by Nick Clark, National Manager, General Policy
Reserve Bank’s Monetary Policy Review
The Reserve Bank’s review of its monetary policy decisions for the period 2017-22 has been published, identifying a number of ‘lessons learnt’ and ‘areas for improvement’.
The review found the period to have been ‘uniquely challenging’, with the global economy responding to globalisation and its fragmentation, technological change, declining global interest rates, plus the Covid-19 pandemic and war in Ukraine. But it considered the New Zealand economy weathered the economic storm created by pandemic and war relatively well.
It considers monetary policy decisions were ‘consistent with the data available at the time’ and that the easing in monetary policy during the pandemic was warranted with worst-case economic scenarios avoided. However, it also found that current heightened levels of inflation could have been lessened ‘at the margin’ by an earlier tightening in monetary policy in 2021 – which was Federated Farmers’ view in its earlier submission on the review.
The review identified eight areas for improvement in formulating monetary policy:
- Develop broader insight into the impacts of supply shocks on inflation
- Develop new sources of data for economic monitoring
- Develop better measures of ‘neutral’ interest rates
- Understand the future role of fiscal policy instruments in managing economic shocks
- Refine the measure of ‘maximum sustainable employment’
- Use large scale asset purchases to mitigate financial market dysfunction
- Be cautious in providing forward guidance in uncertain times
It also identified two areas for improvement in implementing monetary policy:
- Maintain the OCR as the preferred tool for setting monetary policy
- Maintain operational readiness for alternative monetary policy tools
Perhaps in anticipation of being accused of marking its own homework, the Reserve Bank’s report was peer-reviewed by two independent international experts on monetary policy from Australia and Canada.
While the review has provided a useful debrief and sensible areas for improvement, the Reserve Bank should be laser focused on inflation and not allow itself to be distracted by other objectives, like employment, housing affordability, inequality, climate change, and language and culture. These are all important but they’re more appropriately handled by other arms of government.
In a separate development, the Minister of Finance also reappointed Adrian Orr for a further five year term as Reserve Bank Governor, a decision that sparked unusually strong criticism from National and ACT. Both were also strongly critical of the review.
Deficit on track but debt surges
The Government’s Interim Financial Statements for the three months to 30 September 2022 show a fiscal deficit close to what was expected in Budget 2022 but debt significantly higher than expected.
Core Crown tax revenue was $26.7 billion, $133 million less than expected. Income tax was higher than forecast thanks to the strong labour market but this was more than offset by lower than forecast revenue from GST, fuel excise duties and road user charges. Meanwhile core Crown revenue was $29.5 billion, $283 million more than expected, mainly due to higher interest income.
Core Crown expenses were $31.2 billion, $243 million more than expected, mainly due to higher finance costs and health-related expenses. The net result was an operating deficit (before gains and losses) of $2.6 billion, $53 million more than expected but largely close to forecast.
Net debt was $71.0 billion, $4.7 billion more than expected, mainly due to market movements impacting on financial instruments. It was similar picture for gross debt of $130.3 billion, $9.9 billion more than expected due to derivative liabilities being greater than forecast, borrowings by the Reserve Bank, and other borrowings by the Treasury. Total borrowings of $219.0 billion was also $9.9 billion more than expected.
All of these debt indicators were also a lot higher than at the same time last year – net debt by $26.1 billion, gross debt by $18.1 billion, and total borrowings by $39.8 billion. Ouch.
With debt larger and interest rates increasing higher finance costs will take up more of government spending. This will constrain the ambitions of politicians.
Card transactions lift
Retail spending measured by Statistics NZ’s monthly Electronic Card Transactions rose in October.
Seasonally adjusted spending on retail industries increased by 1.0% in October 2022 compared to September 2022. All the main spending categories were up – for the first time since May 2022. Vehicles had the strongest percentage increase, up 6.0%, bouncing back from four consecutive monthly declines.
Looking at annual growth, comparing October 2022 to October 2021, spending was up 20.2% to $9.1 billion. This very large increase was distorted by the Delta lockdowns and restrictions. All spending categories were sharply higher, except consumables (i.e., groceries) which only just eked out a 2.5% increase. Apparel was up 62.4% and hospitality up 45.9%.
On the face of it higher card spending would indicate consumers continuing to keep their wallets open but high inflation will likely be an important factor. The growth in real spending, adjusted for inflation, will be somewhat weaker than the headline figure suggests.
Job ads slip
BNZ-SEEK’s monthly Employment Report has shown a slip in job advertisements in October.
October’s job ads were down seasonally adjusted 1.1% compared to September, which in turn had been down 3.9% compared to August. However, they are still at very strong levels and were up 16.3% compared to October 2021.
Most industries had month-on-month declines in job ads but one of the exceptions was the farming, animals, and conservation industry which had a 2% increase.
This data indicates there might be some easing in the labour market but it is still very tight.
Banking Survey
Federated Farmers members should keep their eyes on their inboxes on Monday, with the November 2022 Banking Survey open for responses from 14 to 21 November. As well as giving us valuable insights into banking relationships, respondents can choose to go into a prize draw for a $500 grocery voucher. Just the ticket for Christmas coming.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 10 November) show a mixed bag. Soil moisture levels are significantly wetter than usual in Northland, Auckland, Coromandel, Rotorua-Taupo, East Cape, South Otago, and Southland. In contrast, soils are significantly drier than usual in Manawatu, Tararua, Tasman-Nelson, and North and Mid Canterbury.
Exchange Rates.
The NZ Dollar was up again this week, rising 0.2% against the Trade Weighted Index. It was up against the US Dollar, UK Pound, the Yen, and the Chinese Renminbi, but it was down against the Australian Dollar and the Euro.
Source: Reserve Bank of NZ
Wholesale Interest Rates.
Over the course of the week, the yield for the 90 Day Bank Bill was up 2 points to 4.19% while the 10 year Government Bond yield was down 4 points to 4.52%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 November. It will be the final review for 2022. Most expectations are for a 75 point increase.
| This Week (10/11/22) | Last Week (3/11/22) | Last Month (10/10/22) | Last Year (10/11/21) | |
| OCR | 3.50% | 3.50% | 3.50% | 0.50% |
| 90 Day Bank Bill | 4.19% | 4.17% | 3.92% | 0.83% |
| 10 Year Government Bond | 4.52% | 4.56% | 4.33% | 2.51% |
Source: Reserve Bank of NZ
