by Nick Clark, National Manager General Policy
OCR unchanged
The Reserve Bank kept the Official Cash Rate unchanged at 5.50% at this week’s review. This was universally expected.
In its statement, the Reserve Bank said, “Interest rates are constraining economic activity and reducing inflationary pressure as required.”.
It also said, “While the imbalance between supply and demand continues to moderate in the New Zealand economy, a prolonged period of subdued activity is required to reduce inflationary pressure” and that “the OCR needs to stay at a restrictive level”.
The Reserve Bank dropped previous wording that the OCR would need to stay at restrictive levels ‘for the foreseeable future’. However, there was also some suggestion it might need to stay elevated at 5.5% for longer than previously thought.
The next review of the OCR will be on 29 November. It’s likely to be more interesting than this one as it follows not only the election but also the release of key data for the September quarter for consumer price inflation (17 October) and for the labour market (1 November). Crucially, the RBNZ will have updated its economic forecasts through the quarterly Monetary Policy Statement, which is also out on 29 November.
Some economists think we could see an OCR increase on 29 November, but this will depend on how the economic data and forecasts are tracking between now and then.
Ag lending falls
Agricultural sector lending dropped in August, according to the Reserve Bank’s monthly Sector Lending Statistics.
Agricultural sector lending was $63.17 billion in August, down $249 million compared to July. It was still $927 million (or 1.5%) higher than August 2022 after strong growth over the preceding few months. Debt had increased by a cumulative $1.24 billion from April to July.
There were differences within the sector:
- Dairy cattle farming: $37.20 billion, down $310 million for the month but up $427 million (or 1.2%) for the year.
- Sheep, beef cattle, and grains farming: $15.32 billion, up $24 million for the month and up $52 million (or 0.3%) for the year.
- Horticulture: $7.64 billion, up $35 million for the month and up $505 million (or 7.1%) for the year.
- Other agriculture on farm: $2.16 billion, up $2 million for the month but down $153 million (or 6.6%) for the year.
In comparison to agriculture’s annual 1.5% increase, annual growth in housing lending was 3.0%, continuing its trend of slower annual growth, personal consumer lending was up 5.4%, and business lending was up 1.8%.
Commodity prices rise
The ANZ World Commodity Price Index increased 1.3% in September compared to August, breaking a run of three consecutive monthly decreases.
Dairy prices lifted 0.2%, with whole milk powder strengthening after a rebound in demand. Meat and fibre prices were up 4.3%, with stronger prices for beef (up 3.9%), lamb (up 4.5%), and wool (up 11%). Horticulture prices were virtually unchanged (down 0.1%), as were forestry prices (up 0.3%), while aluminium prices were up 2.3%.
On an annual basis, comparing September 2023 with September 2022, the World Price Index was down 13%.
Adjusted for the exchange rate, which weakened in September, the NZ Dollar Index was up 2.0% for the month. This will help ease some of the pain in farmgate prices, but the NZ Dollar Index was still down 11% for the year.
Another GDT increase
This more positive vibe on commodities has carried into October, with this week’s Global Dairy Trade auction posted another welcome increase.
After rising 4.6% a fortnight ago (and 2.7% prior to that), the GDT Price Index was up a further 4.4% this week. Whole milk powder was up 4.8%, skim milk powder was up 6.6%, anhydrous milk fat up 3.7%, butter up 1.3%, and butter milk powder up 0.6%. On the downside, cheddar dropped 4.8% and lactose slipped 1.3%.
Overall, the average selling price was US$3,104 per tonne and $38,350 tonnes were sold.
Three healthy increases for the GDT Price Index have taken it back to where it was in mid-July. They have also moderated the year-on-year decline to 14% (from 24% at the previous auction).
Government finances in the red
The 2022/23 Financial Statements for the Government are out, unsurprisingly showing a bigger deficit than predicted in the May Budget.
Total revenue of $153.0 billion was up 11.4 billion on the previous year but $2.5 billion lower than expected in the Budget. This was mainly due to lower-than-expected revenue from corporate tax and other individuals’ tax.
Total expenses of $161.8 billion was up $10.9 billion and virtually unchanged from what had been budgeted (down $102 million). Core Crown spending of $127.6 billion was $1.9 billion higher than last year and $621 million lower than budgeted.
