by Nick Clark, National Manager General Policy
Hawk in flight
The Reserve Bank this week moved into beast mode in its fight against inflation, with it hiking the Official Cash Rate and signalling a steep trajectory of rises over the coming months.
The 50 point increase in the OCR to 2.0% was almost universally expected but it was the future path which surprised. The Reserve Bank’s language was more hawkish about the need to reduce inflation. Its forecasts also signalled there will be more 50 point increases in the offing with the OCR likely to be around 3.5% by the end of the year and peaking at just under 4% by this time next year. This is a higher peak reached more quickly than earlier forecast.
The economic risks remain acute. Inflationary pressures are rising globally and at home. Supply disruptions associated with Russia’s war on Ukraine and Covid-19 restrictions in China have piled on more pressure on those that had been building for a year or more. Inflation was already rising well before the tanks rolled into Ukraine and before China’s Omicron lockdowns. The world’s central banks are not only playing catchup to rein in an inflationary beast they and their governments themselves helped unleash with extraordinary monetary and fiscal stimulus. They’re now also trying to fight fresh inflationary fires.
New Zealand is in the same boat. Pandemic related monetary and fiscal stimulus was, to use a now tired term, ‘extraordinary’. It helped cushion the economy at a tough time but it fuelled an asset price bubble, especially visible in house prices. Combined with a closed border and other restrictions the stimulus led to supply-demand imbalances. With too much money chasing too few goods business cost pressures rose and they’ve spilled into higher consumer prices.
Although it’s been criticised for being too slow to act compared to other developed country central banks our Reserve Bank was relatively early both in halting its version of quantitative easing and in starting to hike interest rates. Good on it for taking decisive action once it grasped the problem but it hasn’t been helped by a government which continues to spend hand over fist. Last week’s Budget was a big spender and it does nothing to take pressure off inflationary pressures. Its cost of living package is a short-term fix which will either be reversed if its temporary cuts to petrol excise tax, RUC, and public transport fares expire or will add to the flames through its $350 payments.
With interest rates rising uncomfortably quickly and with consumer and business confidence continuing to suffer a recession can’t be ruled out. If the Government wants to spend its way out of trouble it risks even tougher medicine from the Reserve Bank. That’s an uncomfortable place to be in an election year – for both sides.
This could also become a test of the Government’s commitment to an independent central bank. Its 2018 changes to the Reserve Bank Act show it’s prepared to exert more influence on the Bank by adding an employment goal, which arguably diverted the Bank’s attention from inflation for too long, and by giving the Minister more influence on its governance. At the time Feds opposed the changes as unnecessary and risky and we continue to.
In the meantime, expect another 50 point increase at the next review on 13 July.
Fonterra’s opening price forecast
Fonterra has announced its 2022/23 opening forecast Farmgate Milk Price, setting a range of
$8.25 – $9.75 per kgMS, with a midpoint of $9.00. A volatile global environment was cited for the wide range although it considers the long-term outlook for dairy to remain positive
Fonterra also maintained its 2021/22 forecast Farmgate Milk Price of $9.10 – $9.50 per kgMS, with a midpoint of $9.30. If confirmed, $9.30 would be the highest milk price in the Co-op’s history. A $9.00 milk price for 2022/23 would make it the second highest.
A small drop in farmgate milk price next season would be a relief as often in the past a very high price has been followed by a crash (recall 2008-09 and 2013-14). However, higher farm working expenses, driven by strong inflation of farm input prices, risk eroding farm profitability.
Dairy continues to drive exports
April saw another big increase in dairy exports, according to Statistics NZ’s monthly Overseas Merchandise Trade statistics.
Goods exports were worth $6.31 billion in April 2022, up 17.2% compared to April 2021, with milk powder, butter, and cheese up 30.2% to $1.63 billion, and meat and edible offal up 16.4% to $877 million.
Goods imports continued their strong growth, up 14.9% to $5.73 billion. This include big increases for imports of food residues, wastes, and fodder (up 91.3%); fertilisers (up 74.3%); and other chemical products (up 158.9%). On the other hand, imports of petroleum and products (which can be volatile) dropped 41.1%.
The goods trade balance in April 2022 was a surplus of $584 million, up on the $397 million surplus in April 2021. Surpluses are typical in April months.
On an annual basis, for the year to April 2022, goods exports were $66.30 billion, up 12.3% on the previous year. For the key primary sector export commodities:
- Milk powder, butter, and cheese: up 19.7% to $18.19 billion.
- Meat and edible offal: up 16.9% to $9.22 billion.
- Logs, wood, and wood articles: up 4.5% to $5.37 billion.
- Fruit: up 4.1% to $3.90 billion.
- Preparations of milk, cereals, flour, and starch: down 11.0% to $2.01 billion.
- Wine: up 2.3% to $1.93 billion.
- Casein and caseinates: up 47.1% to $1.46 billion.
In addition, live animal exports were up 2.0% to $504 million and wool up 16.8% to $440 million. However, exports of eggs, honey, and other animal products were down 5.3% to $500 million and vegetables down 4.6% to $448 million.
Annual growth in goods imports was huge, up 29.4% to $75.42 billion. There were particularly big increases for fertilisers (up 65.7%); pharmaceutical products (up 64.0%); iron and steel (up 58.9%); petroleum and products (up 49.5%); and vehicles, parts, and accessories (up 46.3%).
The annual goods trade balance for the year to April 2022 was a deficit of $9.12 billion, a massive turnaround from a $748 million surplus for the previous year.
Retail sales dip
Statistics NZ’s latest quarterly Retail Trade Survey has shown a drop in retail sales in the March quarter.
For the March 2022 quarter compared with December 2021 quarter the volume of retail sales was down a seasonally-adjusted 0.5%, following an 8.3% jump in the previous quarter. There were large declines for non-store and commission-based retailing (down 10.4%); hardware, building and gardening supplies (down 5.5%); and motor vehicles and parts (down 4.0%). There was relatively healthy growth for liquor (up 5.7%); pharmaceutical and other store-based retailing (up 3.5%); electrical and electronic goods (up 2.7%); and fuel (up 2.6%).
On an annual basis, comparing the March 2022 quarter with the March 2021 quarter the total value of retail sales (with price effects included) was up 8.0%. Thanks to high inflation sales growth was weaker once price effects were excluded, rising only 2.3%.
Retail sales have been very choppy over recent times, and this data suggests GDP growth will have been weak in the March quarter. That shouldn’t be too surprising given the economic headwinds now buffeting the country. These headwinds won’t be easing any time soon either.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 26 May) show conditions significantly drier than usual in western Northland, Auckland, much of the Waikato, southern Wairarapa, Tasman, much of the east coast of Canterbury south of the Waimakariri, and much of Otago. Conditions are significantly wetter than usual around Whanganui.
Exchange Rates
The NZ Dollar was slightly stronger over the week, rising 1.7% against the Trade Weighted Index. It was up against all our major 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 another 18 points to 2.40% while the 10 year Government Bond yield was up 1 points to 3.56%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 13 July. It will likely be another 50 pointer.
| This Week (26/5/22) | Last Week (19/5/22) | Last Month (26/4/22) | Last Year (26/5/21) | |
| OCR | 2.00% | 1.50% | 1.50% | 0.25% |
| 90 Day Bank Bill | 2.40% | 2.22% | 1.97% | 0.34% |
| 10 Year Government Bond | 3.56% | 3.55% | 3.54% | 1.76% |
Source: Reserve Bank of NZ