Economists are continuing to push up their expectations of how high New Zealand's inflation rate may go this year as the effects of Putin's War keep pushing oil prices higher and higher.
ASB economists now see inflation hitting 7% in the first half of this year, which would be up from the actual 5.9% rate as of December 2021, measured by Statistics New Zealand's Consumer Price Index.
The Reserve Bank (RBNZ) is currently forecasting inflation to peak at 6.6% in the March quarter, although subsequent to the forecast appearing in the February Monetary Policy Statement, RBNZ Deputy Governor Christian Hawkesby conceded that the even higher surge in oil prices following the start of the Ukraine conflict would likely see inflation go above that level.
ASB chief economist Nick Tuffley said rising fuel prices are already being felt around the world and are adding to transport costs and "already pressuring stretched global supply chains".
"Traded wheat prices are nearing the levels seen around early 2008, when oil prices soared and some food crops were used to make biofuels. Russia and the Ukraine account for around 30% of global wheat exports, with much of this shipped via ports in the Black Sea, close to the Ukraine conflict. Retail prices of grains, other foodstuffs that make use of them, and substitutes for them are likely to rise over time. Added spending on necessities reduces more discretionary spending, impacting wider demand," he said.
"For NZ, it is the direct impacts of oil and affected food prices that will be most noticeable, with annual consumer price inflation likely to exceed 7% in the first half of this year. The wider demand for our exports will depend on the extent to which global growth slows. There are few signs of this yet, with dairy export prices continuing to ratchet higher," Tuffley said.
BNZ economists are currently still expecting March 2022 quarter inflation of 6.6%. But they now see inflation staying higher for longer.
"...We’ve upgraded our view on annual CPI inflation through 2022," senior economist Craig Ebert said.
"We now see 6.4% for Q2 [second quarter], 5.3% for Q3 and 4.1% for Q4. This time last week we were forecasting 6.0%, 4.7% and 3.6% respectively.
"To be sure, our latest view is closer to what the Reserve Bank was already forecasting, as per its February Monetary Policy Statement (namely 6.3%, 5.0%, 4.1%). Still, it underscores the likelihood of headline CPI inflation running well above the top of the 1.0 to 3.0% target band, for a good while to come.
"And, the way things are going, the risks are that we see inflation going even higher than we forecast, for the nearer term at least," Ebert said.
Westpac acting chief economist Michael Gordon said Westpac economists were already forecasting that consumer price inflation will peak at 6.3% in the March quarter.
"The risks to that forecast are clearly towards a higher peak in the near term, with the possibility that it could remain above the Reserve Bank’s 1-3% target range for longer," he said.
"This makes the RBNZ’s balancing act even trickier. Obviously they can’t prevent the sorts of price shocks that are emanating from overseas (and higher fuel prices act as a handbrake on activity over the medium term, as well as boosting inflation in the near term). But the bigger issue for them is the extent to which this feeds into local price-setting behaviour, including wages."
Gordon said "with the right conditions" – in particular a tight labour market – even a temporary price shock can provide the spark for a sustained series of price rises.
He said RBNZ officials noted last week that the significant amount of tightening that’s already factored into market interest rates was a key reason why they settled on raising the Official Cash Rate (OCR) by 25 rather than 50 basis points at last month’s Monetary Policy Statement.
"However, there is a risk that current interest rate pricing may not have enough of a restraining effect to bring inflation under control. Indeed, it’s notable that while the RBNZ is now projecting the OCR to peak at around 3.4%, the market hasn’t quite been willing to endorse this profile. If the RBNZ does believe that the OCR will ultimately need to go this high, it may need to be a bit more forceful about conveying its intentions, including the possibility of larger OCR moves."
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Orr and the entire top management at the RBNZ must be sacked immediately, and replaced with the utmost urgently by somebody who has the competence, honesty and intelligence to immediately normalize current monetary policies. An immediate emergency raise of the OCR to 3% is needed now, followed by a series of 50 bps increments, up to a peak of at the very least 5%. Even this would be, considering the current and expected inflation rate, an accommodating monetary policy.
Not doing this would be a serious dereliction of duty and a serious breach of the very core of the mandate of the RBNZ.
Inflation can and does become psychologically reinforced. Which is usually a very difficult problem to solve. The RBNZ is in direct dereliction of duty with price stability. It’s a very ugly problem from any angle. Which is why housing bubbles should never been `permitted to blow up to this “too big to fail” size. The risks are too high. It has left RBNZ unable to move when the global shock came (which it always does eventually).
