by Nick Clark, Federated Farmers Manager General Policy
No changes to monetary policy
The Reserve Bank this week kept in place its prolonged monetary policy support and made no changes to Monetary Policy Settings.
In summary it decided to:
- Hold the Official Cash Rate (OCR) at 0.25%;
- Maintain the existing Large Scape Asset Purchase (LSAP) programme at a maximum of $100 billion by June 2022; and
- Maintain the existing Funding for Lending Programme (FLP) conditions.
The Reserve Bank had a tricky balancing act. On the one hand it acknowledged that economic activity has picked up and that the labour market has proven more resilient than earlier expected. It revised up many of its forecasts, including for GDP growth, employment, and inflation. Inflation is forecast to push over the Reserve Bank’s 2% target range mid-point and employment is back to near its maximum sustainable level. House prices have grown rapidly and will continue to. All this is in favour of winding back monetary policy support.
On the other hand, the Reserve Bank sees the global and domestic economic outlook as ‘highly uncertain’ and noted border restrictions will continue to weigh on growth this year. It also thinks at least some of the recent inflationary impulses will prove temporary and seemed content if in the meantime inflation pushes over 2%. It also sees its LVR restrictions as being the best tool to rein in the housing market. All this is in favour of prolonged monetary policy support.
On balance the Reserve Bank came down on the side of the latter. It was probably keen not to give the financial markets any more reason to bet in favour of higher interest rates. This comes after 10 year government bond yields have risen sharply in recent weeks (as they have also in Australia and the United States) on expectation of a ‘reflationary dynamic’ and sooner moves to normalise monetary policy. The exchange rate is also strong and is sitting well over its pre-pandemic rates (except against the Australian Dollar).
The Reserve Bank did not say whether or when monetary policy will be normalised, although its forecast path for ‘unconstrained OCR’ suggests this might start from mid-2022 (a bit sooner than previously forecast). There was no further forward guidance on the OCR and in fact the Reserve Bank stated it’s operationally ready for it to be cut into negative territory if necessary. Meanwhile, there was no talk about pushing out the time period for the LSAP programme, which would have given a ‘tapering’ signal, and it restated its support for the FLP, even though its uptake from banks has not been high to date.
Despite the Reserve Bank’s ‘dove-ish’ tone, wholesale interest rates and the exchange rate firmed following the announcement.
The Reserve Bank’s next review of monetary policy settings will be on 14 April.
Government directs Reserve Bank to focus on house prices
The Reserve Bank has a lot on its plate. In addition to its longstanding objectives on price stability and financial stability, in 2019 it was given the additional objective of employment maximisation and now Finance Minister Grant Robertson has directed the Reserve Bank to also consider how it can contribute to the Government’s housing policy objectives.
This has been framed as the Reserve Bank needing to have regard to house price sustainability when making its financial stability policy decisions. Rampant house price inflation and households borrowing big in order to buy certainly poses significant risks to the financial system and to be fair on the Reserve Bank it has been warning about these risks for some years. This is why it put in place LVR restrictions and more recently brought them back. So, the Minister’s direction might not change much except perhaps the Reserve Bank’s communication. The Reserve Bank welcomed the direction.
In practice the Reserve Bank is only one player in a much bigger game and its policy settings can only deal with demand. What is really needed is supply measures and that is about RMA and planning processes, provision of infrastructure, and getting to grips with building regulation and the costs of building. The Reserve Bank can’t do anything about these.
Credit rating upgrade
Credit ratings agency Standard & Poor raised New Zealand’s local currency credit rating to AAA with a stable outlook. It makes New Zealand the first developed nation to receive an upgrade from the powerful ratings agency since the pandemic began.
S&P praised the Government’s handling of the pandemic saying New Zealand is recovering quicker than most advanced economies because it has been able to contain the spread of COVID-19 better than most others. It also said our relatively better management of the pandemic means the Government’s credit metrics are in a good position to weather negative shocks to the economy.
