Stimulus reduced.
The Reserve Bank caused ripples this week with its decision to wind back on its extraordinary monetary stimulus.
Although it kept its Official Cash Rate on hold at 0.25%, the Reserve Bank announced it would be ceasing its programme of large scale asset purchases from 23 July 2021, almost a year ahead of its previously signalled end date of June 2022. Back in May it had said it would not make all of the $100 billion purchases it had placed a limit on.
The Reserve Bank’s Monetary Policy Committee decided to reduce the stimulatory level of monetary policy to ensure it meets its consumer price and employment objectives. Inflation is pushing higher, with businesses and consumers facing cost and price pressures, while unemployment is not far off its maximum sustainable level and businesses are finding it increasingly difficult to recruit and retain staff.
The decision comes as the global economy continues to improve, boosting commodity prices, and with the New Zealand economy remaining robust. Household spending and construction activity are at high levels and continue to grow. The Reserve Bank observed that business investment is responding to capacity pressures and labour shortages, and measures of economic confidence continue to improve.
The Reserve Bank expects spikes in headline CPI inflation in the June and September quarters, with the June quarter data out today. But it thinks these reflect factors that are either one-off (e.g., higher oil prices off low bases last year), or temporary, such as supply chain disruptions. The concern will be if higher inflation becomes more generalised and imbedded, especially though higher inflation expectations.
As mentioned in last week’s commentary, a return to more normal monetary policy should be welcomed and it’s good the Reserve Bank is now moving in that direction, as are number of other central banks around the world.
Expectations are that the OCR will start to increase, possibly as soon as its next Monetary Policy Statement on 18 August. The market is tipping higher interest rates and banks are beginning to respond with higher mortgage rates.
What is also needed though is for both local and central government to take notice and do their bits to help ease inflationary pressures by controlling their spending and reining in the tsunami of regulation and other cost pressures they are applying to farmers and businesses generally. Policies need to promote and foster productivity and competitiveness, not hinder it as seems so often the case.
Food prices jump.
A big increase in vegetable prices pushed food prices up 1.4% in June (and 1.5% after seasonal adjustment) according to Statistics NZ’s monthly Food Price Index.
Comparing June 2021 with May 2021:
- Fruit and vegetable prices rose 9.4% (up 7.3% after seasonal adjustment), with vegetables up 15.1% and fruit up 0.6%.
- Meat, poultry, and fish prices rose 1.0%, with beef & veal up 1.3% and mutton, lamb & hogget up 4.7%; and
- Grocery food prices rose 0.1%, with bread & cereals unchanged and milk, cheese & eggs up 0.3%.
This large monthly increase pushed the annual rate of food price inflation up to 2.8% (from 1.8% last month). Comparing June 2021 with June 2020:
- Fruit and vegetable prices rose 9.6%, with vegetables up 11.5% and fruit up 6.4%.
- Meat, poultry, and fish prices rose 0.4%, with beef & veal down 1.2% and mutton, lamb & hogget up 8.4%; and
- Grocery food prices rose 0.5%, with bread & cereals up 0.9% and milk, cheese & eggs up 1.6%.
Traffic pains.
Traffic volumes were mixed in June, according to ANZ’s monthly Truckometer.
The Truckometer’s light traffic index (mainly cars) was down 1.4% compared to May, the second successive month-on-month decline, while the heavy traffic index (trucks and buses) was up 1.2%, a slight recovery from a 6.2% decline in May. Compared to the same time last year, light traffic was up 60.4% and heavy traffic up 35.0%, but both are off low bases from the Covid-19 lockdown period.
ANZ observed that the data remains volatile. Loss of tourism is affecting traffic in some areas, while reduced and unpredictable shipping schedules is causing disruption for export and import freight. The supply side is straining to cope with demand and this is pressure is acute in the road transport industry, which is suffering labour shortages.
House prices up again.
Median prices for residential property continued their rise in June, according to the Real Estate Institute’s monthly Residential Property Data.
