OCR jumps in inflation fight
The Reserve Bank moved decisively this week, increasing the Official Cash Rate 50 basis points to 1.50%.
The economy is not exactly in great shape and there are many risks to growth, both global and local. The Russian war on Ukraine and China’s latest COVID shut down are both hitting growth and adding to supply chain disruptions, while central banks around the world are tightening monetary policy to tackle inflation, necessary medicine but adding headwinds for economic growth.
Locally the Omicron outbreak and associated restrictions have been depressing domestic economic activity while higher mortgage interest rates and tighter lending restrictions have taken the wind out of the housing market. These factors coupled with severe cost and price pressures have depressed both consumer confidence and business confidence.
High and accelerating inflation has become a growing and severe headache, defying predictions a year ago that a spike in prices would be ‘transitory’. In the December quarter the Consumer Price Index hit an annual rate of 5.9% and it’s expected to get as high as 7% by mid-year. Even taking off spiking energy prices core inflation is well above the Reserve Bank’s 1-3% target range and inflationary expectations have increased. Capacity constraints, including acute labour shortages, are stretched to the limits and the economy is overheating. It’s time to reduce the monetary stimulus and it’s better to do it quickly.
So, increasing the OCR by 50 points was the right move but at 1.50% it is still very low and there is still a way to go before it gets back to more neutral levels. More increases are coming and although the Reserve Bank didn’t update its forward guidance market pricing suggests it could be above 3.00% by November and 3.50% by mid-2023. That’s a steep trajectory but a higher OCR will get inflation under control more quickly and it could result in a lower peak rate. Getting the OCR to 3% or more would also give the Reserve Bank more room to cut and reduce the need to resort to money printing like it did two years ago.
With the Reserve Bank doing its bit to fight inflation the Government now needs to help by reining in its runaway spending. This would reduce the need for the Reserve Bank to do so much of the heavy lifting through the OCR. There is plenty of room for it to do so. Government spending is forecast to hit $128 billion this year, a staggering $52 billion (or 68%) more than in 2017. No one can credibly say there isn’t fat amongst that $128 billion spend.
It’s time the Government be laser-focused on its spending and ensuring it is phased, controlled, and delivers value for money. New spending initiatives should be funded by reprioritising existing spending rather than simply increasing the quantum as currently envisaged.
Next month’s Budget will be a test of its mettle.
Food prices keep on rising
A few hours before the Reserve Bank’s announcement came a key ‘bread and butter’ indicator of the problem of inflation. This was Statistics NZ’s monthly Food Price Index showing annual food price inflation accelerating in March to its highest rate in more than a decade. Increases were broad-based across food categories but were especially strong for vegetables.
On a month-on-month basis, comparing March 2022 with February 2022, food prices were up 0.7% (or by 0.4% when seasonally-adjusted), with:
On an annual basis, comparing March 2022 with March 2021, food prices were up 7.6%, with:
Only a year ago annual food price inflation was less than 1% but since then it has steadily accelerated. At 7.6% it is now close to its previous high of 7.9% in July 2011, which had been boosted by the September 2010 increase in GST from 12.5% to 15%. Excluding the period after the GST increase the previous peak in annual food price inflation was in 2008/09, when it got as high as 10.8%.
The impacts of Russia’s war in Ukraine will provide further upward pressure in food prices over the coming months.
Another gloomy confidence survey
This week saw another grim business confidence survey, this time the long-established and respected NZIER Quarterly Survey of Business Opinion.
For the March 2022 quarter a net 33% of businesses surveyed expected a weakening in general economic conditions on a seasonally adjusted basis. The retail sector was the most downbeat, with a net 60% expecting a deterioration in general economic conditions. The survey doesn’t include agriculture.
Meanwhile a net 9% of businesses reported weaker activity in their own business during the March quarter although a net 8% expect it to increase looking ahead.
Despite more firms increasing prices, a net 34% reported reduced profitability in the March quarter and a proportion expect it to be weaker in the June quarter. Unsurprisingly given the mood of businesses, respondents said they are reducing their investment plans, both in buildings and in plants and machinery. This is a concern given acute capacity constraints.
A net 77% expected to increase their prices further indicating that inflation is going to need some beating down to get it back under control.
Cooling faster
The housing market continues to cool according to the Real Estate Institute of New Zealand’s monthly Residential Property Data.
The median house sales price in March 2022 was $890,000, up 0.6% on February but down 4.8% on a seasonally-adjusted basis. Most regions had drops in their seasonally-adjusted prices, with the biggest drops in Otago (down 8.2%) and Southland (down 7.2%).