Hi fortunr.
There is a petition here for the resignation of Jacinda Adern. Maybe someone should set one up for Mr Orr.
https://www.change.org/p/jacinda-ardern-a-call-for-jacinda-ardern-to-st…
The changes seem only to allow greater leeway to do nothing about inflation and to protect the housing market. It's thoroughly unrealistic to believe that National would not have been all-in in favour of protecting their property portfolios too. We just wouldn't have had the environmental aspect there.
NZ's inflation depends on the US' inflation, which depends on whether capitals in the EU flow back to the US as they are scared of Russia's special military operation in Ukraine turning into a NATO-Russia war.
Without China saving the US' ass this round of time, the US will have persistently high inflation.
You can update your wording now.
"Now that Russia has invaded Ukraine, there is a war happening and another set of responses will be developed."
https://www.newshub.co.nz/home/politics/2022/03/ukraine-invasion-new-ze…
You missed the word "invasion", "war" and "criminal" for Putins actions.
The declaration of war has already been made by Putin, just Europe have tried de-escalation and it is failing. But then supporters of authoritarian regimes generally don't recognise or care about their own failings do they?
Just oppress a minority or restrict free press and internet activity, perhaps crackdown on a city state (like Hong Kong) while breaking written agreements at a governmental level, and everything will be OK.
Imagine the suffering Russia will need to face before they rise against Putin. Not that he will ever go without anything, he'll be looked after by his billionaire mates.
I suspect there is a fair amount of gouging of consumers going on- ie the increases being passed through are built around "making more profit" rather than costs rising.
Today I picked up some black beans and canned corn from one of the major supermarkets The NZ brand - made 300kms up the road ie Watties was $3.19 (this time last year they were $1.99 ) a can for both items, meanwhile the branded Australian manufactured Product - Edgell was $1.69 a can
Who knew that Australian production (with their higher minimum wage and the most expensive shipping lane in the world) was so cheap.
You can guess whose product I bought- sorry not supporting kiwi jobs at those inflated prices unless Watties cares to explain why they are so much more expensive.
BTW Edgell also name the beans country of origin (US) whilst Watties keeps it suitably vague (made from NZ and imported items
I thought watties improved their range and flavours and quality when heinz took over but now it is owned by Berkshire hathaway,they dont care where the product comes from or tastes like ,asparagus from Peru or whatever, as long as it meets the required return on equity
There is so much I find outrageous/ridiculous - off the top of my head:
PM Ardern's interview with Ryan Bridge where she refused to accept the reality of percentages pertaining to GST/Excise-Tax on fuel:
https://youtu.be/SN_UUK73S04
The demand for now redundant mandates/vaccine-passports by retail/business groups juxtaposed next to their lack of customers and tears.
Spending tens of billions on a Covid response, yet the health system is worse than ever and medical staff are mentally packing their bags.
Methed out cracked-heads wondering the streets and a justice system Kiwis know is broken.
A housing crisis that young people actually voted for! lol
A leader who stated she wanted to create 'two classes of citizen'.
Wasteful/Woke spending EVERYWHERE and workers refused tax relief.
People are Strange
OH.. and the RBNZ, but that's another whole set of bullet points and possibly a lost cause
"However, there is a risk that current interest rate pricing may not have enough of a restraining effect to bring inflation under control."
The idea that pumping up the OCR 25, 50, or erven 500 points will do anything about the drivers of price increases is getting increasingly ridiculous. Crashing the domestic economy and pushing people into unemployment will not change the price of imported petrol and wheat. Furthermore, increasing the cost of borrowing may actually increase some of the prices that are pushing domestically-driven inflation (pressure on rents for example).
But that is what central banks have been doing...well in recent history. Raise rates, economy crashes, experience deflation....inflation issue resolved.
Why would this time be any different?
Is it because we have a giant debt bubble that everyone is terrified...like the elephant in the room nobody wants to address
Yes, people are terrified about an asset bubble bursting - it is a guaranteed election loser for a start.
My point is that RBNZ are trying to use a single lever (OCR) to control too many economic variables - the cost of borrowing for real estate, the cost of borrowing for productive enterprise, consumer demand, employment rates, and, to a degree, the exchange rate. It is simply dumb - like trying to drive a car by only using the throttle. By all means allow the OCR to track the international trend, but don't expect that to help with our cost of living issues. Treasury and RBNZ need to plan some smarter interventions.
