The Reserve Bank's tough job in the battle against inflation just got a little trickier.
Clear signs are now emerging that the economic tide is turning. That means the RBNZ is approaching the time when it has to be less aggressive in its fight with inflation and switch to what it terms the 'watch, worry and wait' phase.
However, that time may be coming upon the RBNZ faster than it anticipated. And how it reacts now is crucial. I think this is now the time when the central bank is at serious risk of overcooking it with the interest rate hikes.
For the RBNZ, pushing down hard on interest rates in the inflation fight is actually the easy bit. The really, really hard bit is deciding when to back off. But I think the 'back-off' point is now much closer than the RBNZ anticipated at the end of last year. And I have to say it is much closer than I thought at the same time as well.
Since inflation started to seriously raise its ugly head in 2021, one of the common factors has been that key economic data releases - such as CPI inflation, unemployment and GDP - have continually come in stronger than forecast. Often, the data has been WAY STRONGER than forecast - and this had included some of the inflation releases.
There've been abundant shocks.
The Reserve Bank has conceded it could have reacted faster to the emergence of inflation. It like other central banks around the world miscalculated that the rising wave of inflationary pressures would be transitory. Not so. These transitory pressures, such as from supply chain bottlenecks, made their way into the domestic economy and started to fuel that most dreaded of things - inflationary expectations.
Once you have inflationary expectations in your midst you've got a population with one eye all the time on what they think things are going to cost in future and so they react in pre-emptive fashion by putting their costs up. And so up inflation goes, and that's where we are now.
The RBNZ decided to start pushing up interest rates in August 2021, but in the event that became a false start because Auckland chose that very moment to have its Covid Delta outbreak. So, the RBNZ held fire through the August 2021 Official Cash Rate review decision and then, once there was greater clarity around the Delta outbreak, it started the OCR hiking 'cycle' with a 25-basis-point rise in October, lifting it from the emergency setting (since March 2020) of 0.25% to 0.5%.
There was a bit of speculation about how quickly the RBNZ might look to 'normalise' the interest rates and so the RBNZ itself, in September 2021, before the first OCR move had in the end been made, came out with a "considered steps" mantra. This told the marketplace that the interest rate moves upward would therefore be gradual, IE in 25 point moves.
Well, that didn't last, as the economic data - and particularly the inflation figures - continued to run just so much hotter than anybody expected. And so it was that after a total of three 25 point hikes taking the OCR up to 1% by February of 2022 in a suitably considered-step manner, the RBNZ went for its guns and hiked the OCR by 50 points in April 2022.
Another four 50 point rises followed between May and October, taking the OCR to 3.5%. At about this time the RBNZ was thinking it had matters in hand and that it was on the right path to checking inflation.
Then came the September quarter inflation figures, which were an almighty shock and clearly rattled the RBNZ. Annual inflation actually fell, from 7.3% to 7.2% - but this was a much smaller fall than expected. And the devil was in the detail, with domestically generated inflation increasing from 6.3% to 6.6%. It is the domestic inflation that the RBNZ can do something about - with its OCR hikes, so if that's rising it knows it has more to do.
Therefore, come the November OCR review and we had the big bang 75 point OCR hike and some very hawkish language from the RBNZ. It even candidly conceded that it was now looking to engineer a recession.
The clear inference to be drawn from the RBNZ was that after the 75-pointer in November it would follow this up with another one at the next review - some three months later - on February 22, 2023.
Ah, but three months is a long time and the tide appears to have turned over the summer.
Amidst some of the frightening language the RBNZ was brandishing in November, was a pick for the next inflation figures for the December quarter 2022 to come in with an annual rate of 7.5%.
In the event, the figures released in January 2023 showed inflation stayed static at 7.2%, but again it was all about the detail and those figures gave a clear indication that inflation may be at last slowing, that the constant blasting away on the OCR by the RBNZ was starting to gain traction.
Already after those inflation figures, there were several economists that came out and suggested the RBNZ should be looking at a smaller rise to the OCR in February, of 50, rather than 75, points.
Then we came to the labour market figures for the December quarter. My view of these was that if they came in as super strong as, certainly I was expecting, then the RBNZ would still go ahead with a 75 point rise.
However, they did not at all. They showed a rise in unemployment, massively contrary to what I thought when I was walking around during the holidays looking at signs everywhere on the pavement urgently seeking staff.
