This morning has brought another feature of 2022 which is central banks scrambling to try and put the inflation genie back in its bottle. Or perhaps at least trying to make it look like they are. In the early hours of the night for us there was this announcement.
The Monetary Policy Committee today increased the
Official Cash Rate (OCR) to 1 percent.
It was from the Reserve Bank of New Zealand or RBNZ. Although reading the statement you might be wondering why they have bothered if it is soon going to be all right?
Headline CPI inflation is well above the
Reserve Bank’s target range, but will return
towards the 2 percent midpoint over coming years.
Ah “coming years” provides them with an obvious get out. Let us check also what they mean by “well above”?
In the December 2021 quarter compared with the December 2020 quarter, the CPI inflation rate was 5.9 percent. ( NZ Statistics)
The breakdown of this is as follows.
Housing and household utilities increased 7.6 percent, with home ownership up 16 percent.
Transport increased 15 percent, with private transport supplies and services up 21 percent.
Food prices increased 4.1 percent, with grocery food up 3.9 percent.
Good to see that they are having a genuine go at measuring the cost of housing in the numbers. From the 2020 weights review.
purchase of new housing (from 5.50 percent to 8.65 percent)
If we switch to the quarterly numbers we see several familiar themes.
Housing and household utilities was the main contributor to the 1.4 percent rise in the CPI in the December 2021 quarter, rising 2.0 percent. The main driver for this was higher prices for purchase of new housing, up 4.6 percent. Actual rentals for housing also contributed, up 1.2 percent.
You may note that we see yet again why so many establishment bodies love to put imputed rents into inflation series because they give a lower number! In this instance quarterly inflation would have been cut by around a quarter,.
But returning to our inflation target we see that quarterly inflation of 1.4% and annual inflation of 5.9% is responded too by a 0.25% rise to 1% in interest-rates. Central bankers from the past would be bemused by this.
Oh and later we learn that the return to the inflation midpoint is some way away.
Looking five and ten years ahead, inflation expectations remain near the 2 percent midpoint of the target band.
Frankly after what we have just been through anyone relying on five-year forecasts is none too bright. If you do not believe me just look at how 2022 was forecast in 2017 .
When would they raise by 0.5%?
Looking at a 4.9% difference between annual inflation and even the new interest-rate you might reasonably think it was time for a bigger move. Apparently not.
When considering the case for a 25 basis point increase, members noted that interest rates had already increased significantly late last year.
The increase was a total of 0.5% in two moves as opposed to the 0.75% cut in one day in March 2020. So if 0.5% is significant I wonder how they would describe the inflation rise?
What did they look at?
When considering the case for a 50 basis point increase, the
Committee noted the high starting point for inflation and the drift upwards in measures of inflation expectations.
It makes you wonder what would make them increase interest-rates by more than 0.25%? This is an issue which also took place in the UK as the Bank of England also decided that it was not the time for such a move. We can perhaps learn something about the expectations of a 0.5% move by the US Federal Reserve next month as we see other central banks deciding not to do it.
Something that is familiar is that central bankers prefer theory/fantasy to reality.
The Committee agreed that maintaining stable
longer-term inflation expectations near the midpoint of their target would greatly assist their purpose.
These are of course rather intangible and in fact they also prefer expectations of their policy to actually doing it. Well for interest-rate increases anyway because as we have already noted they made all their pandemic inspired interest-rate cuts in one day.
and are expected to continue rising as the OCR is
progressively increased. They also noted that conditional on the outlook, the OCR is expected to peak at a higher level than assumed at the November Statement.
What is never addressed by this type of analysis is why if they were wrong as recently as November people should take much notice of them now?
Quantitative Tightening
The RBNZ has decided to reverse course on its bond buying programme. Firstly by no more reinvestments and then by some sales.
The Committee agreed not to reinvest the proceeds of any
upcoming bond maturities and directed the Reserve Bank to
sell the nominal New Zealand Government Bonds and
Inflation-indexed New Zealand Government Bonds to NZDM at a rate of $5 billion per fiscal year.
It will take a while to unwind at that rate as holdings of bonds in the secondary market were 102.7 billion Kiwi Dollars in January.
Real Wages
These look like they are in real trouble as we observe yet another international theme in play.
While nominal wage growth has been increasing, it
has been outstripped by higher CPI inflation
to date.
You may also note that they do not mention any numbers. This is probably because we see that they expect real wages to fall by around 3% as wage growth is also 3%.
This is taking place in spite of a labour market which would in the past have been described as tight.
the unemployment rate declined to 3.2 percent
– its lowest-ever recorded level – in the
December 2021 quarter………Employment is currently assumed to be above its maximum sustainable level, as
reflected in a wide range of indicators.
Comment
I wanted to look at New Zealand because it is the most recent ( this morning) example of central banker behaviour. As they are pack animals we learn a lot I think. But also let me give the Kiwis so credit as they are making an effort to properly measure housing inflation. But like so many other central banks they have come to the party late and are left hoping that people will take note of their claims.
The central bank forecast that the cash rate will reach 3.3% in the last quarter of 2023, compared with its November forecast of a peak of about 2.6%. ( MarketWatch)
This is in my view the failure of these times as they chase inflation with interest-rate increases rather than getting ahead of events. It is one of the reasons why I am doubtful they will happen. It seems reading between the lines so are they.
The Committee agreed that while higher interest rates are
necessary, households and firms may have become more sensitive to interest rate changes as their debt levels have risen
Also if things are the same as in November why is policy being reset today?
Annual CPI inflation has increased largely as expected in the November Statement