By Gareth Vaughan
The Covid-19 pandemic has been a very challenging time, the likes of which we haven't experienced since World War Two. And it's against this backdrop that the Reserve Bank is waging its fight against the highest inflation since the 1980s, Kiwibank Chief Economist Jarrod Kerr says.
Speaking in a new episode of interest.co.nz's Of Interest Podcast, Kerr says he expects the Reserve Bank to increase the Official Cash Rate (OCR) by 75 basis points to 4.25% when it reviews the OCR for the last time in 2022 on November 23.
"It is an aggressive move but the war on inflation is far from over," Kerr says. "The deceleration back towards price stability is going to take some time."
By the time the Reserve Bank is next scheduled to review the OCR, on February 22 next year, Kerr expects to see a significant slowdown in household consumption, further signs of a slowdown in global economic growth, and "hopefully" a slowdown in inflation.
"By the end of next year I think enough will have been done that we'll actually be in a situation where central banks, including the Reserve Bank, will start to ease monetary policy into 2024. So more hikes, more pain near term, a cash rate of 5% which sees mortgage rates staying around current levels if not a little bit higher. And then hopefully by the end of next year, the war on inflation will be won and we'll see central banks starting to reduce interest rates," says Kerr.
In the podcast he talks in detail about the inflation picture including core inflation, the labour market and why the Reserve Bank wants to see a rise in unemployment, plus the role of government fiscal policy. Kerr also discusses just how disruptive the Covid-19 pandemic has been to the economy, when the world last witnessed shocks of this magnitude with war-time settings such as closed borders and disrupted supply chains, and the changes this has wrought on the economy.
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From The Economist (ironically!)
Everyone can agree on one thing about the past year. It has revealed quite how little economists understand inflation, including both what causes it and what causes it to persist. It is likely, therefore, that economists will also struggle to predict when inflation will cool. Optimists hope that prices will once again take people by surprise, with their rise slowing sooner than expected. But it seems more likely that inflation will prove stubborn even as the economy slows. That will leave policymakers with a grim choice: to squeeze the economy tighter and tighter, or to let prices spiral.
https://www.stuff.co.nz/world/300740115/even-a-global-recession-may-not…
The house-price-to-income ratio is currently about 8.2 years for NZ. With higher interest rates we will need to return to the long term average of about 5 years. Even if incomes rise at 6% annually, and current nominal house prices stay at the current level, it will take about 8 years for houses to seem cheap
At what point do they consider that asset price inflation especially in property, requires more 'money' to be created via debt?
2 decades of excessive money creation by both commercial and central banks, borrow and spend, consume, consume, no corrections allowed and we wonder how we got here. Yeah, we've had additional shocks to the system, but some teachings would suggest that the shocks increase in scale everytime because we haven't learnt from the previous lesson.
And it would seem that everyone's just hankering for lower interest rates again so we can rinse and repeat.
Could it be that our entire narrative - 'making' money, monetary wealth (magic numbers) at all costs, and an economic theory built around these "values" - is in fact a root cause of the problem?
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.
Brock,
Their raison d'etre is to devalue your wages and pilfer your savings.
Can you back that up with evidence? Not just evidence that shows they make mistakes, we all know that, but evidence showing that this is indeed the reason for their existence, their raison d'etre as you put it.
The low inflation of past 2 decades was mostly about the rise of China. Those demographics have changed for good.
That coupled with climate change affected global agriculture and cost of infrastructure resilience...
Don't see a return to pre-covid times ever. This is the inflection point to a 20-30 years of higher inflation.
RB will have to change it's inflation target to 2-4%, explicitly at 3% ?
OCR will be about 4% for next 5 years .
Yep, economists so fixated on their theory and data modelling, blinded by their own biases and vested interests, they're unable to join the dots, to incorporate actual conditions and causes from each preceding period into their theory.
As long as GDP numbers increase, CPI inflation and interest rates stay low, assets to the moon and debt/equity leverage to the max, everything is normal.
TD - not yet a given as there are plenty of other Asian nations looking to do exactly what China has done -Vietnam, Malaysia, Philippines, Indonesia -
and China still wants the miracle to continue so they will push hard for a few years yet to compete on price
and demand drops as population growth stagnates and we age so need less stuff
but this is not to say that OCR should remain low - it should be higher regardless because we still have onshore inflation to combat
and zero should be the target
I seriously doubt those countries could replicate the economic efforts to the scale that China did to become the factory to the world over the last 2 decades.
SE Asian countries have had issues with access to energy and political instability but increasingly frequent weather events also make foreign companies nervous in putting their entire manufacturing base in this region.
Things are rapidly changing. We had over a decade where you should have taken on as much debt as possible and bought assets, but now that debt is becoming very expensive to service and asset prices are going backwards. All of a sudden being an employee seems like a good place to be compared to an investor.
Look at that conclusion statement:
"Kerr also discusses just how disruptive the Covid-19 pandemic has been to the economy, when the world last witnessed shocks of this magnitude with war-time settings such as closed borders and disrupted supply chains, and the changes this has wrought on the economy"
As ever our media downplays/ fails to mention outright the ELEPHANT in the room that caused all this. Irresponsible government spending done by all the Western nations (starting to look intentional given how our very own DIA has been working on digital currencies and so forth since 2020.. All part of the great reset/build back better plan). The spending was the GFC quantitative easing on steroids. Never before seen levels of printing. And see how they blame everything else. "closed borders, disrupted supply chains". Those are just additional stressors on top of the ELEPHANT.
Media you are making many angry with your blinkered biased reporting.
Keep labelling us conspiracy theorists. Each time the "theory" becomes fact. At what point do you all see it?
Media can only reframe/repress the truth for so long.
MSM don't even bother looking for the truth any more. They get their PR's from the state agencies & what do you know(?) print it word for word. I'm not even sure they have the where-with-all to look for the truth any more as their education levels have been so poor.
This is the WEF way, dumb us down whilst at school & do as we're told after it. In fact, better still, don't even bother to go to school. Just do as we're told.
PS: If you think people are dumb because they didn't attend school, then how come so many people are so dumb after spending 15 years being 'educated'. Maybe the people who didn't bother to attend school in the first case knew something we didn't?
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