The median house price increased by 0.3% between May and June 2021 to $820,000. Although this is a month-on-month slowdown, the annual increase accelerated to 28.7% from June 2020’s median of $637,000.
Auckland’s median price was up 25.0% to $1,150,000, but there were even bigger percentage increases for regions like Marlborough (up 56.0%), Taranaki (up 41.5%), Gisborne (up 37.5%), Manawatu-Wanganui (up 35.6%), Northland (up 32.6%), and Bay of Plenty (up 31.3%). The slowest growth rates were in Nelson (up 15.3%) and Otago (up 17.3%).
7,345 houses were sold in June, down 4.9% on May but up 6.2% on June 2020 – and the highest for a June month since 2016. The median days to sell was 31, down 15 on the same month last year. REINZ noted that inventories of houses available for sale are low.
The Government’s tax changes do not seem to be having much effect on the housing market. The Reserve Bank’s withdrawal of stimulus and resulting higher mortgage interest rates might though.
Retail spending rises.
Retail spending pushed higher in June, according to Statistics NZ’s monthly Electronic Card Transactions.
Actual retail spending in June 2021 was $5.93 billion, up 4.0% on June 2020. Growth as driven by hospitality (up 17.3%) and fuel (up 15.2%), both bouncing back from Covid-19 base effects. Durables (e.g., furniture, whiteware, electronics, and hardware) spending was down 2.2% though. Spending on services and other non-retail industries was even stronger and this pushed total card spending to $7.99 billion, up 5.4% compared to June 2020.
Seasonally adjusted card spending was up 0.9% compared to May. Month-on-month growth was driven by hospitality, up 2.0%; consumables (e.g., supermarkets), up 1.8%; and fuel, up 1.8%. Apparel spending was down 5.1% though. Spending on services and other non-retail industries was again stronger and this pushed total card spending up to 1.6% month-on-month.
Migration still choked.
The number of migrant arrivals and departures continued to be constrained in May 2021, according to Statistics NZ’s monthly International Migration Statistics.
In May 2021 there were an estimated 3,200 migrant arrivals and 2,100 migrant departures. Both were up compared to May 2020 but just a fraction of pre-Covid levels due to border restrictions. The monthly net migration gain was around 1,200.
For the year to May 2021 there were an estimated 42,600 migrant arrivals and 36,800 migrant departures, leaving a net migration gain of around 5,700. This is a stark contrast to the 87,500 net migration gain for the year to May 2020.
International travel lifts in May
The number of overseas visitors continued to pick up in May 2021, according to Statistics NZ’s monthly International Travel Statistics.
There were 57,600 overseas visitor arrivals in May 2021, up 55,400 from the 2,200 in May 2020. With the opening of two-way quarantine-free travel with Australia, 93.0% of the visitors came from Australia.
On an annual basis, for the year to May 2021 there were 138,000 overseas visitor arrivals – down by 2.99 million (or 95.6%) on the previous year.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 15 July) continue to show most of the country’s soils about normal for this time of year, with the exception of coastal Central Hawkes Bay (significantly drier than usual) and areas of Marlborough and Selwyn (significantly wetter than usual).
Exchange Rates
The NZ Dollar was a little stronger this week, up 0.3% against the Trade Weighted Index. It was up against all our major trading partner currencies, except the Yen where it was down a little.
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 0.41% and the 10 year Government Bond yield was up 1 point to 1.64%.
The Reserve Bank will next review monetary policy settings (including the OCR) on Wednesday 18 August.
| This Week (15/7/21) | Last Week (8/7/21) | Last Month (15/6/21) | Last Year (15/7/20) | |
| OCR | 0.25% | 0.25% | 0.25% | 0.25% |
| 90 Day Bank Bill | 0.41% | 0.35% | 0.32% | 0.31% |
| 10 Year Government Bond | 1.64% | 1.63% | 1.67% | 0.94% |
Source: Reserve Bank of NZ