So, are we in enough pain?
I get an increasing sense that the Reserve Bank (RBNZ) may be concerned that the overall public are not yet discomforted enough by its efforts to make them (the public), well, UNcomfortable financially.
It's not nice to think that the RBNZ might actually want people to lose jobs and to be struggling sufficiently enough to pay their mortgages that they need to rein in spending - but that in effect is exactly what the central bank is trying to achieve by continuously thumping up that most blunt of instruments, the Official Cash Rate.
I'm not really in agreement with the majority of economists that have tended to want to portray the RBNZ's OCR announcement on Wednesday to be an 'as expected' announcement.
It wasn't what I expected. Because up to that announcement, I had thought the central bank's body language was very much 'we've got this' - by which I mean they felt the drive to get annual inflation (last seen at 7.3%) back towards the targeted 1%-3% range was on track.
I think the RBNZ folk have been spooked by the falling NZ dollar (or more to the point the surging US dollar) and the potential inflationary ramifications of that.
And the willful insertion in the RBNZ OCR announcement of the suggestion that they came close to hiking the OCR not by 50 points (which of course they did, to 3.5%) but by 75 points was not a casual thing. This was designed to inject a greater sense of urgency.
I had already rubber stamped another 50 basis point rise (to 4.0%) in the OCR in the last review of the year on November 23. And then I thought the RBNZ would take the next three months (till the February review) to think about whether it wanted to go further than 4.0%.
Well, all change. I now think the possibility of a 75 basis point rise in November has to be taken very seriously. That would give the RBNZ an OCR of 4.25% to be looking at in February and then be able to decide whether it goes higher or not.
Right now (and remember they haven't yet updated their OCR forecasts - the last one was in the August Monetary Policy Statement) my bet is the RBNZ is now seeing an OCR peak of 4.5%.
This could change. Very quickly.
There's two huge pieces of the economic puzzle that will be revealed before the November 23 OCR review.
We've got the CPI inflation figures to be released on October 18. The RBNZ's currently forecasting an annual rate of 6.4%, dropping down from that peak (we hope it was the peak) of 7.3% as of June.
Then there's the labour market figures (unemployment was 3.3% as of June) on November 2. The RBNZ's picking 3.3% again - but for the figures to start rising as of the December quarter.
Any sign from these two sets of data that the RBNZ is getting more traction with its rate rises than it has been thinking may lead to a more sanguine central bank in that November 23 OCR review.
The flip side is though that if these data give an unpleasant surprise then a 75 basis point hike is a live issue.
Right now I think there's a very strong likelihood that come the end of February 2023 we will have an OCR at 4.5%.
What the RBNZ is trying to do in effect is create a quick spike of pain for the public that will rein spending in enough to start to drop inflation very quickly.
The concern is obviously that if inflation doesn't start to fall quickly (and bearing in mind at the moment the RBNZ is targeting having inflation back under 3% by June 2024) then wage and subsequently pricing pressures will keep inflation at worryingly high levels.
What that would mean would be that the RBNZ might have to keep pushing the OCR higher and higher.
And that of course would see mortgage rates going higher and higher.
This would not be good.
The rampant housing market of 2020-21, coupled with then very low interest rates, ensured that some mortgages became of very gargantuan size indeed.
I've always just had the gut thought that as a country we might get into dangerous territory if we see general mortgage rates of over 7%.
As I look today we've got one-year specials of a little under 5.5%.
Given the tone of the latest RBNZ OCR announcement, I think we can confidently see these getting higher over the next few days and weeks. Rates of around 6% may well be coming - as things stand at the moment.
But if it looks like the RBNZ might need to go higher for longer with the OCR? Well, 7% could be around the corner.
I thought it worthwhile just to check where we are with how much money is due to be refixed. Remember, at the start of this OCR hiking cycle in 2021 there was much made of the fact that the RBNZ could get real bang for its bucks due to the amount of mortgage money that was due to have its rate refixed quite soon.
RBNZ figures tell us that as August a year ago nearly $240 billion out of $322 billion was either on floating ($38 billion) or was due to be refixed within a year. That's three-quarters of the outstanding stock of mortgages due to be refixed in at least a year. Bang. For. Bucks.
