The Reserve Bank of New Zealand’s efforts to bring economic demand in line with available supply appear to be working, according to BNZ’s chief economist Mike Jones.
In a report simply titled ‘Progress’, Jones said inflation had peaked, the labour market was slackening, and interest rates and house prices appeared to be at a turning point.
“There’s clearer evidence emerging of the economic rebalancing we’ve been anticipating, and that the Reserve Bank is trying to deliver”.
Over the past weeks, a number of promising indicators have started to move in the direction economists and the central bank were hoping they would.
Migration data was perhaps the biggest surprise. Jones said February estimates showed that inward migration was “going bananas”.
Approximately 52,000 migrants have settled into NZ in the 12 months to February, and monthly arrivals are still accelerating. This number could climb as high as 70,000, which would be equal to about 1.8% of the working age population.
“More people in the country means more economic activity, more spending, extra available workers, and additional pressure on the country’s housing resources,” Jones said.
This surge of new New Zealanders has likely been the driving force behind other positive developments seen in the economy; such as easing staff shortages, solid spending levels, and some stabilisation in the falling housing market.
“We still think the NZ economy is destined for recession this year. But if anything was to pull us back from the brink, all the extra people in the country, both migrants and tourists, stand out as the most obvious candidate”.
Prime Minister Chris Hipkins called attention to the inflow of migrants in a pre-budget speech to the Employers and Manufacturers Association on Thursday.
To help offset worker shortages, the government has adjusted immigration settings to create easier pathways to residency, more holiday working visas, and increased the cap on RSE workers.
The prime minister said a recent OECD report ranked NZ as the number one country in the world for attracting highly skilled workers.
“Now I know many businesses are still facing worker shortages, and I’m not suggesting the changes we’ve made, or the OECD ranking, mean the issue is fixed.
But you asked the Government to take steps to attract more labour to New Zealand --- and we have”.
Workers need houses
High levels of migration has caused ANZ to back away from their house price forecast of a 22% peak-to-trough decline. Their economics team now predicts a total fall of 18% is “the most likely of many plausible outcomes”.
However, good news always comes with its own set of risks. If the housing market was much more resilient than that, the RBNZ may decide another rate hike might be needed to kill inflation.
ANZ attributed the better forecast as being due to new migration and a stabilisation in wholesale interest rates which means fixed mortgage rates may have peaked.
On Thursday, Westpac estimated the average mortgage rate currently being paid by borrowers was approximately 4.1% in February, and would rise to just under 6% next year.
This average is an estimate of the rate on all outstanding mortgages, taking into account that most loans are on fixed terms. This has the effect of smoothing out rate peaks and troughs.
Monetary policy lags mean that despite the central bank beginning to lift interest rates 18-months ago, only now is the average mortgage rate climbing above pre-pandemic levels.
This delayed reaction will occur in reverse when the RBNZ begins to loosen its restrictive policy, meaning it could cut rates as soon as mid-2024.
Helping to cement this expectation was first quarter consumer price index data which showed the annual inflation rate falling from 7.3% to 6.7%, with the slowest quarterly rate since 2021.
BNZ’s Jones said weaker March quarter numbers had prompted his team to trim 0.6% off of its 2023 inflation forecasts; now predicting an annual rate of 4.7% across 2023.
Eventual central bank rate cuts are already being priced into long term mortgage rates, which have been falling since December, even as short term rates have crept higher.
This suggests market participants have some confidence that inflation will come under control with the official cash rate at 5.5%, with no need to go higher. It's currently 5.25%.
Missing puzzle pieces
While there are sure signs demand in the domestic economy has been slowing, this has not translated into a weaker labour market.
This is good news for workers, of course, but bad news for the RBNZ which wants more slack to reduce the likelihood of wage increases.
Monthly employment indicators released on Friday morning showed strong hiring, with the number of jobs filled up 0.9%in January, then another half percent in February and in March.
Sharon Zollner, ANZ’s chief economist, said the labour market traditionally lagged behind changes in economic activity, which itself lags behind monetary policy.
In its February monetary policy statement, the RBNZ had forecast unemployment to rise to 3.5% in the first three months of this year. Zollner said this was unlikely to pan out. It was 3.4% in the December quarter according to Statistics NZ.
“While we don’t see that forecast eventuating (yet),the RBNZ can take some comfort from forward-looking indicators of employment and wage growth moving in the right direction.
Job advertisements, while elevated, are trending down, and employment intentions in our ANZ Business Outlook have been negative for six months now”.
Labour market tightness was a key input to the inflation outlook, but the central bank’s next decision will also be contingent on fiscal policy released at Budget 2023 on 18 May
28 Comments
Well, at least I hope that the RBNZ clowns have finally learned the lesson that the consequence of an over-loose monetary policy is an inevitable subsequent tightening.