One thing though: I have to disclose at this point that I am a long time sceptic of unemployment data as I think they can throw up rogue results, as is the risk from any sampling survey. I would not rule out revisions to this week's employment data when the next quarter's figures are released.
But if we take that 3.4% unemployment figure as read, a figure taken just before the summer holidays, when our tourism industry was cranking up for the first 'real' tourism season since the start of Covid, then it is to be assumed that things are already cooling much more than anybody thought and therefore unemployment could start to rise quite quickly this year once the 'summer' (I use the term loosely in consideration of what the weather has been) is over.
So, the pressure is back on the RBNZ. More economists are now saying it should rein back its OCR hike in February to a 50-pointer and not 75. I would actually go further than that and say right now could be the time to go back to a 25-pointer, with future rises 'data dependent'. IE more of a watching and waiting role.
The RBNZ's got another key indicator (too often overlooked in the marketplace) coming out before February 22 and that is its own Survey of Expectations on February 14. This is where a relatively small group of business leaders and professional forecasters give their views on where inflation is headed in future. This is important for the RBNZ, since it tackles that whole 'inflation expectation' ogre. If the inflation expectations fall in the next survey - and I'm going to say I think they will - then I think that will put paid to any talk of a 75 point OCR rise.
We really don't want or need the RBNZ to overcook the inflation response. The time is fast approaching when the central bank, in card-playing terms, needs to change its approach from 'twist' to 'stick'.
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60 Comments
"the 'watch, worry and wait' phase."
Poor strategy if that equates to "Let's hope that Inflation falls, and we can hold off on any OCR rises and wait until the CPI has overtaken the OCR"
Because we know what's going to happen with that policy. It has before and will again if it's tried (and no doubt, sadly, will). The CPI will ease, then wages demands will kick in; asset prices will soar, and before we know it the CPI will be above where it was last month.
That will be followed by a mad dash to chase the CPI with the OCR, and nobody wants that. But there will be no choice left.
Worth looking at the weekly data on filled jobs and median earnings that Stats are still providing on the Covid19 portal. It is very clear from that data, whichever way you cut it, that RBNZ are trying to put out a fire that went out last year. Job growth in the last couple of months was about the same as population growth - and almost entirely focused on 15-19 year olds and over 60s (Christmas casual hires). Wage growth in real terms stopped in mid-22. RBNZ now pose a genuine threat to the livelihood of the country.
It's the Real Terms bit that's the problem. If the wage growth stalled in Nominal Terms, then there might be merit in the OCR being capped. But that's not going to happen.
Our livelihood isn't threatened by the RBNZ, but by an accumulation of failed policy at Government level over many decades. All of them have correctly suggested what our problems were before being elected, and that they would fix them - and none of them have. That can't be corrected lightly. And if most New Zealanders have their way, won't be corrected at all.
The RBNZ shouldn't be having to do all the heavy lifting. But that's the only hope we have left.
Agree but while engineers will always speak to redundancy and resiliiance in systems, it goes over the heads of councilers who want more carols in the park type BS rather then backup pumping systems. Look at the NZ power grid, it took AKL outage to get any attention, and its still not that flash.
We actually jail people who point these things out. Think about the stupidity of that..... vs fixing the weaknesses.
In order to say we are in a much worse position, you must first come up with a relative comparison.
After running subsidies and something close to a managed economy for half a century, the country was broke. So we've now got this. Better in some ways, worse in others.
There's always room for improvement, but there's also a lot of things NZ can never be, for inescapable reasons.
So we get people chanting "incentivise production" without addressing how much that is actually possible, or what it'd even be doing. Its like coming up with a list of desirable traits for the perfect partner. Yeah, it'd be nice if she was hot, easy going and smart, but what are your odds of finding this creature, and then snaring her.
In NZ, free market does not apply if you are a landlord (accommodation supplements), farmer (ETS carve out), or tourism & hospitality businessowner (numerous including GST subsidies, median wage exemption for migrant workers). Housing speculators had a whole raft of policies favouring their easy gains until recently and are likely to be reinstated by the opposition.
As soon as the aerospace, tech or gaming sector seek any government support, we shoot them down without even proper dialogue quoting free market principles.
Successive governments have been subsidising and incentivising all manner of non-housing and tourism enterprises for a significant period of time. There's actually a whole Ministry dedicated to it even.