Okay, and now? The latest figures we have are for August 2022 (hence comparison with August of last year) and these show that just 57% of the now $340.5 billion mortgage pile is up for resetting at least within a year. That includes $40 billion of floating rate mortgages. In terms of fixed rate mortgages alone, that percentage is now down to around half of the $153 billion total due to be refixed in a year.
If we look at the next three months, it should be busy, with about $31 billion of fixed rate mortgages due to be refixed.
The RBNZ clearly sees an opportunity to hit now while a lot of people are still to refix.
The concern I would have is that while all looks well now and people appear to be coping, we might suddenly hit a brick wall and things flop seriously.
I think there is a danger that the OCR's going to be raised too far too fast.
I won't on this occasion go into the detail of my examples, but using the interest.co.nz calculator, I figure that someone who took up a mortgage on a one-year special rate in August last year would be facing an increase of 34% in their monthly payments if refixing for the same term in August 2022.
Likewise, someone who took up a two-year special rate in August 2020 would now be seeing a 38% rise in monthly payments.
This is a lot. People do seem to be managing though. But of course, they wouldn't necessarily say out loud if they were struggling.
I think the concern is that everybody's going to look like they are okay, and then suddenly not be.
What this all boils down to I think is that at some point the RBNZ might have to decide whether it keeps trying to really hit inflation on the head.
Or whether through necessity (IE the potential of killing the economy, if it is not careful) it will have to concede that some higher levels of inflation are going to be with us now for some time. Longer than anybody would want.
As I've said before, I was not in favour some years back to the RBNZ changing to a timetable of taking three months off over summer with OCR reviews.
Increasingly, it's looking like the break this year might be very timely.
It could save us from some very bad mistakes being made.
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Surely a recession every so often is natural and serves to sort out the issues in society, such as market bubbles and getting rid of deadweight companies. The longer we put off trying to avoid a recession the worse it will be when it finally arrives?
Now we're talking about risking inflation run away on us to avoid a recession! That's going too far.
Central banks are supposed to be independent from the government. You are just right.
They are supposed to be wise, long-term driven, not looking for votes.
Problem is... what is the best "long term" scenario?
If you ask me I'd say a max ratio of HAPPY/PEOPLE ...
That is subtle... if you can't make happy++ you make people--, <== that is what a machine would think as a logical consequence.
And, well,... you also need to define clearly terms like "stability", "happiness", and so on
Or you work with the even more vague "human right" idea.
There are several very unethical ways to achieve that, and a very few good ones.
The real world is a difficult equation.
That makes it sometimes fun, sometimes sad.
You are correct, however, and scarily, I think you will find that the level of influence exerted from the top within government currently, and the culture this has bred it far-reaching outside it's parameters.
https://www.newshub.co.nz/home/politics/2022/09/chief-ombudsman-trouble…
Transparency is not a strong suit for them and hopefully we can get to the bottom of all the shady dealings going on behind closed doors.
- Ministers are treated like gods who cannot be questioned
- OIA requests are commonly declined for reasons that are not valid, hence leaving the government able to cover tracks on certain things
Having a single party with over 50% of the vote is bad enough, but their control is become excessive and unproductive to the democratic nation of New Zealand
My wife and I have experienced lots of mediocre and poor service over the past couple of years, even worse than usual for NZ standards. I'm sure some of that is due to full employment, and employers struggling to get staff (let alone good staff).
Some businesses need to fail, and some extra unemployment generated. There's many people doing jobs they don't want to be doing, and are poor at doing their job.
Have others felt quality of service has deteriorated quite a lot over the past couple of years?
Yes, to poor and mediocre service getting more common.
Also, poor staff working with dumb, bureaucratic systems from the dark ages that (a) they don't realise are so stupid and/or (b) have no power or willingness to change/respond/adapt.
Also, businesses not set up to reliably take money when people want to give it to them, because they are so short staffed and/or have stupid systems, that mean their staff are dicking around interviewing their screens, instead of talking to the customer standing there who just wants to buy. Just daft!
Hah, this has been a hot topic lately.
There's a few things I see going on.
Companies aren't investing in customer service they way they used to. Where there used to be knowledgeable customer service reps, you now get a hybrid of do-it-yourself online, and live support that is really a glorified messaging and data entry service.
The world is still kinda janky due to covid. I think this includes people feeling less invested in their professional careers.
