The country's very full employment levels are being pointed to by Reserve Bank Governor Adrian Orr as a key reason why households are going to be able to cope with the much higher interest rates ahead.
The RBNZ hiked the Official Cash Rate on Wednesday to 2% and indicated the OCR could be around 4% in 12 months' time, which has raised concerns about household's ability to cope with very substantial mortgage rate rises.
And Orr was asked about this - and the prospect of a recession - by MPs at a Finance & Expenditure Committee hearing on Thursday.
He said household balance sheets in NZ were in a strong position.
"...Especially because we are employed. The single biggest concern for a bank, a household, a housing market is the state of the labour market. Banks do not want to be foreclosing. Banks are happy to talk with customers if people are employed and committed to continuing to service mortgages," he said.
MPs pointed out that with the number of mortgages due to be reset at in coming months, this would slow the economy.
"That's our intention," he said.
"We've raised interest rates with the explicit intention of slowing down demand growth."
Asked about the possibility of a recession, he conceded: "That is one of the risks.
"In an outright sense. If you are growing too fast to be able to supply the goods and services - its only inflation. That means you can either suddenly manage to ramp the supply side up or temporarily reduce demand."
But in terms of whether there would be a recession: "We don't project a recession at all.
"...Can I rule a recession out? No. Can I rule a future boom out and higher interest rates. No. So, that's our best central projection that we can have."
The RBNZ in its latest forecasts is not projecting inflation to return to its 1% to 3% targeted range till the end of next year.
"In terms of how long we will have inflation outside of the band, we need to be able to credibly bring inflation back within the 1% to 3% range without doing unnecessary damage to or instability to output, interest rates and the exchange rate," Orr said.
"What does that translate to? It means we are focused on inflation one to two years ahead because that helps us look through to the core parts of the inflation, and adjust conditions to achieve that."
Orr was pressed by National Deputy leader on National's current big theme of the current Government being a big spender. She asked Orr if current Government spending was putting upward pressure on inflation.
The answer was: "We believe it is putting upward pressure on aggregate demand and hence inflation - now. And then over the course of the projection period it starts to have a negative impulse. So, over the near term - a positive impulse upward pressure on aggregate demand, but with the fiscal projection that we take, it then eases off through the projection period."
Willis stressed that the Government had never stuck to a projected spending track and questioned Orr further on this.
He conceded that Government spending was one "variable" the RBNZ had to deal with. "Higher than otherwise Government spending would mean all other things equal higher than otherwise inflation pressures."
Asked by other MPs whether the recession risks had increased recently, Orr said: "Yes - internationally. And of course that sheets home to New Zealand. And it sheets home in different ways. So the first part. We are starting in New Zealand in a very strong starting position. Of course we are still floating in this global economy. The recession challenges are coming through significant downgrades in growth expectations internationally.
"...And for us, especially China. It's such an important trading partner for us. The Covid lockdowns, the ongoing supply constraints, the activity there is one of the things we need to watch and worry about.
Asked about future projections of the growth of trading partners, Orr said: "The confidence bands around any of these projections is always wide.
"The butterfly flaps its wings and something different is happening again. You know we can create quite plausible stories where a lot of the current price pressures dissipate quickly. Oil prices stop rising even if they just stay there and so on and so forth.
"So you can have stories where a lot of the inflation pressure and necessary monetary restraint ends up not being needed.
"Likewise you can tell stories where you are in a very tough global environment.
"So the reason we are doing what we are doing today is to at least make sure we can head off the single biggest risk to this nation at the moment, which is enabling current price CPI inflation become embedded in future ongoing inflation expectations."
Orr was then asked whether there was anything that could be done when governments around the world undertake the kinds of stimulus seen with the pandemic to prevent a subsequent surging of asset, particularly, house prices.
"No. Not for monetary policy. But there are many other policies that you could do. And the number one other policy is make sure there's lots of houses.
"We've seen the outsized price reaction to an interest rate because housing has been so scarce. We are seeing more of a dull reaction going forward as housing supply increases."
Orr said while houses are dwellings "people will treat them and be priced like an asset. Higher interest rates means lower asset prices and vice versa.
"We can't target house prices and inflation. You can't do both."
Asked about risk factors to the economy and whether the building/housing industry represented the biggest risk, Orr said consumption made up the biggest bulk of total spending in the economy and one risk to the economy was around falling consumer confidence.
"But the building sector has always been New Zealand's canary. It's either boom or struggling."
Orr indicated that the RBNZ has been doing work with the housing industry around what the future sustainable path for construction of houses is.
"Clearly it's not the current growth rate. That's unsustainable. It's too fast. People can't get the labour, get the resources, so, there is a sustainable growth rate that is below where we are. Can we slow things down gently or does it come with a thud?
"That is going to take a lot of sensible conversations between the owners and the builders and between the owners and banks. And we really do call on that credit facilitation to be open minded and medium term thinking. This supply is a fantastic opportunity."
Orr said the RBNZ was now seeing credit grow for businesses, while there was slowing mortgage investment.
"So you are seeing the right changes happening in the patterns.
"But we don't want to leg trip ourselves between builder and financier."
