Next week’s OCR call.
Next Wednesday the Reserve Bank will review monetary policy settings, including the official cash rate. It’s the first review since 24 November and a lot has happened in the three months since. The economy has been overheating, with inflation high and likely to go higher and unemployment rock bottom. All the economic data points to an increase and markets are expecting it but will it be a 25 point increase or a 50 point increase?
There are arguments in favour of both approaches.
On the one hand the Reserve Bank made it clear last year it would prefer to move in steady increments rather than big moves (a ‘least regrets’ approach), Omicron will negatively impact economic growth and potentially employment, and credit conditions are already much tighter than last year causing a correction in the housing market. These support a 25 point increase.
On the other hand, inflation is higher and unemployment lower than previously forecast, cost pressures remain acute and Omicron will add to them, the exchange rate has fallen (despite record high commodity prices) which will add to imported inflation, and inflation expectations have ticked up, requiring the Reserve Bank to burnish its inflation fighting credibility. These support a 50 point increase.
The OCR isn’t the only monetary policy tool at the Reserve Bank’s disposal. Of interest will be whether it says how it will manage the $55 billion of securities built up from its 2020-21 programme of large scale asset purchases (LSAP). Reducing this holding over time would have the effect of tightening monetary policy and could take some pressure off the OCR.
On balance I think the Reserve Bank will pick the more conservative least regrets option, a 25 point increase. More important though will be its forecast for further OCR increases over the coming year and what it will do with its LSAP holdings. Market pricing already suggests a succession of consecutive 25 point increases which would get the OCR to 3% by mid-2023. Retail interest rates are reflecting this too.
GDT up again.
Dairy prices continued to strengthen at this week’s Global Dairy Trade auction.
Overall, the GDT Price Index was up 4.2%, the third consecutive increase of at least 4%. All commodities on offer increased in price, with whole milk powder up 4.2%, skim milk powder up 6.0%, anhydrous milk fat up 1.2%, butter up 5.1%, cheddar up 3.5%, and lactose up 3.4%.
Overall, the average selling price was $US4,840 and 27,726 tonnes were sold.
The GDT Price Index is now 29.6% higher than the same time last year and it has not been this high since April 2013. Fonterra’s already high forecast farmgate milk price may be lifted again before the season ends.
Food prices jump.
It’s a tough time for consumers and this hasn’t been helped by a larger than usual rise in food prices in January which has pushed annual food price inflation to its highest level in a decade.
Statistics NZ’s monthly Food Price Index shows the biggest monthly and annual increases were for fruit and vegetables. However, price increases were widespread with 76% of items posting increases in January.
On a month-on-month basis food prices increased by 2.7%. Food prices often increase in January but even when seasonally-adjusted they were still up 1.1%.
- Fruit and vegetable prices were up 9.9% (up 6.0% after seasonal adjustment), with fruit up 10.8% and vegetables up 9.3%.
- Meat, poultry, and fish prices were up 3.6%, with beef & veal up 3.8% and mutton, lamb & hogget up 5.3%.
- Grocery food items were up 1.6% (up 0.7% after seasonal adjustment), with bread & cereals up 1.4% and milk, cheese & eggs up 1.1%.
Annually, comparing January 2022 with January 2021, food prices were up 5.9%. This was an acceleration from December 2021’s annual increase of 4.5%.
- Fruit and vegetable prices were up 15.4%, with fruit up 5.2% and vegetables up 23.5%.
- Meat, poultry, and fish prices were up 5.7%, with beef & veal up 2.5% and mutton, lamb & hogget up 11.5%.
- Grocery food items were up 4.3%, with bread & cereals up 3.6% and milk, cheese & eggs up 6.6%.
Recent wet stormy weather caused damage and losses to many crops which will likely apply further upward pressure on prices for fruit, vegetables, and cereals.
Better than expected
The Government’s Interim Financial Statements for the six months to 31 December 2021 have shown a better position compared to what was forecast in December’s Half Year Economic and Fiscal Update.
Core Crown tax revenue was $51.00 billion, $1.47 billion higher than forecast, with favourable variances for corporate tax, source deductions, other individuals’ tax, and GST.
Core Crown expenses were $62.93 billion, $664 million lower than forecast, mainly due to lower than expected health spending and lower than expected uptake of the COVID-19 Resurgence Support Payment.
The operating balance before gains and losses was a deficit of $8.05 billion, $2.85 billion lower than forecast.
Net core Crown debt was $126.36 billion, $108 million higher than expected.
Housing market correcting?
January saw a big drop in house sales and a further slip in median sales prices, according to the Real Estate Institute of NZ’s monthly Residential Property Data.
In January 2022 only 3,665 houses were sold, down 28.6% on January 2021, and the lowest sales count in more than a decade. In some regions it was the lowest since records began in 1992. REINZ posited that some people might have had extended holidays following the easing of COVID-19 restrictions but it also pointed to headwinds from higher mortgage interest rates, tightened loan-to-value-restrictions, and the impact of tougher regulations under the Credit Contracts and Consumer Finance Act.
Median sales prices also slipped. January 2022’s median of $880,000 was down 2.2% from December 2021’s $900,000. However, this was still up 20.5% compared to January 2021’s $730,000.
