All eyes will be on the RBNZ this week. Will Governor Orr hike rates 25 or 50 basis points, is the focus for financial markets. For the wider community, though, it’s how far will rates eventually go that is of greater importance. We think quite a long way, and this will ultimately result in a softening in activity and house prices, and a higher unemployment rate.
November MPS preview
When the Reserve Bank Monetary Policy Committee meets ahead of its Monetary Policy Statement on November 24 there will be almost no discussion about whether the cash rate should be lifted. Instead the debate will be over how much and how fast?
Days of Reckoning Fast Approach
New Zealand is rapidly headed towards its days of reckoning. In our opinion, the single biggest uncertainty facing the economy over the next twelve months is how business and consumer sentiment responds to endemic COVID.
To the Extent It’s Unsustainable
We don’t need Wednesday’s Q3 labour market reports to tell us that things are extremely tight, and increasingly inflationary. But they will probably do so all the same. And the robustness of the results will be all the more remarkable, in that they will come to pass amid the latest COVID-19 lockdowns, which began mid-August (and continue).
Rounding the Bend to A Vaccinated Economy
The announcement by the government last Friday, of a 90% double-dose vaccination target, before the traffic light system can come into play, seems a tough milestone to reach. In corporate speak, a stretch target. But if this target gets the vaccination rate to a higher level than otherwise, then who’s to argue?
50:50 50 as CPI Soars
The Reserve Bank is now well and truly behind the curve. Annual headline CPI has soared to 4.9% on its way to a number well above 5.0%. This is happening at a time when the labour market is exceptionally tight so will add to the already significant upward pressure on wage inflation. As wage inflation rises the elevated headline inflation rate will take on a much less temporary form than many still care to believe.
Another Test of Transitional Fortitude
here are numerous monthly-type economic reports to discuss. However, this week’s news effectively begins with this afternoon’s government decision on COVID alert levels. The trend in raw case numbers over the last week or so doesn’t look all that encouraging. Having said that, the government has much more than that to consider (including the case details), as it judges Auckland’s stepwise transition out of level 3 lockdown.
NZ In Transition
On Wednesday, the RBNZ will be announcing what it will do with New Zealand’s cash rate. Its decision is to be made on a “least regrets” basis. While financial markets will be fixated on this outcome, today’s post-cabinet announcement on how the government is going to approach Delta’s current stronghold in New Zealand will be based on a least regrets analysis a hundred-fold more complex and life-changing for every citizen of New Zealand than is the Bank’s.
A least regretful rate rise
“In the end . . . We only regret the chances we didn’t take, the relationships we were afraid to have, and the decisions we waited too long to make” Lewis Carroll.
When the RBNZ delivers its Monetary Policy Review on October 6, its decision will be based on “a least regrets approach to uncertainty”. Well that’s what we were told when Assistant Governor Hawkesby released his “speech” of the same title on Tuesday September 21. On this basis, we can only conclude that the RBNZ will raise its cash rate by 25 basis points on the day and will signal, to the extent that it can in a Monetary Policy Review, ongoing gradual rate increases from there on in, until the cash rate returns to the apocryphal neutral.
Of this week’s local news, Tuesday’s speech (notes) from RBNZ Assistant Governor, Christian Hawkesby, will be firmly in the market’s crosshairs. Who knows, for sure, what the speech means to convey. But the Bank’s description does give us the impression that it is a planned, big picture, affair, rather than something impromptu designed to address current market expectations of OCR increase. So more about neutral policy rates, than near-term market pricing. Still, the Bank is open to use the occasion to say whatever it likes, about a range of things, conscious that its Monetary Policy Review (MPR) is still just over two weeks away.
A Stronger Basis for GDP (and Inflation)
With New Zealand under COVID-induced restrictions, there is understandable focus on today’s ANZ business survey, and government alert-level decisions later this afternoon, as being real-time relevant for the economy. However, this is no reason to discount Thursday’s GDP report as old hat. And not just because its Q2 expansion will likely far exceed RBNZ expectations. Stats NZ’s annual revisions will probably boost the historical level of GDP to boot. All of this will emphasise just how much of an inflationary head of steam the economy had, which the latest lockdowns has interrupted, but are unlikely to stop at its core.
Vaccinations No Panacea
It seems highly likely that by early next year New Zealand will be progressively easing its border restrictions. Moreover, with the great majority of New Zealanders fully vaccinated by then, it will become increasingly less likely that people will again experience, or even accept, lockdowns of the current intensity. This is all great news, and is a very real cause for optimism about the future. However, we are concerned that many are starting to assume life will be a lot more rosy post vaccination than will actually be the case. A post lockdown world will come with its own set of challenges, many of which will stay with us for months/years to come. A lot of the issues that currently confront us will not magically disappear with the vaccine roll out, and there is certainly no going back to a pre-COVID world.