Some of it sticks, much of it doesn't, because at the end of the day it needs commercial viability to stick around.
Incentivising the productive sector by scrapping many rules that serve only to keep over paid under performing Bureacrats in a job that obstructs innovation and adaptation and has the added benefit of reducing the public sector wage bill releasing many to do any more productfull work in the private sector if they have any skill the private sector values.
Yip. Or maybe we raise the RBNZ inflation target to 7% for this year . Then we can agree things are all tickety boo and Orr can level off the OCR. House prices can rise again and we can all breath a sigh of relief. (except those poor buggers who cant afford to eat, or heat their homes.. if they are lucky enough to afford a roof that is.. and of course the impact would be an even higher inflation rate... but hey we can just raise the target again cant we.. and just pretend all is good for a couple months)
Yeah - the trouble is the decisions made (deliberately or not) are widening the gap between rich and poor and pushing our least educated, most needy people further and further into poverty. At the expense of the voting middle class to wealthy elite. Its not only causing suffering but also increase crime, increased truancy and a far worse quality of life for everyone.
An example was keeping interest rates too low for too long during the pandemic, driving up asset proces, driving up rents and driving up inflation. Whilst not all domestic inflation it has driven up wages for the skilled but not the poor, when things are ever expensive. So now when inflation remains at 7%+ with a target of <2% decisions should favor the needs of the poor over the wealthy and inflation reduction needs to trump house price stability (in the short term).
Orrs problem is that every time he hikes the OCR (his only tool against inflation) the next month only 1/36 mortgages roll over onto the increased rate (as we all have fixed mortgages that need renewing every 3 years in a certain month). so because only a fraction of the population actually have a mortgage and only a fraction of those are big enough for mortgage rates to have an impact on the discretionary spend of the household... probably each month only 1/90 households feel an impact which has a negligable effect on spend and inflation. So the next month he has to hike again and then probably gets 1/45 households. The time to actually see an outcome could thus be 18 months AFTER the OCR rises to the required level when 1/2 people with a mortgage get affected.
Thats the weird thing. I am assuming Rbnz cant wait another year for everyones mortgages to renew.. they need less money being spent now so inflation drops. To do that they can only hike the ocr in ever increasing amounts until they see a result. And each time they raise it only 2-3 months worth of mortgages renew before they see the impact on inflation.. which wont really have much impact so next time there will be another sledgehammer ocr raise.
They are all hard work..... they have account closure forms that need multiple signatures witnessed by lawyers, and death certs etc etc etc. I am doing mums at the moment, lucky most was in a single trust acc and accually sitting inside a lawyers trust acc.
They where also very hard when she was in rest home with dementia, growing boomer population = they need to sort this out.
Ive no experience with ASB however I worked through my late wifes estate last year. In addition to our joint home, investment & household accounts, she had her own bank (BNZ), investments (Sharesies), Super & KS (Kiwiwealth) accounts.
All were sympathetic & excellent to deal with as long as I followed their process & provided the info they requested - for eg strangely all had slightly different wording required on my certified identification.
Probate took 4months, then a couple of months to obtain all funds.. Our solicitor advised me to do as much as possible myself to reduce legal fees which totaled ~$2k at the end, mostly the house ownership change (no mge).
There was a fair bit of tooing and frooing involved, i could see how it could get very expensive very quickly if 3rd parties are involved eg Public Trust.
My experience with my mothers estate, over the last few months is that there is no issue. Lawyer prepared all the paperwork and I signed it all. Westpac, ASB and BNZ and none were any problem. Money came in as expected and in a time frame that the banks said they would.
I had an issue with BNZ a few years ago.
My father had advanced Parkinsons disease, so I took over his affairs for him. he had to sign a document for BNZ to allow me authority.....but due to the shaking in his hands he couldn't really hold a pen to sign. B
But he tried anyway and then BNZ come back and said well it doesn't match his signature that we have on file. I said I know and here's the reason why....
They then come back and say OK......in the event of situations like this we need him to sign another form ......
And this is all in a small town where both he and I are "known to staff".
It took months to overcome.
I am the opposite, David.
I previously thought the RBNZ needed to start taking its foot off the accelerator. I saw real signs of inflation slowing or about to slow.
However, the floods will have a significant inflationary impact over the next few months. Inflation will remain higher than it would have.