35 Comments
... " the butterfly flaps it's wings " ... aaaaahhh ... I see the path ahead ... too poor to afford groceries , Kiwis will head out into the fields and eat bugs ! ... good protein , and a boon for horticulturists , clearing the pests from their crops : Win/win ...
Albert - there is a major issue with the unemployment figures as the number on the jobseeker allowance (work ready ) is more than the number receiving unemployment benefit so I reckon actual unemployment is between 6-7%. However if those receiving jobseeker benefit are not actually work ready then the result is the same, am I wrong or are the politicians being economical with the truth?
For starters, does anyone really think that a low unemployment rate means everyone else that could/should be employed is?
And secondly, being employed meant you use to earn enough to have a decent life. For many, even those that are two-income families working 40 hours each per week, that is not enough anymore.
I recall reading being in employment is defined as working a single hour a week. They deal with this in Australia be having full time and part time disclosed.
If true, clearly we do not have unemployment at 3.2% in reality. Many would work extra hours if they could. We also know most of the shortages are seasonal jobs scattered far and wide that in reality a Kiwi could not support themselves on.
Te Kooti - read my comment above and as you are correct the under employed should be added to the figures on a pro rata basis of full time equivalents and 10% may be closer to the real figure. The difficulty in employers getting staff however indicated a deeper problem of those who do not want to work, Don Brash had a solution !
"In an outright sense. If you are growing too fast to be able to supply the goods and services - its only inflation. That means you can either suddenly manage to ramp the supply side up or temporarily reduce demand."
I suppose this answers those people who complain that inflation is imported and not to raise the OCR.
What a clown show, the "Employment" situation can change in a matter of weeks, the high interest rates could be with us for years. Orr will just be leaving his job as it all turns to custard. 2023 is going to be epic, I suggest you get your popcorn early or its going to be all sold out.
Almost on a daily basis one can read reddit threads about people trying to find a second job since one is not enough anymore, so yes, we might have a lot of jobs, even more than we can fill but that does not translate in higher salaries or better life necessarily (offer and demand hey?), so definitely not a healthy work environment, more like one that is generating enslaved workers due to the rampant inflation Mr Orr and their minions pretend to be able to control, truth is that they have no idea what they are doing and did not even realize yet that this inflationary process is not demand based so little their continuous rate hikes can do to alleviate that, instead they will make mortgage payments harder to afford to people who are already paying massive mortgages and dampen demand even further.
Wow you are right.I tracked back to March 22 interest.co.nz articles - as below.
Seems t0 mean we are all paying not only higher mortgages (as the OCR rises) but also we pay more money to the foreign banks listed below? (but it was borrowing the money in the first place from these banks that caused the inflation and hence the OCR rise?)
The Treasury last week estimated rising interest rates would see the cost of the Large-Scale Asset Purchase (LSAP) programme hit $5.1 billion. It was initially expected to be cost-neutral.
and
The Treasury made another point. It noted the LSAP programme has made the government’s balance sheet more sensitive to changes in the OCR (which is expected to rise steadily).
This is because the RBNZ is paying banks interest (at the OCR) on the cash they received from the RBNZ when they sold it their government bonds in 2020 and 2021.
As at March 18, the RBNZ was paying interest on $49.1 billion of deposits banks had in their settlement accounts with the RBNZ. In February 2020, the balances of these accounts sat at only $7.4 billion.
and
when the RBNZ went about buying the bonds on the secondary market (IE from banks that bought them from the Treasury), it paid a premium. The eligible banks included ANZ, BNZ, Citibank, ASB's parent Commonwealth Bank of Australia, Deutsche Bank, HSBC, JP Morgan, Morgan Stanley, Rabobank, the Toronto Dominion Bank, UBS and Westpac.
Why thank you OldSkool.
The LSAP portfolio is $55b with maturities from 2023 to 2040. Guestimate portfolio duration of 5.5 years I reckon. The bond curve is up 250bp, so thats $55m*$550*250 = $7.5b loss.
Now, you can buy a lot of stuff with $7.5b. We could have a fleet of 20 Eurofighter Typhoons and squeeze in a nuclear submarine as well. Stuff like that.
The market has already determined the value of the NZ$ and its down 13% in a couple of months from .74 to .64 - good for exports or inflation on imports plus increased freight costs and delays, message to Grunter and Orrful - your decisions mater nothing to the market so best shut up lest you confirm what you really are rather than the taxpayer just thinking it.
We are still well below the RB's calculated "neutral Interest Rate"
https://www.interest.co.nz/public-policy/115960/bank-economists-agree-r…
Even this so called "neutral" rate looks suspiciously low and fabricated to justify their actions.
In a situation where they are trying to stomp out rampant inflation they need to be well above the neutral value, not under it, somewhere nearer 5 to 5.5% at least. Look back at 2005-2006 and note that the OCR was 2 to 3% above the "neutral" point. Then this so called neutral is a bit of a moving feast and could rise to 5% meaning the OCR could go to 7- 8%
The OCR should be as a minimum at around the 4% level right now. Reaching 4% only by mid next year, as projected by the RBNZ, is too little too late. This will probably force the RBNZ to go even higher towards the end of 2023. I expect an OCR peak closer to 5% than to 4%, as the RBNZ is just too behind, as there is a price to be paid for this tardiness and incompetence.
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