100%. Eating out these days is like pot luck. Will the restaurant actually have any food (one ran out of food at 6pm on a Saturday night), will there be anyone to take your order (an hour later ....), will your order actually make it to the kitchen (food never arrives) and if it does, will it be cooked properly (ordered a rare steak and got a medium-well done one).
And yet, the number of people on Jobseeker has increased by 47% since Labour took office. Go figure.
What an easy and lazy chump statement that is.
The government and it's institutions are the foundation of a strong society. Almost all human progress has been achieved through the work of an enlightened and respected government apparatus.
Just imagine where we would be without the government. No universal education, no healthcare (I mean none at all), no roads, trains, electricity, energy, no free elections, no private property rights, no regulations protecting us from corporations polluting our harbours, rivers and air, no noise control, no trade with foreign nations, no internet, nothing.
Whether you like it or not all these things need to be planned, administered and regulated and that's what governments do. They do not just come about.
Seriously, stop f****ing whinging about governments, anarchy would be the worse outcome ever. Try living in a failed state (without your NZ citizenship, state resources and bolthole to return to) and then tell me about how bad you poor little snowflakes have it here with New Zealand's government. Entitled, ignorant, whinge bags.
Not wanting to steal David's thunder but what seems to be missing here is a real understanding of the negative impacts of the wealth effect as it relates to consumption. And of course this is the big unknown. But let's look at what we do know. The vast majority of h'holds are living paycheck to paycheck (or nearabouts) and borrowing for discretionary spend has been all the rage. NZ is awash with 'nice to have' products and services based around the value add mantra of growing successful business (which is partly one of the reasons we don't have a sophisticated store brand environment and no frills consumer economy).
Now I know that the economists and commentators steer clear of discussing, analyzing and quantifying the wealth effect. Too much like hard work and based on so many assumptions related to behavior. So I understand. What I am suggesting is that if the wealth effect is real and consumption falls off a cliff, we're going to see real economic pain. Even in the grocery environment, NZ already has some of the biggest assortment of categories and brands among developed countries. All these products were already barely meeting incremental sales before the latest sh*tshow. If sales fall below minimum revenue requirements, we will see the effects across the economy as businesses close and people lose their jobs.
In a nutshell, living beyond your means has made the situation far worse than it should have been.
What I like to remember is that only about 32% of New Zealanders have a mortgage (StatsNZ, March 2022.) Rising rates likely only crimps the cashflow of a small part of the population whereas almost everybody is disadvantaged by above target inflation rates.
That's why I don't understand this notion of striking a balance between loan rates and inflation, it's far more important to keep consumer price inflation low than keep the housing bubble inflated.
In addition to mortgage debt, is there a calculation for total household debt in NZ, including credit cards, buy now pay later schemes,and purchases on HP? These are included in the household debt calculations here in Australia, (which is why Aus has some of the highest household debt per capita in the OECD as it takes into account all of the above). It appears that household debt on CC’s and BNPL schemes have increased this year in Aus, as people put increasing amounts of non discretionary spends on these, to tide them over, as household budgets get increasingly squeezed both by inflation and rising interest rates. Is the same calculation used in NZ i.e. the totality of all household debt? Does anyone know?
You mean households, not New Zealanders?
While only 32 percent of households have a mortgage on the primary residence,
There is some subtlety in this statement I think.
Renters, by definition, don't have a mortgage on their primary residence. A landlord potentially does though.
It's not beside the point, if you're an investor, you put the mortgage on the investment property, not the "primary residence", to be able to claim back interest cost (yes this is changing). So the real percentage of households with a mortgage on any property owned is likely much higher than 32%
It's not beside the point, if you're an investor, you put the mortgage on the investment property, not the "primary residence", to be able to claim back interest cost (yes this is changing). So the real percentage of households with a mortgage on any property owned is likely much higher than 32%
Arguing about the proportion of punters directly exposed to the cost of credit is beside the point when understanding how bursting bubbles negatively impact an economy.
That's true, so long as aggressively raising rates does not affect the economy too much and unemployment doesn't rise too much.
If aggressive interest rate hiking results in a recession, and significant job losses, then those job losses will affect people with mortgages AND without mortgages. So it's the indirect impacts of increasing interest rates that we need to consider on people without mortgages.