With unemployment still very low, and no signs that it will ramp up quickly, there is no reason why the RBNZ should not continue on with 2-3 more hikes.
Whether it will is another matter. While the floods will boost inflation, it will also hit some businesses and households hard. This may influence the RBNZ’s decisions, even if it’s not a central, mandatory consideration.
Actually i reckon now a .5 increase might just do it. I see increasing pain at the pumps and food shops as mortgages roll over. Orr wont want to annoy his bosses new boss (Chippy). Chippy actually wants inflation to drop, house prices to fall (most his voters want that) but at the same time to avoid a recession. Most big businesses (his new besties) want the same... so i predict a close relship between Orr-Chippy-Business to try to achieve the outcome we all want and avoid a crash. Its possibly the best plan!
Who knows? He might be referring to house prices increasing at 6% while wages increase at 8% and CPI is at 7%?
In a scenario like this, people aren't finding nominal values retreat behind the loan value, but price increases aren't outstripping wage growth, and income earners are getting ahead. But for some reason wages growth contributes more than 100% to CPI, so there's no way this could happen.
OK, lets talk worst case scenario.
The wannabe FHB loses their job for two years. That is, say 50k savings towards a house lost.
But house prices drop by half. Two years later the FHB get a mortgage for 400k less than what they would have today.
A couple of bad years, but they have saved a decade of mortgage repayments.
It really cant get much worse for FHB can it? What have they got to lose really?
It's a valid point though. "Ermergerd $700m on public transport" meanwhile the amount spent on pensioners regardless of need probably increased by that amount in the last 12 months.
Let's not forget, a good chunk of those benefiting from the $700m are out there working and paying taxes to fill the hole that is an otherwise unfunded national super.
Define need!
A loser on the benefit, in a motel, using drugs, soon to be in a new house and never been employed and never paid tax or contributed to society or the economy!;;. Suddenly hits 65.
According to you he gets the super because he's a loser! And ... He gets it ahead of a ..,
... Medium/ rich person, worked all their life, brought thier own home, drug free, paid taxes, saved thier money, contributed to society and the economy.!!.
NZDan... You my friend are why we have so many good people either leave ,. Live in enclaves, or just keep giving to support the losers who have " taken" all thier lives and sucked our economy dry (fiscally and socially).
Yip according to you they should get a life time of taxpayer cash, housing and benefits cos they should. And then get the super
The super PA payments don't even go close to what the Govt pays in welfare, prisons, rehab, policing, health care, re education, mental health care.....
Super should be only for people who worked in NZ for more than 20 years... After all they are the ones that payed for it!
The rest get feck all!. That should send a message to the nest generation of wanna be losers
The basic supply chain problem is China has run out of new internal migrant workers for its factories. The West will now have to pay more for Chinese goods and look for another place to buy from. A transitory inflationary period before the West finds a new space to exploit for cheap production. This is not a bottleneck caused by a disease or a war, it will probably last at least a decade.
If a central bank lowers interest rates during this period it will cause inflation to go from high to extremely high, the sort of extreme inflation that breaks economies.
Get used to high interest rates or prepare for a broken economy.
China is a major exporting nation and covid lock downs and the lack of trust by most other trading countries is resulting in on shoring or moving to other countries like Vietnam so China,s impact will change in the future and probably cause internal dissent as unemployment pushes newly more affluent rural labour imports to cities to return home to a lower standard of living and they will not be happy bunnies.
Funny how most here can analyse the " bleeding obvious" and make the correct calls weeks before the so called " silo'd" experts figure it out!
These experts need to get away from thier screens, myopic unilateral focusses, and stand back and see the Forrest for the trees.. or slash!
Three things happening now will lead to a fairly rapid cooling of the economy and declining inflation IMO. Lots of Kiwis coming off short term fixed mortgage rates will curtail domestic demand, global slowdown will curtail export demand (though this will have a lesser impact as a large part of this is made up of primary industry output) and rising immigration will make the labour market more competitive for job seekers.
The pathetically dep financialised parts of W economies want their free money back. Rates are still negative in real terms but that is not good enough for these parasites
Rates should be higher than inflation or savers get nil return and rich borrow to invest and thereby poor get further behind. Now markets think central banks will back off for their benefit. Central banks are way behind the curve and rates will still be negative in 6 months
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