the blow-everything-out-of-the-water 1.6% quarterly rise in GDP (the RBNZ picked a -0.6% fall). The housing market's remaining remarkably hot. Then there's the QSBO showing both rising prices and a tighter than tight labour market.
The RBNZ these days of course has twin goals of maintaining "a stable general level of prices" over the medium term and supporting maximum sustainable employment.
Up to now the RBNZ has, along with other central banks around the world, maintained the view that the pricing pressures stemming from the Covid-induced supply chain problems will prove temporary. And it's very true to say that in the recent and indeed not so recent past our central bank has struggled to get inflation up to the 2% 'midpoint' of its 1% to 3% targeted inflation range.
The prices are right - up
I think, however, that two things were enormously significant in that QSBO survey. First, the country seems to be very rapidly approaching maximum employment. Second, the survey shows that firms ARE being able to pass on the increased costs they are facing. That's right, they are putting prices up.
Recent history tells us that firms struggle to pass on increased costs to consumers. Well, at the moment, it seems that businesses are able to pass on increased costs to consumers who are possibly intoxicated by a 30% increase in the value of their real estate over the past 12 months - and bored out of their trees at not being able to travel overseas.
What this says is that the first wave of inflation from the supply chain disruptions appears likely to be followed by a second wave as businesses successfully raise prices. And with the labour market now squeezed, meaningful pay rises - for the first time in a long time - might be on the horizon.
In short, this looks like a recipe for something rather more than just passing inflation. And it will call for higher interest rates.
The timing of all this is a bit damned inconvenient for the RBNZ.
It's complicated
The central bank alternates during the year between the release of a full Monetary Policy Statement (last one was May) and what's now termed a 'Monetary Policy Review'. The latter, which is what we've got next week, involves just a one page statement from the Governor, accompanied by a brief summary of the meeting of the RBNZ's Monetary Policy Committee. There's no press conference. They only have a press conference in conjunction with the release of an MPS document.
What this all means is that the RBNZ has shown a definite preference for signalling any major changes in monetary policy in conjunction with the release of an MPS. That way the underlying thinking behind the change can be explained.
Okay, so the big headache for the Governor and team is - do they announce big changes in monetary settings next week? When convention says they've got a one-page statement to do it in and no press conference? Can they? Will they?
A poorly explained change in monetary policy settings could send the financial markets haywire.
Doing nothing is not an option
But equally if the RBNZ tries to sit on its hands with a kind of 'move on, nothing to see here' statement designed to 'hold' things until the next MPS release on August 18 that might cause some ructions as well.
With some economists and market pricing suggesting that the first move in the OCR could come in November, the RBNZ surely needs to at least address this sentiment. Even if it does try to knock it down. But again, it could be a difficult juggling act under the constraints of next week's style of release.
Personally, I wouldn't be at all surprised if we don't see next week's release followed quite quickly by a speech from either the Governor or another senior member of the team outlining more fully the RBNZ's current thinking. Indeed, I had half expected we might get that before next week's Monetary Policy Review, but it's probably a bit late in the piece now.
The fact is, if the RBNZ thinks the market and economists are getting ahead of themselves with predictions of imminent rate rises and potentially persistent inflation, then it probably needs to say so as soon as possible.
If it agrees with the markets and economists then, yes, it should say that as well.
Don't squash it!
I don't envy the task ahead for the RBNZ. On the one hand it doesn't want to jump on the economic recovery and squash it. But on the other it doesn't want to hold off acting for so long that by the time it does, it has to throw the kitchen sink (through OCR hikes), at galloping inflation.
And in the meantime there's still Covid.
Weighing it all up though, I think the biggest worry/risk right now is that the RBNZ does leave it too long. And if it really does have to pump up interest rates quite quickly then some folk who've recently taken on heroic-sized mortgages are going to feel that very quickly. Remember again, it's just on seven years now since anybody experienced a rise in mortgage payments - unless they've specifically decided to increase what they pay.