Most regions saw month-on-month drops in median sales prices but continued to have large annual increases. Auckland’s was up 20.6% to $1.20 million (but down from December’s $1.28 million), while the biggest annual increases were in West Coast (up 32.7%), Gisborne (up 30.0%), Northland (up 29.6%), and Canterbury (up 28.1%). The lowest was Nelson’s 7.4% increase.
The median days to sell a house in January 2022 was 37, up 2 days compared to January 2021.
The housing market appears to have turned a corner but it remains to be seen how far it will ‘correct’ over the coming months. Much will depend on how the economy fares in what are increasingly challenging conditions and on how tight credit conditions get.
Manufacturing and services slipping.
The PMI for January 2022 was 52.1, down 1.7 points from December 2021. A PMI over 50 indicates expansion while under 50 indicates contraction, so January’s PMI saw a weaker level of expansion but not a contraction.
Production (51.2) and New Orders (53.3) sub-indexes both fell back from healthy levels of expansion, while Employment (49.2) fell back into contraction. The proportion of negative comments also increased from 49.5% in December to 63.1% in January.
BusinessNZ observed that the PMI has “struggled to gain any real expansionary momentum with constantly changing COVID-19 related rules and sanctions obviously a key inhibitor for certainty and planning”.
Meanwhile, the January PSI came in at 45.9, down 3.9 points compared to December. The PSI has been in contraction territory since August. The key New Orders/Business (41.8) and Activity/Sales (44.1) sub-indexes experienced significant drops in activity, while Employment (48.1) was at its lowest level in a year. The move to the traffic light system did not seem to boost services much.
Statistics NZ’s International Migration Statistics have shown a 3,900 net migration loss for the year to December 2021, a far cry from the net gain of 36,800 for the year to December 2020.
The net migration loss was driven by non-New Zealand citizens where there was a net loss of 8,700, considerably larger than the net gain of 4,800 for New Zealand citizens. Many of the non-New Zealand citizens will be migrants leaving and they have not been replaced in sufficient numbers – hence the acute a growing labour and skill shortages.
The pandemic and associated restrictions have caused a reversal of historical patterns. New Zealand usually has an annual net migration gain of non-New Zealand citizens and an annual net migration loss of New Zealand citizens. No longer.
Meanwhile, International Travel Statistics show a continued throttle on visit numbers with only 6,200 overseas visitor arrivals in December 2021. This is up a little compared to December 2020 but is still only a tiny fraction of December 2019’s 528,000 arrivals.
Primary industries help drive productivity growth.
Labour productivity rose 0.5% in the year ended March 2021, according to Statistics NZ’s annual Productivity Statistics.
The rise in labour productivity reflects labour inputs declining by more than the fall in output over the March 2021 year. Rises were also seen in multifactor productivity, which rose 0.7%, and capital productivity, which rose 1.0%.
Covid-19 had significant impacts on inputs and outputs for many industries, resulting in some large industry increases and decreases in productivity measures.
Agriculture, forestry, and fishing had an impressively solid 4.0% increase in labour productivity, a 3.5% increase in multifactor productivity, and a 3.2% increase in capital productivity. This continues the primary industries’ long-running strong productivity performance relative to the economy as a whole.
Card spending up.
Retail card spending was up in January, according to Statistics NZ’s monthly Electronic Card Transactions.
On a seasonally-adjusted basis card spending in January 2022 was $8.40 billion, up 2.1% on December 2021. Retail spending was up 3.0%. Durables (e.g., furniture, electrical goods, hardware, department stores, recreational goods, etc.) was up 3.3%, fuel up 2.7%, and consumables (e.g., groceries) up 1.8%. Apparel was unchanged and vehicles down 0.4%. Non-retail spending was weaker with services down 0.3% and on other non-retail industries up 0.7%.
On an annual basis, actual card spending was up 4.3% compared to January 2021. Retail spending was up 5.7%, with fuel up 12.2%, consumables up 9.4%, durables up 5.7%, vehicles up 2.1%, and apparel up 1.6%, although hospitality was down 2.8%. Non-retail spending was again weaker with services down 0.8% and other non-retail industries unchanged.
Although spending was up in January and also up in annual terms, high inflation means ‘real’ growth will have been much slower and could even be negative.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 17 February) show the effect of recent heavy rain. Most of the country’s soils are significantly wetter than usual for this time of year. Southland is the exception with its soils continuing to be significantly drier than usual.
After losing ground in January the NZ Dollar was virtually unchanged this week, down 0.1% against the Trade Weighted Index. It was up a little against the US Dollar, the Euro, and the Yen, and it was down a little against the Australian Dollar, the Pound, and the Renminbi.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 6 points to 1.23% while the 10 year Government Bond yield was up 10 points to 2.84%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 February 2022. Another increase is about as close a certainty as possible.
|This Week (10/2/22)||Last Week (3/2/22)||Last Month (10/1/22)||Last Year (10/2/21)|
|90 Day Bank Bill||1.23%||1.17%||1.04%||0.28%|
|10 Year Government Bond||2.84%||2.74%||2.55%||1.51%|
Source: Reserve Bank of NZ