It remains to be seen how much unemployment will rise. As per my posts yesterday, it may not rise as much as I have been thinking, for a few reasons. In which case, a stronger case exists for raising interest rates.
- 32% of New Zealanders have a mortgage.
- 20% of New Zealanders are under the age of 14 so unlikely to have a mortgage
- 15% of New Zealanders are over the age of 65 also mostly unlikely to have a mortgage
- 35% of New Zealanders are aged between 15 and 39. Assume 5% are aged between 15 and 18.
So 40% of New Zealanders are ineligible for a mortgage. 32% have a mortgage. In amongst the remaining 28% will be renters and mortgage free.
This is a very interesting concept, as lets say 20-30years ago when the majority of boomers all had mortgages, the OCR would arguably be more effective with a greater portion of NZ'ers having mortgages at the time. Higher mortgage rates = less disposable income and hence less spending. With the lessening of this since they have since paid off their mortgages and are now in higher earnings on average, will this mean higher OC's than expected in order to have the spending effect that is necessary? And if so, do we need to consider other economic levers that have a more widely spread impact?
I think given the increase in wages of late and level of households without a mortgage, the lag in a drop in spending is becoming longer than is necessary to enact meaningful change in inflation.
I hope they're freaking out about the falling NZD. They should be. We might find that all the 'sacrifices' of a higher OCR aren't enough to move the needle on inflation with the currency getting hammered.
It's a shame the gov't isn't doing more to help. A good time for some well-targeted taxes.
It's not just that NZD has fallen but that it has done so far more rapidly than businesses could reasonably have been expected to react. Having currency stability is actually important to companies when they are trying to plan and forecast. Had they known the Kiwi would plummet many exporters would likely have ratcheted up to take advantage and vice versa.
...the willful insertion in the RBNZ OCR announcement of the suggestion that they came close to hiking the OCR not by 50 points (which of course they did, to 3.5%) but by 75 points was not a casual thing.
They should have at least matched the FED. I'll believe RBNZ have asserted some control over inflation when we get back to back quarters of declining inflation, until that begins policy must continue to be liberally applied.
Patience, the pain from the rising interest rates takes time to be felt, many are still on low interest rates fixed before the OCR started to rise. The pain will come in 2023, trust me! This delay between cause and effect, is a serious issue, both on the way up and on the way down. By the time the "pain" is felt in 2023, rates will be too high, and lowering them will only be consequential in 2024.
Orr, when he was a kid, his mum told him to feed the bird. But then being a little overzealous, he could see it was very hungry and he didnt want the birdie to die so he kept feeding and didn't stop and he started stuffing seed in its mouth. When mummy finally turned around and saw what little Adrian was doing she said quickly stop that, the bird will die. Adrian didn't want the birdie to die so grabbed it by the neck and started shaking it hoping that the seed would fall out of the birdie and it would be happy and he would be happy. The birdie died.
Good article, RBNZ dropping clear hints about currency, persistent inflation, and upside risk to OCR moves. I believe a 6% 1 yr mortgage rate is needed here, 5.4% will not have quick enough effect with the strong labour market. The current exchange rate is a real problem for RBNZ. The Opec cuts today are a further headache for Orr. I believe Kiwibanks call yesterday of the OCR topping out at 4% are very optimistic.
The last time the 1 year fixed mortgage rate was 6% was Aug 2014. The national median dwelling price then was 420k. Median 2014 annual income from wages and salaries was 45K. Current national median dwelling price is 810k. 93% increase since 2014. Median 2022 annual income from wages and salaries was 62K. 38% increase since 2014
Inflation affects most of us, as most of us have to purchase stuff.
Increasing interest rates affects only about 1/3 of us who have mortgages, plus businesses with borrowings.
OCR changes are frequently described as a blunt instrument, but they are in another sense a highly targeted instrument.
A blunt instrument targeted at just 1/3 of the population.
Those without debt are unaffected by the OCR increase in terms of their ability to pay the higher prices. They can choose to pay the higher prices or not, but they're not directly affected by the higher interest rates.
Whereas those who have borrowings pay both the higher prices of inflation and the higher interest rates designed to kill off inflation...
Those without debt are unaffected by the OCR increase in terms of their ability to pay the higher prices. They can choose to pay the higher prices or not, but they're not directly affected by the higher interest rates.