I hope that they will never indulge again in the stupid belief that low interest rates are the solution to all problems.
The election result is just one mediating factor. No doubt the reintroduction of interest deductibility would be worth a bit if a rerate of the investment stock and to the extent that it is partially baked in, a Labour win would provide a bit of cold water. Either way, the rubber band is fairly taught and ripe for a bit of reversion.
"If the housing market was much more resilient than that, the RBNZ may decide another rate hike might be needed to kill inflation.
With the way current commentary is running, including much of that above, and community sentiment reflecting that, then an OCR quite a bit above what the RBNZoriginally targeted looks on the cards.
It doesn't really matter where the OCR peaks. There is increasing downward pressure on forward rates. A higher short term peak is likely to flow through to lower forward rates at this juncture, as RBNZ saw with their recent shock therapy attempt.
Don't fight the Fed? RBNZ ain't no Fed. Don't fight the invisible hand.
The prime minister said a recent OECD report ranked NZ as the number one country in the world for attracting highly skilled workers.
Cough. For anyone who is interested in this data, https://www.oecd.org/migration/talent-attractiveness/
You will see that quite a few liberties have been taken with the above claim. While the scores are good, the data does not show intention or action to move to NZ for professional purposes. It's a measure of perception. For ex, if 'income and tax are less important' to an individual, NZ is seen as more attractive compared to those who see this attribute as important.
These fools. Govt is not spending more than it taxes, and people are paying off debts faster than they are taking them on. What borrowing we do have is businesses trying to keep the lights on. Wage growth has been flat or negative for a year in real terms. I could go on. Needless to say I will bookmark this page so I can make fun of all these bank economists in a few months' time.
Australia is doing a little better than New Zealand on the trade front though. Figures this week showed Aussie export prices unexpectedly lifted by 1.2% in the first quarter, while import prices fell by 4.2%. That means that the Aussie terms of trade boom is still rolling on, but over in New Zealand it is a different story. Data this week showed the Kiwi trade deficit widened to $16.4bn over the 12 months to March as demand for dairy, proteins and timber products continues to be lacklustre. Those numbers look diabolical for an economy that is heavily dependent on foreign financing, running a fiscal deficit of ~4.9% and recorded a contraction in GDP of 0.6% in the December quarter. Can New Zealand avoid stagflation? We want to believe
From what I could see in the last CPI report most falls in inflation where due to international commodity prices. Consequently I would very much caution against putting up the bunting and rolling out the "mission accomplished" banner this early. Domestic/non-tradable inflation is a menace and I am not convinced that RBNZ has the upper hand yet.
I can't see any justification for the RB cutting the OCR in the future. We have only returned to the OCR rate that was normal prior to the 2008 GFC. The current OCR rate is no where near appropriate for our 7% galloping inflation. The 5.25% value only has shock value because it follows a period of prolonged and totally inappropriately low rates. If our economy normalizes (what ever that is going to look in future) , the OCR rate should be kept at about where it is. I would not be surprised if we still will face some hefty wage rises leading to further inflation, so I would not be surprised if the OCR has to be raised further. This prevailing psychology that we will only face a short wait before we return to the low interest house price fueled ponzie is very foolish. However given the leadership that we have, that is where we may well end up.
The low OCR rates that prevailed since the GFC were meant to boost the economy through making it cheap to invest in our economy. The only thing that people invested in was property speculation and this highlights a very big flaw in the RB CPI/OCR model. I think that it is totally unfit for purpose, full of flaws, unintended side effects and we should now be seriously reviewing it. Changes to it should only be made after the current so called high rates have tamed inflation and undone the massive damage that we have done to the housing market and peoples lives. Changes should only be made when we are in a stable neutral period.
I very much agree. I suspect we'll see a resurgence of inflation, more rate rises, and lower asset prices. Most of the country is still in denial, and I can understand the psychology as many have a lot riding on this outcome. I have seen some panic about, however with panic also come indescision, until at some point a decision needs to be made and some will try double down, DCA or simply resign and sell off.
Again, garbage in garbage out rules.
The OCR/CPI would've worked just fine - if the CPI hadn't had housing removed. People were swapping houses like hot cakes, under normal circumstances they are a high-maintenance item with little return for the maintenance, yet they were removed from the CPI back in 1991.
If house prices (not the interest, not rentals) had been included in the CPI all these years, we never would've had the bubble.
Ditto to allowing unrealised equity as leverage against interest-only, rent-backed investment properties.
Apologies, I should’ve included some data.
The amount of auctions cleared increased in March (this is often a leading indicator for prices) and prices held flat during the month.
That’s mostly gleaned from Auckland data, so might not be the same nationwide.
It’s only a very tentative signal, but there is data behind it.
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