Will the Reserve Bank really raise rates again in 2024? And will we really have to wait until mid-2025 for the first rate cut?
I don't believe either of these things that RBNZ said last week it wants us all to believe.
I'm not alone.
In his latest column headlined simply “Really?” former RBNZ official Michael Reddell points out that while RBNZ changed its forecast track for its official cash rate (OCR) in its latest monetary policy statement (MPS) late last month, it didn't bother to change its quarterly inflation forecasts accordingly.
RBNZ's forecasts now incorporate a better-than-even chance of a hike some time after the March quarter next year and they show the earliest likely cut from the current 5.5% level as coming between the June and September quarters of 2025.
But financial markets don't believe it either, and continue to price in no OCR increases and one-and-a-half OCR cuts in 2024.
RBNZ's own MPS shows “inflation is on the brink of collapsing,” Reddell says.
And indeed, RBNZ's own quarterly CPI forecasts for 2024 barely budged between the August and November MPS' – the only change was to raise the September 2024 quarter rate up a fraction to 1% from 0.9% in August.
What the MPS said
The December quarter of 2024 is projected to fall to 0.4%, unchanged from August, and, on an annualised basis, that would be an undershoot, reaching 1.6%, below the mid-point of RBNZ's target range of 1% to 3%.
As Reddell points out, if you believe that monetary policy works with a 12 to 18-month lag, that means RBNZ's actions up to May this year – it began raising the OCR from 0.25% in October 2021 and has held it at 5.5% since May – have already done the required work.
Our picture is similar to that of other countries, particularly the US, where markets believe the Federal Reserve has done hiking and will likely cut its key rate three times next year.
Global markets still seem to believe we're in for “a soft landing,” even though soft landings are very rare and depend heavily on what your definition of “soft” is.
Kiwibank chief economist Jarrod Kerr says it's difficult to find any examples of a soft landing and notes that a maxim in financial markets is that “the Fed keeps hiking until something breaks.”
ANZ strategist David Croy says this was the fastest and longest hiking cycle the Fed has conducted since at least 1980 but that academics consider the 1994 to 1995 period, when the Fed funds rate peaked at 6%, as the only proper soft landing.
Changing goal-posts?
Property professional Kieran Trass is lamenting on LinkedIn that RBNZ keeps moving the goal posts to justify keeping the OCR high, blaming it previously on unsustainable house prices and unsustainably-high employment levels.
Now house prices have dropped 15% and unemployment is rising, “net migration is RBNZ's latest scapegoat ….. today, RBNZ also strawclutching? Blames a slight lift in borrowing, even though borrowing is at historically low levels,” Trass says, suggesting RBNZ won't be happy until it has driven the economy into decline.
But BNZ head of research Stephen Toplis reckons we're already enduring a very hard landing.
“Typically, we think of soft and hard landings as how deep a measured recession was and what happened to unemployment,” Toplis says.
“People talk about the current situation being a soft landing because unemployment hasn't risen that much and the economy hasn't been thumped.”
When unemployment is high, only those who are actually unemployed or underemployed get hurt, but when inflation is very high – and it reached 7.3% in the June quarter of 2022 – then the value of all incomes are eroded and everybody feels it, Toplis argues.
The suffering ones
That's particularly true of those who bought houses and took out mortgages after covid; as well as seeing their house values fall, their mortgage payments effectively about doubled between October 2020 and October 2022 and, since the most popular period to fix is one year, by October this year they jumped about another 50%.
That's based on ANZ's “special” rates for those with at least 20% equity remaining well below 3% between July 2020 and late 2021, rising to about 5% between October 2021 and October 2022 and reaching 7.39% currently.
There's no question people in these circumstances have suffered a severe squeeze on their incomes from both higher interest rates and general inflation.
To demonstrate the size of the impact, RBNZ data shows that in October 2020, $105.45 billion of mortgages were due to reprice within six months to a year, in October 2021, there were $93.86 billion, in October 2022 there were $91.06 billion and in October this year, 97.551 billion.
Toss in the double-digit increase in local council residential property rates, soaring cost of insurance and rising rents, and most people, if not everyone, is feeling the pinch, Toplis argues.
Last week, RBNZ governor Adrian Orr told journalists the surge in net immigration was the main reason that the OCR needs to stay higher for longer, or even rise further.
While per-capita consumption has fallen, overall consumption is rising because of the growth in the population, Orr said.
What the data says
Stats NZ said last month that there was a net migration gain of 118,800 people in the year ended September, the highest annual total on record.
“Per capita consumption is actually declining but overall consumption is rising because there are more New Zealanders,” Orr said.
If the RBNZ is correct, and current record net immigration is inflationary (we know it also has disinflationary impacts in preventing wages and labour costs rising as much as they would without it), then nothing RBNZ does is going to do anything to address net immigration, Toplis argues.
He points to the situation back before covid when net immigration peaked at about half current levels, and the government decided it needed to make it more difficult for migrants to come to NZ.
The government was reacting to perceptions by New Zealanders that strong immigration was responsible for pushing up house prices.
Toplis notes that despite double the number of net new migrants now, that sort of anti-migrant sentiment hasn't surfaced strongly, so far, at least, despite it being obvious that the surge has limited wage increases.
Soaring residential property rates across the country have largely been driven by the need to address crumbling infrastructure, and more increases are likely, unless we can find another way to fund the necessary work.
And, on top of earthquakes, severe storms earlier this year have driven massive increases in insurance costs, Toplis says.
None of this is anything RBNZ or a higher OCR has any power to stop, he says.
Nothing RBNZ can do
“A lot of things need to be fixed that the central bank can't address,” he says.
“Ultimately, central banks, generally, are going to have to accept that we've moved from what's been broadly a disinflationary world to a broadly inflationary world.”
When it comes to climate change and its impact on prices, “there's nothing the central banks can do by raising interest rates that will stop climate change.”
Toplis thinks the answer is not to raise central banks' inflation targets, but that they should be more flexible in applying monetary policy and focus on fixing the types of inflation that monetary policy is capable of addressing.
Like many, Toplis thinks the RBNZ's “jawboning” was aimed at preventing financial markets from getting over its skis in anticipating rate-cutting.
He says RBNZ achieved that aim because, while global markets have rallied further, pricing in three rate cuts in 2024, our's has remained at one and a half cuts since the MPS.
US markets have rallied a long way from the 10-year Treasuries peaking at 4.997% in mid-October to 4.121% on Thursday, nearly 90 basis points with about 23 points of that delivered after the Nov 29 MPS.
Given that RBNZ has sent that same message to the banks that it doesn't want falls in the cost of borrowing, ironically I think we're likely to see the banks' profit margins increase as their cost of funding declines, but mortgage and other borrowing rates don't follow suit.
So much for the Commerce Commission's inquiry into whether banks have been making excessive profits.
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I'm picking in 2024 RBNZ will imply 'surprise' at how quickly inflation falls, justifying a change in their stance and announcing small OCR rate cut/s they will likely say is "because we did such a great job taming inflation". No credit though to the millions of kiwis doing it tough who have curbed their spending on essentials.
Oil Oil Oil, the most important of all.