The operating balance before gains and losses was a deficit of $9.4 billion, $2.5 billion more than budgeted. However, the deficit was nearly $600 smaller than the (unaudited) $10.0 billion deficit for 2022/23 in last month’s Pre-Election Economic & Fiscal Update.
June 2023’s net debt of $71.4 billion (18% of GDP) was $9.5 billion higher than in June 2022, but very close to that forecast in Budget 2023. Revaluation gains had a significant favourable impact on the value of assets and liabilities.
No great surprises, very much as signalled in the PREFU. Looking ahead, it’s the current 2023/24 year which matters. Its deficit was forecast to be even bigger at $11.4 billion and will be a headache for whatever government emerges post-election.
Business confidence edges up
There’s been an improvement in business confidence in the September quarter and an easing in the labour market, according to NZIER’s Quarterly Survey of Business Opinion.
A net 53% of businesses expect deterioration in general economic conditions, a 7-point improvement from the previous June quarter. However, there was not much improvement for own trading activity where a net 17% reported reduced activity in the September quarter, down 4 points, and a net 14% expect activity to decline in the next quarter, up 3 points.
The most significant development was a sharp easing in labour shortages over the September quarter, for unskilled and skilled labour. However, cost pressures remain intense despite an easing in capacity pressures.
Sentiment was mixed across the sectors, with the retail sector remaining the most downbeat. Farmers are not surveyed in the QSBO but businesses that serve farmers will be.
The QSBO provides the Reserve Bank will provide some comfort that it’s on the right track but it’s too soon to declare victory in the fight against inflation.
Consumer confidence remains weak
The monthly ANZ-Roy Morgan Consumer Confidence Index recorded a modest increase in September, but it remains firmly in negative territory.
Comparing September with August, the Index was up 1.4 points to 86.4. A score below 100 indicates there are more pessimists than optimists. It has been below 100 since October 2021.
There were small improvements for most questions, with the exception of the key question on whether it’s a good time to buy a major household outcome which slipped 1 point to a score of -32. This measure is regarded as a good indicator for retail spending.
Although there was a pick-up in expected house price inflation over the coming year, from 2.4% to 3.2%, there was a drop in expected consumer price inflation, from 4.6% to 4.2%.
Building consents fall
Statistics NZ’s Building Consents Issued for August have another monthly and annual fall for residential building consents as well as, after strength up until now, a drop for non-residential consents.
In August 2023, there were 3,170 residential building consents, valued at $1.5 billion. The seasonally adjusted number of consents was down 6.7% for the month, after a 5.4% fall in July. For the year ended August 2023, the number of new dwellings consented was 42,110, down 17% from the previous year. These consents were valued at $18.1 billion, down 11% annually.
For non-residential consents, with August 2023’s value of $751 million was down 25% compared to the same month last year. However, the annual value of $9.9 billion for the year ended August 2023 was up 8.3% from the previous year.
For farm buildings, the month’s value of $23 million was down 21% compared to the same month last year, and the annual value of $285 million was down 13%.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 5 October) show soils across most of the North Island having normal moisture levels for this time of year. The eastern coastal areas from Gisborne to Wairarapa are mostly wetter than usual, except for an area around Hastings which is drier than usual. In the South Island conditions are drier than usual in the Marlborough Sounds, while most of the east coast from Kaikoura to Otago are wetter than usual.
Exchange Rates
The NZ Dollar was almost unchanged for the week against the Trade Weighted Index, up 0.1%. It was up against the Australian Dollar and the US Dollar, stable against the UK Pound, Euro, and Chinese Renminbi, and down against the Japanese Yen.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was down 3 points to 5.70%, while the 10-year Government Bond yield was up 21 points to 5.47%.
The OCR is next reviewed on 29 November.
| This Week (5/10/23) | Last Week (28/9/23) | Last Month (5/9/23) | Last Year (5/10/22) | |
| OCR | 5.50% | 5.50% | 5.50% | 3.00% |
| 90 Day Bank Bill | 5.70% | 5.73% | 5.66% | 3.83% |
| 10 Year Government Bond | 5.47% | 5.26% | 4.96% | 4.07% |
Source: Reserve Bank of NZ
