RBNZ hikes OCR by 25bps to 0.5% and sees more hikes to come, despite noting acute stress in Auckland and services sector businesses and a cooling of global and Chinese growth outlooks
Probably just pressure from the oldies wanting returns on what they have hoarded in their bank deposits. They get upset if they see low interest rates on them. I wonder if the Government decision not to lock down Waikato as they usually would’ve and really should is due to Reserve Bank pressure to put fingers in their ears and go “lalala…”🎶
I agree, the cost of waiting was low, the cost of a premature increase is somewhat higher. Their jawboning has seen retail fixed interest rates rise by ~60bp, which will have way more impact than the 25bp increase to debt based on floating interest rates anyway.
I have a few questions about the inflation vs interest rates scenario. I'm wondering if anyone (Bernard or others) can indulge in providing some education.
When a key inflation driver is cost pressures (shipping, materials, compliance costs) but demand for goods & services is static, how does raising interest rates dampen inflation?
Second question...
In previous posts, Bernard, you've talked about deflationary factors remaining strong. Are you suggesting these cost pressures on supplies will reduce? Or are you saying these cost pressures will simply be over taken over the next few years by other factors?
Perplexed:
I was talking to a friend who rattles around the halls of power in the UK yesterday. Apparently, the government's internal economists are saying that the UK inflation spike is very temporary and they see return to normal service resuming quickly (and that they are much more worried about stagnant GDP). However, on the ground in our business we're not seeing that at all. Cost of goods & services has ramped hard and are not showing any signs of reducing. I'm struggling to get my head around it (esp with the costs of Brexit on top of the pandemic)
Thanks Luke. Fair questions. I still think the deflationary forces of globalisation of services, weak labour power and the stifling effects of savings gluts are more powerful than the more permanent forces unleashed by this pandemic of some labour shortages, less efficient supply chains and rising energy costs linked to emissions reductions..
Quite possible to see rising costs, but the key will be whether you're able to pass on those costs and if you have to/put up wages. If you're able to put up your prices and wages in the face of competition then either you've got a monopoly (congrats!) or there are widespread inflationary pressures. Do you see that yet?
Interesting point on whether a central bank should respond to a supply shock with rate hikes. Depends on whether it's permanent or not. Too early to say yet. The energy cost rises look like being stickier. cheers
Yes - definitely. We've had to do an out-of-cycle inflation adjustment to staff salaries (the pain for our Norwegian and UK staff was rising quickly), but we've yet to reflect that in pricing - just taking it on the chin until our industry dynamics are right.
Your response made me pause and think about the perspective of timescales here. Supply shock of 3-4 years in years in tech (and the tactical challenges it causes) feels really long. But against the backdrop of decades of globalisation of services, weak labour power etc, well, it's a drop in the bucket.
Bernard I really appreciated reading your analysis of the Reserve Bank interest rate increase, I strongly suspect this change will be seen to be in hindsight as premature as the other two premature increases to interest rates. The concerning thing is that the RB doesn’t seem to learn from its mistakes.
I am worried that the NZ economy could be headed for a hard landing late next year.
Quite possible on the hard landing. Depends on how bad this outbreak gets and what happens overseas. These rate hikes (they'll probably do two or three more before they have to stop) won't help. cheers
I’d say the amount of debauchery & financial market madness since the global ‘COVID related’ monetary authorities went cray, is well past it’s due date to end. I’m not sure you can advocate zirp, qe, minting T$ coins, mmt, AND call for lower asset prices. They go hand in hand. In a year when already historically well overvalued assets performed as they did, you can’t hide behind ‘mandate targets’. Societal impacts of inequality enhancing policies are rampant and obvious everywhere. This trend has been ongoing since ‘qe’ became the norm rather than the exception, & of course won’t be addressed until we get a 2008 repeat. They’ve extended the cycle, but damn it’s quite a disturbing world they have created in many ways.
An attrocious decision, but what do you expect. NZ was amongst the first nations to implement reserve bank independence and inflation targeting by monetary policy, and the entire civil service is now ideologically locked into these paradigms. RBNZ has already stuck up its middle finger at the Finance Minister, who doesnt have the cojones to make the necessary changes, not withstanding his dire need to "protect the surplus". With only one lever to pull they have to pull it or become irrelevant.
The banks certainly are doing well. They hold peoples deposits and pay no interest. They invest these and take profits. The QE from Government, in an exceptional display of generosity on NZ citizens part, is given to them in large part. Then they create debt and charge homebuyers for it if they can even access it due to random conditions imposed.It seems to me they are winning three ways (or is it four?) and everyone else loses as the QE has to be paid by the public by tax, the debt created to homebuyers has to be paid with interest despite the bank only needing to hold a percentage, funds in savings pay no or low interest to the savers despite being used by the bank, so yes that is four returns to banks and none to anyone who pays for it! Brilliant sleight of hands. So is this rate hike even necessary or just more of the farce of pretend we all have to play. I’d love a chart on this! I think we need the middlemen out for sure.