The annual increase also slowed to 7.9% comparing March 2022 with March 2021. This is a cut from the 13.5% annual increase last month and a big change from annual percentage increases in the 20s until very recently.
Auckland’s annual increase was 6.7% to $1.20 million. There were still big annual increases in Taranaki (up 26.2%) and Canterbury (21.9%) but a number of regions slipped into double digit growth. Marlborough had a decline though, its median price down 0.6%, the first region to ‘go negative’ in annual terms.
The volume of house sales of 6,752 was up 17.7% from February. However, even with this monthly increase house sales were still much lower than March 2021 – down 33.5%.
The median days to sell a house was 36. This was up 8 days from March 2021, another sign of a cooling market.
Bumpy roads
The Omicron wave impacted on people’s mobility in March according to ANZ’s monthly Truckometer.
The light traffic index fell 1.8% in March compared to February, with ANZ putting that down to a reduction in people’s movement due to isolation requirements and a general reluctance to get out and about. In contrast, the heavy traffic index increased 1.8%. Even with COVID disruptions heavy traffic has held up better with goods continuing to have to be moved. It tends to be a good indicator of GDP growth.
On an annual basis, comparing three month average data, the light traffic index is down 0.5% but the heavy traffic index is up 1.3%.
March spending rise but retail industries weak
Electronic card spending was up a seasonally adjusted 1.6% in March compared to February, according to Statistics NZ’s monthly Electronic Card Transactions. But this rise was entirely due to a jump in non-retail spending.
Card spending on non-retail industries (e.g., travel agencies and tour arrangement services, health and pharmaceuticals, wholesaling, and other industries) leapt a seasonally-adjusted 14.5%. Stats NZ noted this coincided with easing of restrictions on international travel. There was also a 2.7% increase in spending on vehicles (excluding fuel).
However, other industries’ spending was weak. Consumables (e.g., groceries), apparel, and services were all down. Spending on durables (e.g., furniture, electrical goods, hardware, etc.) and fuel were both flat, the latter probably due to more people staying at home.
In actual terms, total card spending in March 2022 was $8.0 billion, up 0.9% on March 2021. It was very much a mixed bag though. There were double digit percentage drops for hospitality and apparel, both industries hit hard by people hunkering down, while services spending was also down.
There were increases for consumables, durables, fuel (reflecting higher fuel prices), and vehicles. Non-retail industries had the strongest growth of 7.1%.
Migration loss continues
Statistics NZ’s monthly International Migration Statistics showed that in February 2022 there were 2,000 migrant arrivals, down 60% on February 2021, and 2,600 departures (down 56%), resulting in a monthly net migration loss of 600.
For the full year to February 2022 there were 44,500 migrant arrivals (down 26%) and 52,200 departures (up 2%). This resulted in a net migration loss of 7,600, a reversal on a 9,500 gain for the previous 12 month period. As has been the case since the start of the pandemic, the net migration loss was due to a larger net loss of non-New Zealand citizens (9,700) than a net gain of New Zealand citizens (2,100).
With international borders reopening we can expect resumed outflows of New Zealand citizens which inwards migration will likely be slow to offset at least in the short to medium term.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Wednesday 13 April) continue to show soils significantly wetter than usual at this time of year on the east coast of the North Island, from Gisborne to Wairarapa, as well as in Rodney and Kaikoura. In contrast conditions are significantly drier than usual in western Northland, the Waikato, Tasman, Grey, and northern Westland, much of Otago, and in Southland.
Exchange Rates
Despite the Reserve Bank’s large OCR hike, the NZ Dollar was weaker this week, down 1.0% against the Trade Weighted Index. It jumped immediately after Wednesday’s announcement but fell later in the day and on Thursday. For the week it was down against all our major trading partners, except the Yen where it was stable.
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 12 points to 1.79% while the 10 year Government Bond yield was up 7 points to 3.48%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 25 May 2022. Another increase is a near certainty and, depending on the data, it could be another 50 pointer.
| This Week (14/4/22) | Last Week (7/4/22) | Last Month (14/3/22) | Last Year (14/4/21) | |
| OCR | 1.50% | 1.00% | 1.00% | 0.25% |
| 90 Day Bank Bill | 1.79% | 1.67% | 1.49% | 0.32% |
| 10 Year Government Bond | 3.48% | 3.41% | 2.98% | 1.69% |
Nick Clark
14 April 2022