Why the Reserve Bank isn’t spineless and insane

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OPINION: Spineless and bird brain. This is how one commentator described the Reserve Bank of New Zealand (RBNZ) after it raised the Official Cash Rate (OCR) by just 25 basis points in its most recent OCR decision.

The RBNZ is neither.

A sense of perspective is required, both from commentators and the media printing the stuff.

Financial markets are pricing in an increase in OCR to around 2.3 percent by the end of 2022 in New Zealand, 155 basis points higher than the current OCR.

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That will be almost even tighter at every meeting next year, or eight hikes in a row and not fooling around. We have never seen eight OCR walks in a row. The markets are pricing in an OCR 190 basis points higher by mid-2023, which means almost another eight OCR increases for a total of 10.

The RBNZ isn’t just playing around with actual OCR to tighten the policy. They do this with their guidance on where the OCR leads.

New Zealand has a stronger domestic economy than most other countries and needs to start streamlining, says Cameron Bagrie.

Mark Tantrum / Getty Images

New Zealand has a stronger domestic economy than most other countries and needs to start streamlining, says Cameron Bagrie.

To put market pricing in perspective, the RBNZ raised the OCR from 200 basis points in late 1999 and 2000 and the economy was devastated, although that winter of discontent also reflected government uncertainty.

The US Federal Reserve is expected to raise its key interest rate by around 70 basis points in 2022, much more measured.

The Reserve Bank of Australia is expected to hike by 50 basis points.

Our central bank is signaling a much more aggressive stance on interest rates than other central banks are already.

All central banks are facing rising inflation. Some of the inflation is beyond the control of the central banks. Central banks cannot reconnect global supply chains. Covid-19 is in control on many levels.

If the RBNZ is spineless, I don’t want to think about what other central banks are. Headline inflation is 6.2 percent in the United States, compared with 4.9 percent here.

OCR in New Zealand is on the move, and five- and ten-year bond yields have risen roughly 175 basis points over the past year, the largest annual increase since late 1999 / early 2000. Financial conditions are tightening. The availability of credit is also a rapidly emerging issue.

New Zealand had a stronger domestic economy than most other countries and had to start streamlining.

The economy exceeds the maximum sustainable employment. It just means that the job market is too hot. Inflation expectations have risen and there is a risk that a temporary spike in inflation will become more general and sticky.

The RBNZ’s Least Regret strategy, or what I call kitchen sink economics, where it literally threw the monetary sink on the economy, helped overstimulate demand and the OCR far from where it should be. The slightest regret was not without risk.

Marion van Dijk / Stuff

“The greatest certainty that the RBNZ faces is uncertainty,” says Bagrie.

The signals say interest rates are rising rapidly. If it just could be that easy.

We are now living with a virus. Spending patterns are likely to be different in 2022. ANZ / Roy Morgan’s measure of consumer confidence fell in November, despite signals that warning threshold restrictions are being relaxed. Life won’t be normal.

The advent of Omicron, the newest variant of Covid, and the market reaction on Friday evening when stocks and commodities fell sharply are strongly reminiscent of the environment in which we live. The Dow Jones Industrial average was down 2.5 percent and crude oil was down 10 percent cents.

Concerns about the growth prospects in China had previously been expressed.

The monetary conditions have already tightened considerably. The one-year special fixed-rate mortgage rate rose from 2.2 percent to 3.65 percent. There is $ 190 billion in fixed-rate mortgages that will be refed in the coming year that will likely face a 60-100 percent increase in your interest bill.

Yes, inflation risks are evident, but now is not the time to load the economy with 50 basis point movements in the OCR. Sensible minds are in demand, and so are commentators.

We have quality problems in the form of inflation and exceeding the maximum permanent employment, but we have experience with these problems. We don’t do Covids twists and turns.

This does not mean that we should stop asking questions of the RBNZ.

The RBNZ’s enthusiasm for negative interest rates in 2020 and 2021 compared to the Reserve Bank of Australia’s lukewarm stance or the use of a crisis management tool (the loan financing program) without a crisis and questionable overall profits from the large-scale asset program, are questions that must be answered correctly.

The RBNZ, in an understandable desire to support the economy through Covid-19, contributed to a huge surge in property prices, more than other nations. The already existing housing shortage was also a factor and brought the ratio of real estate prices to median income to around 11 and the twilight zone.

Nearly $ 800 billion in household wealth was created in two years. Many have not benefited from it, which leads to more wealth inequality. Wealth inequality is not and should not be the RBNZ’s mandate.

However, you cannot push the accepted norms of society too far. According to the IPSOS Issues Monitor, 54 percent of New Zealanders name living much more than any other topic.

Has the RBNZ board questioned the extent to which the least regretted strategy has been pursued? The board is not there to guide operational decisions, but I hope they have asked serious questions.

But right now there’s the old adage that monetary policy is like driving a car, with an unreliable speedometer, fogged windshield, and unpredictability and delays in applying the brakes or accelerating.

Pragmatism, alias, in the words of the RBNZ “considered steps” in relation to OCR is appropriate. The greatest certainty that the RBNZ faces is uncertainty.

If we can get out of this Covid-19 chaos with a brief spurt of inflation and an inflation rate likely in the upper 1-3 percent range, a largely intact economy, and full employment, it will be a success.

Cameron Bagrie is the managing director of Bagrie Economics


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