Probably just pressure from the oldies wanting returns on what they have hoarded in their bank deposits. They get upset if they see low interest rates on them. I wonder if the Government decision not to lock down Waikato as they usually would’ve and really should is due to Reserve Bank pressure to put fingers in their ears and go “lalala…”🎶
I agree, the cost of waiting was low, the cost of a premature increase is somewhat higher. Their jawboning has seen retail fixed interest rates rise by ~60bp, which will have way more impact than the 25bp increase to debt based on floating interest rates anyway.
I have a few questions about the inflation vs interest rates scenario. I'm wondering if anyone (Bernard or others) can indulge in providing some education.
When a key inflation driver is cost pressures (shipping, materials, compliance costs) but demand for goods & services is static, how does raising interest rates dampen inflation?
Second question...
In previous posts, Bernard, you've talked about deflationary factors remaining strong. Are you suggesting these cost pressures on supplies will reduce? Or are you saying these cost pressures will simply be over taken over the next few years by other factors?
Perplexed:
I was talking to a friend who rattles around the halls of power in the UK yesterday. Apparently, the government's internal economists are saying that the UK inflation spike is very temporary and they see return to normal service resuming quickly (and that they are much more worried about stagnant GDP). However, on the ground in our business we're not seeing that at all. Cost of goods & services has ramped hard and are not showing any signs of reducing. I'm struggling to get my head around it (esp with the costs of Brexit on top of the pandemic)
Thanks Luke. Fair questions. I still think the deflationary forces of globalisation of services, weak labour power and the stifling effects of savings gluts are more powerful than the more permanent forces unleashed by this pandemic of some labour shortages, less efficient supply chains and rising energy costs linked to emissions reductions..
Quite possible to see rising costs, but the key will be whether you're able to pass on those costs and if you have to/put up wages. If you're able to put up your prices and wages in the face of competition then either you've got a monopoly (congrats!) or there are widespread inflationary pressures. Do you see that yet?
Interesting point on whether a central bank should respond to a supply shock with rate hikes. Depends on whether it's permanent or not. Too early to say yet. The energy cost rises look like being stickier. cheers
I appreciate the reply, thank you.
"Do you see that yet?"
Yes - definitely. We've had to do an out-of-cycle inflation adjustment to staff salaries (the pain for our Norwegian and UK staff was rising quickly), but we've yet to reflect that in pricing - just taking it on the chin until our industry dynamics are right.
Your response made me pause and think about the perspective of timescales here. Supply shock of 3-4 years in years in tech (and the tactical challenges it causes) feels really long. But against the backdrop of decades of globalisation of services, weak labour power etc, well, it's a drop in the bucket.
Bernard I really appreciated reading your analysis of the Reserve Bank interest rate increase, I strongly suspect this change will be seen to be in hindsight as premature as the other two premature increases to interest rates. The concerning thing is that the RB doesn’t seem to learn from its mistakes.
I am worried that the NZ economy could be headed for a hard landing late next year.
Quite possible on the hard landing. Depends on how bad this outbreak gets and what happens overseas. These rate hikes (they'll probably do two or three more before they have to stop) won't help. cheers
I’d say the amount of debauchery & financial market madness since the global ‘COVID related’ monetary authorities went cray, is well past it’s due date to end. I’m not sure you can advocate zirp, qe, minting T$ coins, mmt, AND call for lower asset prices. They go hand in hand. In a year when already historically well overvalued assets performed as they did, you can’t hide behind ‘mandate targets’. Societal impacts of inequality enhancing policies are rampant and obvious everywhere. This trend has been ongoing since ‘qe’ became the norm rather than the exception, & of course won’t be addressed until we get a 2008 repeat. They’ve extended the cycle, but damn it’s quite a disturbing world they have created in many ways.
You're right about QE. I would have preferred helicopter money. And the Govt needs to make housing supply more elastic. A lot more elastic.
An attrocious decision, but what do you expect. NZ was amongst the first nations to implement reserve bank independence and inflation targeting by monetary policy, and the entire civil service is now ideologically locked into these paradigms. RBNZ has already stuck up its middle finger at the Finance Minister, who doesnt have the cojones to make the necessary changes, not withstanding his dire need to "protect the surplus". With only one lever to pull they have to pull it or become irrelevant.
Yep. Although I'm not so sure Grant wants to challenge the orthodoxy, or actually accepts it and doesn't want to challenge. My guess is the latter.
Unfortunately I concur with your guess, and further see no light at the end of any of the other tunnels.
The banks certainly are doing well. They hold peoples deposits and pay no interest. They invest these and take profits. The QE from Government, in an exceptional display of generosity on NZ citizens part, is given to them in large part. Then they create debt and charge homebuyers for it if they can even access it due to random conditions imposed.It seems to me they are winning three ways (or is it four?) and everyone else loses as the QE has to be paid by the public by tax, the debt created to homebuyers has to be paid with interest despite the bank only needing to hold a percentage, funds in savings pay no or low interest to the savers despite being used by the bank, so yes that is four returns to banks and none to anyone who pays for it! Brilliant sleight of hands. So is this rate hike even necessary or just more of the farce of pretend we all have to play. I’d love a chart on this! I think we need the middlemen out for sure.