Reserve Bank (RBNZ) Deputy Governor Christian Hawkesby says the central bank is focused on how rising oil prices, caused by the Russian invasion of Ukraine, will influence inflation in the medium-term.
Speaking to interest.co.nz on Monday, Hawkesby acknowledged, “If oil prices stay where they are at the moment, that’s higher than where we projected in our Monetary Policy Statement [released on February 23].
“So, the very near-term implication is that we’ll have higher CPI [Consumers Price Index] outturns over the next quarter or so than we had factored into our statement.
“The key judgement for the Monetary Policy Committee will be - we can’t control that. It’s happened, it’s come from overseas, what does that then mean for the outlook for inflation going forward? And that’s the thing that we really need to stay focussed on.
“We are in an environment where locally, inflation expectations have been rising - in part because what people have seen with recent headline inflation. So, the key question will be, how much of that spills over into higher inflation expectations further out in the window where we can make choices about leaning against that or not?”
While oil prices have risen more than the RBNZ expected when it hiked the Official Cash Rate less than a week ago to try to get on top of high inflation, Hawkesby said the central bank identified geopolitical tensions in the Ukraine escalating as one of the risks facing the economy.
“Markets had put a reasonable probability on this crisis, or on this amount of geopolitical tension brewing. So, some of that was priced in,” Hawkesby said.
“Given what’s happened since the Statement, we’re just going to have to reassess, as we do every six weeks, what the implications are for our mandate.”
Financial stability concerns
Hawkesby said an “immediate” issue the Bank is focussed on is ensuring financial markets operate smoothly, as pro-Ukraine countries try to block Russia from engaging in financial markets.
Pro-Ukraine countries have for example cut off Russian banks from the SWIFT international payments system.
Hawkesby said the RBNZ doesn’t have Russian banks in its payments system, but New Zealand companies that export to Russia will need to consider how their clients pay them.
He said he was mindful of the financial system potentially “gumming up”. He feared there could be “a rush for liquidity; a rush for US dollars as a way for financial market participants to free themselves of that dysfunction”. This could “create challenges in funding markets”.
Hawkesby likened these potential challenges to those the RBNZ faced at the 2008 Global Financial Crisis, as well as in early-2020 when Covid-19 really hit.
He said the RBNZ could respond by injecting more liquidity into the financial system - taking collateral and providing liquidity in New Zealand dollars.
Interest.co.nz also talked to Hawkesby about monetary policy more broadly. Listen to a discussion about what the RBNZ’s appetite for higher unemployment is, as it lifts interest rates to curb inflation from 6:25. For more on the unwinding of its Large-Scale Asset Purchase programme, or selling of government bonds, listen from 11:06.
53 Comments
Wonder where most of these folks' (and Treasury advisers', MPs' etc) wealth is stored. Almost as clarity of thought is very much subject to emotional influence from where one's wealth sits.
Either that or double standards are deliberate and cynical, which would be more sad.
Lol - watching central bankers at the moment is like watching captain of the titanic explain that there aren’t enough life rafts for everyone. The people don’t yet realise how serious the situation is.
By ‘more liquidity’ is he implying even more QE?
BTW - won’t more liquidity in the form we’ve just witnessed the last 2 years create even more inflation which is a serious issue if not resolved? Yet the plan to solve the issue they have, is to create even more of it? These guys are actually insane.
The RBNZ muppets have clearly no idea what they are talking about. Just look at the results of their misguided, reckless ultra-loose monetary policy.
The longer they wait before normalizing rates (in the current environment the OCR should be at 3.5% at the very least, and right now), the higher they will be forced to go later on. They still do not seem to see what is in front of their eyes. If they keep approaching the inflation problem with the current negligent tardiness, the OCR peak will have to go close to 5%.
He said the RBNZ could respond by injecting more liquidity into the financial system - taking collateral and providing liquidity in New Zealand dollars.
Brilliant - imagine signalling the return of QE less than a week after talking a big game on tightening!!!
This is RBNZ realizing that they have been far too hawkish with their signalling and they don't actually want banks to be ramping up rates, reducing disposable incomes, crashing the economy, and increasing unemployment. Jeez.
Inflation driven in from overseas, in this article the focus being on energy, but hardly alone. Iron, steel, cotton, all commodities and all manufacturing, garments, whiteware that has shifted off shore for the advantage of sweat shop labour. Vehicles, spare parts and on and on and the higher freight for all of it. And if the NZ$ slides, so much the worse. Big compounding problem isn’t it. Judging by the solution penned here, the notion of QE on QE, or throwing more bad money after more bad money, it seems quite clear our central bank relinquished any meaningful control at least two years ago.
The problem here is our elected representatives have dropped the ball on sound fiscal policymaking and much-needed economic reforms for decades. All the quick-fixes to make up for their failures have also been inflationary to make matters worse.
More compliance costs on supply, failure to solve infrastructure issues, high unskilled migration, perverse tax incentives, poor education and skill outcomes, more handouts to a broad range of recipients, and the list goes on and on.
RBNZ is only for telling us, that inflation is happening to go bad to worst from last one year?
That we can see when our pockets drain out at each purchase.
I believe you guys are not getting those ultra-fat packages for telling us what is happening to us and giving excuse of being helpless to solve it.
Is inflation is your mandate or not?
If not like housing prices then tell us whose mandate it is?
Expect to see more in the ruble/CNY space. As David Goldman over at Asia Times notes, re-routing Russia payments via China's CIPS and thence to SPFS, is technically feasible if banks join in.
