New Zealand starts to raise interest-rates but may be deterred by QE losses

by Shaun Richards

As we come towards the end of 2021 we are seeing two clearly different approaches to central bank around the world. That is if we exclude my topic of yesterday which was Turkey which is ploughing a lonely furrow. In itself that shows us that the policy there is politically driven because we know that central bankers like to travel in a pack. But this morning has brought an example of what we might call conventional central banking.

The Monetary Policy Committee agreed to raise the Official Cash Rate (OCR) to 0.75 per cent.  The Committee agreed it remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment. ( Reserve Bank of New Zealand)

This is something quite likely as I pointed out on social media on Sunday.

With the All Blacks losing yesterday ( congratulations France Rugby) and the fact this is 2 games in a row should we be ready for the RBNZ to raise interest-rates?

What caused this?


Like in so many places tight now the Kiwis are suffering from a burst of inflation.

The consumers price index rose 2.2 percent in the September 2021 quarter, the biggest quarterly movement since a 2.3 percent rise in the December 2010 quarter, Stats NZ said today.

Excluding quarters impacted by increases to GST rates, the September quarter movement was the highest since the June 1987 quarter, which saw a 3.3 percent rise.

Annual inflation was 4.9 percent in the September 2021 quarter when compared with the September 2020 quarter. This was the biggest annual movement since inflation reached 5.3 percent between the June 2010 and June 2011 quarters. ( New Zealand Statistics )

This left the RBNZ mulling this.

Annual CPI inflation has increased to 4.9 percent
in New Zealand, above the Committee’s 1 to 3 percent Remit
target band.

Also we know that around the world that has been further upwards pressure in the October numbers which the Kiwis do not have yet. The RBNZ was worried about that too.

The Committee assessed that near-term risks to inflation are skewed to the upside, and discussed the risk that higher
near-term inflation could become embedded in price setting

But there was more on this subject.

House Prices

The Kiwi inflation numbers do attempt to measure at least some housing inflation.

Prices for building new houses in the CPI are obtained by surveying construction companies that build standard-plan houses. The inflation of existing house prices is not included in the CPI as household-to-household transactions are out of scope. Land purchases are also excluded as they are considered to be an investment and therefore out of scope.

As you can see it is far from complete but such as it is this is happening.

The main drivers were housing-related costs, such as construction of new houses and local authority rates.

Prices for construction of new houses were up 4.5 percent for the quarter, and 12 percent for the year.

This had the RBNZ concerned.

The Committee discussed the Reserve Bank’s assessment that the level of house prices are unsustainable.

They had published a paper at the start of this month which concluded this.

However, the recent increases in house prices through 2020 and 2021 are more at odds with fundamental drivers. Estimates of serviceability ratios using long-term interest rates are well above their historic average………..

You may note that the concern from the RBNZ today was more about falls latwer rather than the recent rises.

The Committee discussed the risk that house prices could keep rising in the near term, increasing the risk of a sharper fall later.

Central bankers like in absolute terror of sustained house price falls.

The Economic Situation

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The main view of the RBNZ is shown below.

Despite recent lockdowns, capacity pressures in the
economy have continued to tighten. Employment is now
assessed as being above its maximum sustainable level.

I find the second sentence there a little chilling and it is based on this.

The unemployment rate declined to 3.4 percent
in the September 2021 quarter, equalling the previous low in 2007 . A broader measure of slack in the job market, the
underutilisation rate, shows a sharp fall in the number of part-time employees that would like more hours and those available but not actively seeking work.

We have been noting the rise in savings which official policy around the world has created and adding to the economic optimism is the view that it is yet to be spent.

Quarterly income GDP measures show that
while households spent more than they earned on aggregate for the second quarter in a row, the stock of savings built up by households during 2020 is largely yet to be spent.

Oh and I did point out earlier that all central bankers are terrified of house price falls.

Household spending is also being supported by continued increases in house prices, which contribute to total household wealth.

Exports are doing well.

However, demand for New Zealand’s key commodity exports – such as dairy, meat and logs – remains resilient.

There is a nuance as we know that the use of the word “resilient” with regard to banks often proceeds a dive or worse. Also we can note that New Zealand is a country we consider to be first-world with exports more like a third-world one.

Covid provided a catch to the good news story however.

We assume that GDP declined 7.0 percent in the September
2021 quarter due to the recent lockdowns, and will rebound in the December quarter as restrictions are eased.

Yet they also report this.

Capacity pressures have continued to tighten in recent months, and are expected to build further despite the
near-term volatility in economic activity. Reported capacity utilisation for builders and manufacturers is at its highest-ever level.

However it is not really feeding through into wages.

Labour market tightness is being reflected in wages. Same-job wage growth (as measured by the Labour Cost Index) increased to 2.5 percent in the year to the September
2021 quarter, approaching rates of growth last seen in the mid-2000s . Broader wage growth is also being boosted by increased movement between jobs.

It does not require much of a grasp of maths to realise that this means real wages are falling and in fact doing badly.


This starts as a type of conventional central banking as we have an interest-rate rise in response to higher inflation and house prices as well as an economy assumed to bounce back quickly from the recent Covid-19 restrictions. But there is a catch and it was highlighted by this from the press conference.

RBNZ’s Orr: Did Consider 50Bps Increase Today –

Put Best Foot Forward With 25Bps, Gives More Optionality -Can Take Our Time At This Point ( @LiveSquawk )

It is the last point which was the central banking version of an own goal. Central banks are supposed to get ahead of events due to the fact that policy takes time to work. Whereas here the Governor is expressing the reverse view. If you take those quotes as a whole it would have been more logical to increase by 0.5%. For these times it would be a substantial move and the RBNZ could then wait to see what happens from it.

Whereas it is left telling us this when we have only a limited idea of what 2022 will be like.

The RBNZ has said in its forecasts on Wednesday that rates would reach 2.5% by 2023 & higher by Dec 2024 ( @FinancialJuice)

So even the RBNZ is behind the curve but it has at least done something. A factor in this may be the impact on its QE holdings.

The Committee expects to gradually manage LSAP bond
holdings down, in a way that maintains the smooth functioning of financial markets. More details
on how bond holdings will be reduced will be provided early next year.

You see it drove the ten-year yield down towards 0.5% whereas it is now 2.5% meaning it will be carrying large mark to market losses.


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