We've really put all our eggs in one basket with the 30% rise in house prices in the past year. And we are vulnerable.
The RBNZ will know this.
But it has to decide how to handle the issue. Penny for them, Mr Orr.
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58 Comments
The primary driver of New Zealand's economy for two decades has been the housing market. That's clear to everyone The fastest growing areas of the economy, (almost in every region ) being the finance /insurance and real estate sectors ( and mindless TV shows ) supported by the expanding availability of credit. Apparent personal wealth is skewed so much towards housing, 1.5 trillion a number almost numbing.
My comment merely reflects my personal view, that if the OCR is raised, the RBNZ will quickly need to reverse, as everything in itself starts to reverse. In the past various commentators have suggested that New Zealand is unlike Ireland during its housing collapse,, where Ireland had no control over its policy settings . It was often repeated that New Zealand, which has control over its settings could lower the OCR in support, of a housing downturn. If houses turn down the OCR will be taken negative given the position that the RBNZ finds itself in, and because housing is the economy. Then the issue will become the currency.
I agree. I don't think the RBNZ see significant rate raises as an option. I suspect they're much more afraid of a mortgage-market collapse than they are of inflation.
Think of it this way: Inflation means slightly lower living standards for everyone. Rate rises mean lower living standards for mortgage-holders, and probably a flow-on recession as spending collapses (higher unemployment). It's rational for the RB to keep rates low despite inflation. They're in a no-win situation if inflation keeps increasing, but at this point I don't blame the RB so much as the absolute herd mentality of NZers with regard to property (and ineffective governments).
CP,
I have lost count of the number of posts saying 'housing is the economy', but that completely ignores our exports. You know; dairy, meat, logs, kiwifruit, apples, wine, our growing technology sector with gaming an increasingly significant player and some manufacturing.
Of course the property sector is overheating to a worrying degree and our banks are heavily exposed to it, but exaggerating the problem doesn't help.
The central banks' policy of trying to telegraph everything in advance has become counterproductive. It's meant to engender certainty, but in practice it does the opposite -- any announcement of a future change is priced in and acted on immediately, but without any guarantee it will actually happen. It's more instability rather than less. They should just announce changes arbitrarily, whenever they feel it's necessary, which would encourage banks to keep a sensible margin of uncertainty.
Recent history tells us that firms struggle to pass on increased costs to consumers. Well, at the moment, it seems that businesses are able to pass on increased costs to consumers who are possibly intoxicated by a 30% increase in the value of their real estate over the past 12 months
Yes, but the data is also telling us that 2/3 of the population are living paycheck to paycheck. The only way to pass on the costs without causing too discomfort is to enable people to tap into their equity to fund their consumption. Essentially that means more debt and ideally to the 1/3 who have more than $10,000 in the bank.
But if I recall the original reasoning was to encourage businesses to invest and stay afloat which I understand hasn't occurred to the degree expected.
Then the unintended but foreseeable consequence of unfettered widespread lending has just fuelled a housing bubble instead.
So if the original intent didn't play out why maintain the position?
saw an interesting article the other day that having low interest rates to get businesses borrowing may actually be an outdated economic theory- the reason New Zealand (and Australia for that matter) are now primarily service economies - where the majority of businesses are "service related" ie hospitality, banking, insurance, accounting are all service industries (in NZ 80% of businesses are service related).
These businesses rarely buy assets (their premises are leased and they have minimal equipment - in hospitality its limited to kitchen equipment and table and chairs) and the majority of their costs are labour driven. As a result these businesses rely more on cashflow than the use of debt to keep the business afloat.
Lowering interest rates wont result in these companies borrowing anymore debt - and with 80% of the businesses in NZ in this position - its little wonder business debt uptake in the last few years has been sluggish if not non-existant.