It will be an agonizing choice for some banks: join in and face the wrath of the USA/EU, or join the up-and-comers who have half the world's trade and more than half of its resources. What to do? Perhaps might be easier after a long cold dark gasless winter....
Great comment thread - he's proposing the Bowie approach:
https://www.youtube.com/watch?v=Z9GbGO7CKdQ
These folk are out of their depth. Weren't taught about the real world, and worse, were given some real-world words to describe their non-real board-game. The pidgies are coming home to roost; all 500 of then to a coop built for 5.
To be fair, we wouldn't have to pin all our hopes on the RBNZ in the first place if those in the beehive (and their predecessors) actually did something worthwhile with all that cheap money that has been flowing around for the better part of a decade.
Robertson and team borrowed tens of billions of dollars and funneled much of it pumping up demand in our economy for the past 24 months.
There were talks of building supply resilience and funding shovel-ready projects but those commitments met the same fate as Cindy's Kiwibuild did.
Blah blah blah, the incompetence is staggering.
Let me simplify it for you Mr Hawksby, there are the only 2 possible scenarios:
1) raise the OCR aggressively which will lead to a recession
2) Keep talking and raising the OCR too slowly which will lead to uncontrollable runaway inflation
Option 1, a recession, is a normal part of an economic cycle, it's not that bad and it's needed to weed out the weak and unproductive
Option 2, runaway inflation, leads to prolonged misery, generalised poverty, recession and possibly depression.
Choose option 1
Someone posted on here an Aussie party's plan to deal with the debt bubble with the central bank's help by giving a nominal cash handout to each adult: for FHB, to be paid toward reducing their mortgage debt; for non-homeowners, to be spent or saved; for investors, to be paid toward their total portfolio debt. An amount per adult rather than per house. Instead of the current / recent approach of printing and shoveling money into pushing up house prices.
The idea was to reduce both money in circulation and total household debt without unduly rewarding asset speculators and banks at the expense of non-asset-owners, as central banks have done till now.
Anyone have the link to it? I can't recall who it was...
Might end up having to be part of any central bank response to economic hardship without simply blowing more bubbles...
Right Mr Orr, I'd like you to:
- keep unemployment low
- stop house prices going up (but don't let them drop too much)
- be gentle on middle class mortgages and let some first home buyers in
- prevent investors profiting too much from housing
- stop international oil prices hurting kiwis
- maintain liquidity in the markets
- keep our bonds attractive relative to other securities
- steady as she goes on NZD
Dont worry about the enormity of the task mate - you've got this magic interest rates lever, and you can make some recommendations to Ministers. You're all good.
Hehe.
Of course it's not simple, and it's even harder since this government changed their mandate.
This is why I don't think the RBNZ will raise the OCR that much, they have to balance competing goals (explicit and implicit). Raise the OCR a lot over the next 12 months and they will quell some domestic inflation (but not imported inflation) yet destroy the housing market and economy (and importantly, for the RBNZ, unemployment will surge higher). Don't raise the OCR at all, and it will look like they aren't trying to do something about inflation.
What's the least worst option?
It's why I think there will be a middle path, which might be an OCR 'slightly' higher than I think it will go (so maybe higher than my 1.75 max) but not nearly as high as some here (and some bank economists) are predicting.
It's not that different to war strategizing really. Including Orr's rhetoric and his jaw boning in order to try and talk inflation down (without ever genuinely intending to take it north of 3%)
Then again, knowing the RBNZ and their recent history of poor decision making, I could well be wrong and they raise the OCR aggressively and once again we see nasty consequences of their decision making...nothing would surprise me with them
I'd no idea the Reserve Bank has switched from using a consumer price index to a local pricing index that ignores the price of imported goods as it's preferred measure of inflation.
The origin of inflation doesn't matter to consumers, they experience it all the same.
Don't think they are even looking at potatoes :)
https://shop.countdown.co.nz/shop/productdetails?stockcode=314400&name=…
This is reminiscent of many Central Bankers in the past who decide to just start ignoring inflation drivers because they have removed them from their models. They demand the real world fit their models, instead of their models reflecting the real world. Eventually they are woken from their idiocy.
Some great comments and thoughts here. To me, Hawkesby seems to be implying that whatever their interpretation of financial stability (and the limited impact Russia will have on our domestic financial stability underlying fundamentals) is of greater importance in their mandate than inflation…
Which in all fairness has been muddied by Robertson’s introduction of employment despite many experts predicting the shit show that would result (including an ex RBNZ chair)!
Dr John Coyne, head of the Northern Australia Strategic Policy Centre told RNZ reporter Phil Pennington the Government was "buying into a very dated view of globalisation, and certainly hasn't learned the lessons from Covid-19, around secure supply chains and national resilience".
The pandemic disproved assumptions that global supply chains could readily deliver, whether it was vaccines or oil, he said.
"If you listen to the oil companies, they'll tell you all the risk is under control," but the reality is conflicts can escalate quickly, trade splits are deepening and one natural disaster can pile on top of another, he said.
"If the oil refinery in New Zealand closes, you are totally reliant on oil companies doing the right things ... a really dangerous proposition."
Surely it makes sense to retain our refining capacity, at least while this crisis lasts.
Currently, inflation is largely being driven by the rising oil prices, which are as a result of Russia's invasion of Ukraine.
No matter how much RBNZ hikes the OCR, it won't bring down international oil prices. New Zealand's economy is already slowing, house prices are starting to fall and business confidence is falling. A situation you'd expect would lead to stabilising interest rates, not hiking them.
I don't think the RBNZ want to kill the New Zealand economy for the sake of international factors outside of its control.
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