Why is it a guaranteed election loser? I’d like to think that people are a little more complex than that and wouldn’t necessarily spit the dummy over a much needed improvement in affordability. The troubles start when you try and add complexities to the Reserve Banks mandate. It’s simple, raise rates, inflation falls. To use your example… Orr is trying to move the car forward by gently pushing the accelerator when he should be flooring it.
You see, there you go again - faulty assumptions are behind every disaster. 'Raise rates = inflation falls' is not a fact. That depends on a chain of causation that only exists under certain conditions. Sure, increasing rates pushes the disposable incomes of mortgagees down, creates unemployment, and reduces aggregate demand in the economy. But blindly assuming that reduced demand in NZ will bring down prices is foolish when prices are being driven from the supply side (energy, raw materials, wheat, aluminium, dairy export prices, price gouging etc). When prices are being drive up on the supply-side, it is quite possible that increasing interest rates will actually increase prices because borrowing costs are an input costs to businesses (when the costs of inputs go up, businesses tend to put up prices).
I am all for house price crashes by the way - but any political advisor will tell you that Govts in charge during house price crashes lose the next election.
Which way round is the causation - or is it a correlation?
Let's think about how 2022 will play out...
Will RBNZ put up interest rates? Yes
Will we see widespread price increases regardless? Yes
Yet, still economists stuck in the 80s will say, 'ahhh, but prices would have gone up more if rates had not been increased. Thank god we hiked them'.
What increased rates might do is deflate some speculative asset bubbles - shares and maybe even houses if we are lucky. But, if want to reduce house prices without reducing aggregate demand and chucking lots of people on the dole, why not simply turn the screw on credit?
"Why not simply turn the screw on credit"...
That is exactly what you indirectly do by modifying the OCR....(lending rates go up, meaning less debt can be serviced, so less credit is extended....precisely why we never had runaway housing bubbles when OCR was higher in 1970-2000, keeping a lid on mortgage lending - since then we've had low rates and explosive lending on housing).
As directly below! CCCFA.
Access to credit severely reduced, while the cost of it has raised only moderately over the last 6 months. The combination is having an effect.
Another 50-75 BP increases to the OCR and coupled with high prices (high prices as the cure for high prices) and omicron, demand in the economy will be suffocated.
Normalizing rates (even an OCR at 3% would be extremely accommodating) is extremely overdue and it would not crash the real economy, but mostly the housing Ponzi.
By the way, the narrative that the current upsurge of inflation is mostly due to the price of imported goods is simply false: it has been clearly proven by many statistics that NZ has an increasing problem of non-tradable inflation, fueled by the reckless and catastrophically ultra-loose monetary policy pursued by the RBNZ. The RBNZ should have never gone so loose with its monetary policy and it is high time to normalize rates: in any case, this is a global process now and Orr can do very little to prevent the great rates normalization process to gain pace. Be ready to see interest rate levels not experienced in many years. The music is stopping, after many years of a fool's paradise of ultra-loose monetary policies and of hugely inflated housing markets.
Drivers of domestic (non-tradeable) inflation over the last 12 months are (in order): house building costs (43% of contribution to yoy domestic inflation), rent (12%), restaurant / takeaway food (8%), property rates and related services (7%, and property maintenance costs (3%). Increasing the OCR will reduce the disposable income of mortgagees, that's true, but will it reduce building costs given the huge demand and need for development? Will it reduce rents (which have increased 3% to 3.5% every year since the GFC)?
It WOULD effect the price we pay, because it would drive up our exchange rate against the USD etc. Pump our exchange rate up to 80-90c vs the USD and much of those cost increases would be blunted.
Sure farmers might suffer a bit by getting less for their exports (though Fonterra etc use a lot of currency hedging so would be temporarily OK). If it's just a temporary increase in prices, which it may well be until things normalise, then why not pump up the currency now?
Inflation is RBNZ mandate, the interest rates are all-time low and Orr can give the excuse he will go slow don't want to go for knee jerk reaction. But when he have to cut the rates knee jerk reaction was ok.
When housing prices doubled he calmly said housing is not his mandate now inflation is all-time high and in the start, he said it's transitory but after 8 months now he said it is because of international scenarios.
This is what we call hypocrisy, if you don't want to address anything and only give excuses then why are sitting at the top that can be done by high school drop out also?
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