The ratings upgrade should help keep a lid on government borrowing costs but it is unlikely to lower them. This is because the market has already factored in optimism about the economy, an improved fiscal outlook, and reduced need of further relaxation in monetary policy. As a result, government bond yields have been moving higher over recent weeks, especially for the longer-terms.
Businesses confident – but not agriculture
Business confidence stabilised in February, holding on to most of its recent gains, but agriculture remains gloomy.
ANZ’s Business Outlook Survey showed a net 7.0% expecting general economic conditions to improve over the next 12 months, down 2.4 points on December’s survey and down 4.8 points on February’s preliminary result. The reimposition of Covid restrictions last week will have influenced this decline.
It was more positive for business’ own activity, with a net 21.3% expecting their activity to increase over the next 12 months, down 0.4 points from December and down 1.0 point on the preliminary result.
Agriculture remains by a long way the least optimistic sector. At -38.1 it was the only sector with a negative net score for general economic conditions (and pretty much unchanged from December) and at 0.0 for own activity, pessimists and optimists were exactly balanced, and its net score was down 15.4 points. In contrast all other sectors were net positive for own activity, with construction the most bullish.
Dairy prices have been on the rise, with farmgate milk prices on the up. So why is agriculture still so downbeat? Firstly, agriculture is more than dairy farming and the increases in farmgate milk prices have not been enjoyed by other farming types, with meat prices still off the boil compared to their late 2019 highs and wool prices continuing to be poor for the most part.
Secondly, digging into the survey shows agricultural respondents’ intention scores being particularly weak compared to other sectors for indicators like exports, investment, employment, profitability, and pricing, while it was the sector feeling the most pinch on costs. Previous surveys have shown particularly high concerns among agricultural respondents about regulation and this won’t have changed.
Ag debt squeezed further
Agricultural lending by banks further reduced in December, according to the Reserve Bank’s monthly Sector Lending Statistics.
In December 2020 agricultural sector lending amounted to $62.53 billion, down $180 million on November and down $556 million on December 2019’s $63.09 billion.
Turning to lending by agricultural sub-sector (Bank Assets Loans by Purpose):
- Dairy cattle farming: $38.83 billion, down $121 million for the month and down $1.55 billion for the year.
- Sheep, beef cattle, and grain farming: $15.10 billion, down $91 million for the month but up $124 million for the year.
- Horticulture: $5.61 billion, up $37 million for the month and up $618 million for the year.
- Other agriculture on farm: $2.31 billion, down $2 million for the month and down $63 million for the year.
Agriculture’s 1.2% annual decline in lending compares to an 8.2% increase in lending for housing, a 3.3% decline for businesses, and a 12.2% decline for personal consumers.
This monthly release was delayed three weeks by the data security breach suffered by the Reserve Bank.
Business prices little changed
Statistics NZ’s quarterly Business Price Indexes showed output prices up a little and input prices flat in the December quarter.
Overall, the Producer Price Index for Outputs (prices received by businesses) was up 0.4% compared to the September quarter and it was unchanged for the year. The industries with the biggest quarterly increases (over 2.5%) were mining; transport, postal, and warehousing; and retail trade and accommodation.
Output prices for agriculture, forestry and fishing were up 1.2% for the quarter and down 4.6% for the year. Sheep, beef, and grains farming was down 0.8% for the quarter (and down 13.7% for the year) while dairy farming was up 2.7% for the quarter (but down 4.4% for the year).
Turning to prices paid by businesses, the Producer Price Index for Inputs was unchanged for the quarter and it down 0.6% for the year. Most industries were relatively stable for the quarter (movements of less than 1% in either direction).
Input prices for agriculture, forestry and fishing were up 0.3% for the quarter and up 0.4% for the year. Sheep, beef, and grains farmers was down 0.4% for the quarter (and down 3.2% for the year) and dairy farmers was up 0.7% for the quarter (and up 4.4% for the year).
Farm expenses static
The same data release showed a 0.2% increase in the Farm Expenses Price Index for the December 2020 quarter compared to the preceding quarter. On an annual basis, farm expense prices were down 0.1% compared to December 2019.