I'm sorry but this doesn't make any sense. A marginal buyer of a property is affected by the cost of credit, regardless if they're debt free. And everyone is affected by a higher cost of credit. That's how economies work. Economic conditions are determined by an aggregate of behaviors.
Agreed JC, the OCR does come out in the wash for everybody, as does the exchange rate.
Right. There seems to be this general thinking that economic conditions are isolated in silos; for ex, at the household level. I struggle to see why people think like this. A simple example, let's assume there is a massive property crash in NZ. Does this affect people in Australia? It sure does considering the banks are Aussie owned. It could be something as small as equity prices falling or even the banks themselves tightening up on credit. Closer to home, say you run a corner dairy. What do you think happens to revenues and margins if people cannot afford to spend because the housing mkt has collapsed? Trips to Queenie and Fiji; the new spa pool; private school fees. The whole shebang.
Eventually the effects of that get passed through the economy but the effect is diluted as it flows throughs.
This also misses the point. The bulk of the country's savings is in housing (5x GDP). Whether or not you hold any debt is irrelevant because the value of your (and the nation's) "savings" falls.
We seem to be talking past each other.
I don't disagree with what you are saying. Yes, the nation has got 'poorer' (if you ever thought the valuations were realistic - I never did - my home is in my net wealth calculation at a severe discount to its notional value according to the various website estimates available).
I'm just reflecting on how uneven the impact of OCR rises is on different people in the economy.
1. Major, financial-survival-impacting effect - first home buyer who bought at the peak with an enormous mortgage and highly leveraged property investor on interest only payments who didn't lock in low interest rates while they could
2. Major, major impact impact but may be OK - first home buyer who bought at the peak with an enormous mortgage who DID lock in low interest rates while they could
3. Major impact - anyone who bought in the last few years with big mortgage who loses their job
4. Bit of a worry in case anything goes wrong - person who might see notional negative equity but doesn't have to sell his home and keeps his job
5. Debt free home owner who bought decades ago and has steady, diverse income - has to pay a bit more for his cheese at the supermarket - and the list price of the new EV he's considering has just gone up by $3k
The RBNZ is trying to stop no. 5 from paying more for his cheese and his EV, but the tool he uses to do it absolutely crucifies no 1 for a long time before the effects flow through to no 5 .
I'm just making the point that the effect of the OCR rising for no. 5 is significantly different than it is for no. 1.
I'm trying to tease out implications of the OCR rise, not deny that it wont effect more parts of the economy in time, particularly if things turn to custard.
Not a question of "if", rather "when" and for us little people what happens in between.
The unnecessarily complicated term is "Fed reaction function" which is simply how long it will take before policymakers realize they're wrong. Again. Reviewing history through the lens of eurodollar futures isn't kind to rate hikers. But why? That is the question; the only question. Let's find some answers.
whether through necessity (IE the potential of killing the economy, if it is not careful) the RB will have to concede that some higher levels of inflation are going to be with us now for some time.
Glad to see some people gently shifting their opinions to the views I've been expressing for some time; when the recession hits NZ in 2023, the famous and by then aptly named "path of least regrets", will be to accept inflation running well above 1-3% in order to keep the economy afloat!
OPEC's decision to cut production virtually ensures that oil prices will increase, FED will continue to hike, and vastly increases chances of 75 point hike by RBNZ next month: https://www.nytimes.com/2022/10/05/us/politics/opec-biden-saudi-arabia…
Me thinks they should have gone 75 yesterday it would have put them in a very nice seat for when the Fed makes its next move . Those expecting a pivot (unlikely) are starting to form long lines.... possible ease to 50bps hike however (political pressure) otherwise its full steam ahead into destroying overcooked values regardless of the consequences.
What ever happened to personal responsibility?
No one can claim they didn't understand interest rates were temporarily low and would eventually go up, and that taking oversized leverage/debt was a financial risk. Every mortgage application was even stress tested on this.
Perhaps we've learned that mortgages 6-8X your household income is a bad idea?
Let me know when the people who made massive gains off the back of huge increases in property values take some responsibility for driving housing way past sane levels of affordability.
Or do actions only have consequences when it's an excuse to wag a finger in the face of younger Kiwis? Funny that.
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