Our analysis shows that the price of Domino's Pizza and a Netflix subscription is still trending below the targeted inflation band. We have identified two core issues. Technological breakthroughs in supply chain and production line systems, and the internet. Therefore as the RBNZ, we will create a third mandate: sustainable technological development. We believe technology to be deflationary, which is good for poor people, but we don't work for poor people as our friends carry debt and issue debt and get commission on debt. Therefore, we will target deflationary technology to ensure the poor do not improve their lives unsustainably, and to ensure the wealth transfer to the already wealthy is sustainable and hopefully not too noticeable. Therefore we will hold OCR.
Go now - before the spring housing market kicks in. Allowing house prices to increase a further 10% over Spring will only make the problem worse in the future.
Nobody is expecting Orr to put in a huge hike in rates immediately, .25% will be enough to scare the market and make people take a deep breath- especially those taking out $700K + home loans.
Nobody wants the 2006-2008 scenario where rates ended up rising 2% in 24 months.
On top of that Australia which has in the recent past (2017-18) has been prepared to squash rampant housing prices- yesterday announced it was rolling back QE and would start to tighten monetary policy- so the lead has already been taken by a fellow OECD country who typically has managed its economy well.
No I want the OCR to rise to stop the economy falling over and into a recession caused by stagflation. We are highly vulnerable as an economy because of an overleveraged housing market - where if rates rise quickly (to prevent hyperinflation) - the whole housing market could topple over and take us into a very very severe recession. There are many lessons to be learnt from the 2008-09 Financial Crisis which was created by a housing bubble- NZ has all the ugly traits of that period- speculation, FOMO, overleveraging where buyers own multiple properties all leveraged to high values.
Allowing a bubble to grow further - only makes the bubble bursting more catastrophic - for everyone. NZ has had multiple warnings from international monetary agencies including Credit rating companies and the IMF that it has a major housing problem that can only end in tears. The idea would be to make hard decisions now that ensure minimal damage in the short and long term.
However I will make the comment that it feels like from your response- you fear interest rates increasing - which makes me wonder how leveraged are you.
CPI for March year is 1.5%, not suggesting that the CPI reflects real life but it is the main indicator for the RB.
https://www.stats.govt.nz/tereo/indicators/consumers-price-index-cpi
I guess slewing investors towards new builds keeps the prices and therefore taxable profits from developers and the sector up for govt benefit.
Same with inflation and wages - without altering income brackets.
It's a backhanded way of increasing government revenue through taxation.
'David Hargreaves is not envying the tough decisions the Reserve Bank has to make ahead of its Monetary Policy Review next week'
Tough decession but will inevitably be in favour of investor/speculator/share market (cant afford to upset from this peak).
All discussion / debate on pros and cons are only to potray that are taking unbiased decession but reality is otherwise.
Wait and watch
orr isnt interested in a popularity contest and doesnt want to be remembered as another amiable nonentity,he wont care if you think he has sawn through the bottom rungs of the property ladder or reduced a few pensioners to poverty,he has preserved the wealth of the big end of town and now they should have increased their buffer in the last year and can stand a bit of a squeeze.
Good call-out and I guess the doves that believed the Fed's "look-through transitionary inflation" pitch will be happy. It seems to be shaping up this way, I had thought supply chain delays would be inflationary but it looks like they are bad enough to be deflationary.
It seems like all the Banks are saying its time to raise OCR
I think we may see an announcement that the govts bond buying programme will start to be wound down and an OCR rise scheduled for early 2022 (definately not Nov)
RBNZ is intent on taking baby steps when tightening.
Reading most of the comments there has not been a mention of an OBR event which to me is the follow on from a housing market collapse.
The main way for this to happen is for many, probably > 10,000 foreclosures to occur and the banks not being able to sell and recover their capital.
A counter to this is so what. The house prices have increased so much in the last two years there'll be very limited downside to the banks loosing anything if at all. This could give the govt and opportunity to buy some of these houses and rent back to the original owner occupiers.
An increase to 0.5% should be sooner, before Nov21.
The market is still pumping. Orr has run out of ammo, only one option left, time to nuke it with an OCR rise.
https://www.oneroof.co.nz/news/39753?utm_content=intro&utm_content=&utm…
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