Compared to the September 2020 quarter, prices fell for several input costs such as electricity (down 3.5%), livestock purchases (down 0.6%), and interest rates (down 1.3%). These were offset by increases for fertiliser, lime, and seeds (up 1.8%), local and central government rates and fees (up 1.5%), rent and hire (up 1.2%), and insurance premiums (up 1.0%).
On annual basis, compared to the December 2019 quarter, prices were down for fuel (down 19.8%), interest rates (down 10.6%), and fertiliser, lime, and seeds (down 0.9%). The largest annual increases were for grazing, cultivation, harvest, and purchase of animal feed (up 7.6%), weed and pest control (up 7.0%), and electricity (up 4.3%).
Farm sales up
The market for farms continues to strengthen, according to the Real Estate Institute of NZ’s monthly Rural Property Data. The recovery in the rural property market started in spring and has carried into summer with higher sales volumes and prices evident in the data.
Looking at sales volumes, there were 517 farms sold in the three months ended January 2021, up 42.4% compared to the three months ended January 2020. On an annual basis, for the year to January 2021 there were 1,486 farms sold, up 16.4% on the year to January 2020. Dairy farm sales were up 39.2% and finishing farms up 29.7%, but grazing farms were down 6.5% and arable farms down 26.2%.
Turning to sales values, the median sales price per hectare for all farms sold was $25,268 for the three months to January 2021, up 21.9% compared to the three months to January 2020. Meanwhile the REINZ All Farm Price Index, which adjusts for farm size, location, and farming type, was up 6.1% over the same period.
Retail stats paint a mixed picture
Retail sales dipped from their post-lockdown rebound but remained comfortably higher than a year before, according to Statistics NZ’s quarterly Retail Trade Survey.
After adjusting for seasonal effects, the total value of retail sales in the December 2020 quarter fell 1.2% (and by 2.7% in volume terms) compared with the September 2020 quarter. This is something of a ‘correction’ after the surge in ‘catch-up’ spending following the end of the national lockdown.
On an annual basis, comparing the December 2020 quarter with the December 2019 quarter, the total value of retail sales (with price effects included) rose 4.9% (or by $1.3 billion). It was a mixed picture though for sectors and regions with some doing well and others struggling.
The biggest increases by industry were for electrical and electronic goods (up 18.7%); non-store and commission-based retailing (up 18.1%); hardware, building, and garden supplies (up 16.0%); furniture and floor coverings (up 13.9%); and motor vehicles and parts (up 12.4%). In contrast, there were large declines for accommodation (down 18.2%) and fuel (down 10.2%).
Meanwhile, 13 of New Zealand’s 16 regions had higher sales values compared to December 2019. The South Island’s growth of 1.2% was considerably below that of the North Island’s 6.2%, dragged down by the West Coast (down 14.2%), Otago (down 7.5%), and Southland (down 0.1%). In contrast all North Island regions had higher sales values, with particularly strong increases in Gisborne (up 13.5%) and Hawkes Bay (up 10.1%).
These statistics suggest the December quarter will see a small drop in GDP compared to the September quarter.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 25 February) show it drying out again after last week’s welcome rains. While the Far North’s soils are still wetter than usual for this time of year, the rest of the North Island is mainly dryer than usual, with a few exceptions. In the South Island Golden Bay and Catlins are the relatively driest areas, with south west Fiordland and Stewart Island the relatively wettest.
Exchange Rates
The NZ Dollar soared this week, strengthening 2.7% against the TWI. It was up against all our key trading partners.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill was up 1 basis point. However, the yield for 10 year Government Bonds continued its recent run of increases, up 28 basis points, and now 73 basis points higher than a month ago.
The Reserve Bank will next review monetary policy settings (including the OCR) on 14 April.
| This Week (25/2/21) | Last Week (18/2/21) | Last Month (25/1/21) | Last Year (25/2/20) | |
| OCR | 0.25% | 0.25% | 0.25% | 1.00% |
| 90 Day Bank Bill | 0.29% | 0.28% | 0.29% | 1.12% |
| 10 Year Government Bond | 1.79% | 1.51% | 1.06% | 1.19% |
Source: Reserve Bank of NZ