After holding off in August, the Reserve Bank did what it had been widely expected to do, this week lifting the Official Cash Rate from 0.25% to 0.50%. This was the first OCR increase in more than seven years.
The Reserve Bank had to strike a balance between the economic hit caused by recent and current lockdown restrictions and swelling cost and price pressures.
Inflation is running at 3.3% (above its 1-3% target range) and is expected to increase above 4% before easing back next year. Unemployment is 4.0% and there are acute labour and skills shortages, meaning its other goal of contributing to maximum sustainable employment goal has been met. Meanwhile house prices have continued to grow strongly. All good reasons to tighten.
In coming to its decision, the Reserve Bank has taken a medium term view. Although the lockdowns are causing plenty of pain, it pointed to strong household and business balance sheets, ongoing fiscal policy support, and a strong terms of trade. These provide it with confidence that activity will recover quickly once restrictions ease. But a big question is how quickly restrictions ease. If it is a slow process, it will probably not be the ‘V’ shaped recovery we saw last year. More likely a hard slog through choppy seas.
The OCR is likely to be increased again at its next review on 24 November on its way to 1.5% by August next year. But who would bet against something coming along to derail it?
Commodity prices up.
The ANZ World Commodity Price Index was up in September, enjoying a spring lift.
Overall, world prices were up 1.5% compared to August. After falling three consecutive months, dairy prices were up 1.3%. Meat and fibre prices were up 0.6%, with lamb prices up to a record high, but wool and beef both easing. Horticulture was down 1.5% but there were strong gains for forestry was (up 4.7%) and aluminium (up 9.6%).
The NZ Dollar gained 1.1% in September which resulted in the NZ Dollar Index edging up 0.4% for the month.
On an annual basis, comparing September 2021 with September 2020, the World Price Index was up 23.6% and the NZ Dollar Index up 17.4%.
ANZ also observed that shipping costs continue to rise. The Baltic Dry Index was up a further 26% in the month, with shipping costs back to their highest level since September 2008. ANZ thinks there is no end in sight.
Dairy prices were flat at this week’s Global Dairy Trade auction.
All commodities increased in price with the big exception of whole milk powder, which dropped 0.4%. Skim milk powder was up 0.5%, anhydrous milk fat up 0.4%, butter up 0.4%, cheddar up 0.7%, lactose up 0.4%, and butter milk powder up 9.7%.
The average selling price was $US3,977 and 28,667 tonnes of product were sold.
Compared to the same time last year the GDT Price Index is up 27.1%.
ANZ this week increased its forecast Fonterra milk price by 50 cents to $8.20 per kg milk solids.
Business confidence knocked.
NZIER’s latest Quarterly Survey of Business Opinion has shown a weakening in business confidence in the September quarter, despite demand in firms’ own business holding up.
A net 8% of businesses expect deterioration in general economic conditions over the coming months – a 17 point worsening from the net 9% expecting improvement in the June quarter. The drop in confidence came despite demand remaining solid, with a net 29% of businesses reporting an increase in their own activity in the September quarter – although only a net 9% expect it to increase over the coming months.
The building sector went from being the most optimistic sector to the most pessimistic, while manufacturing and services were also feeling downbeat. Agricultural businesses are not surveyed in the QSBO but it covers many businesses that rely on farming.
Uncertainty over how the current outbreak will evolve has led to more caution on investment but firms were feeling more positive about employment in the next quarter in anticipation of a rebound once restrictions are relaxed.
Despite capacity pressures becoming more acute, businesses (oddly) reported a softening in costs and pricing in the September quarter. Firms reported the shortage of skilled labour becoming even more acute, but a slight easing in the shortage of unskilled labour.
NZIER is picking supply-side constraints will keep inflation elevated, but it thinks inflationary pressures will moderate over the coming year. That would be welcome if it comes to pass.
Most but not all of the survey period was during lockdown conditions.
The QSBO is an important economic indicator with a long history (going back to 1961) and it’s closely watched by the Reserve Bank and other policy makers.
And consumers too.
Consumers also became rather less confident in September, according to the latest monthly ANZ Roy Morgan Consumer Confidence Survey.
The overall confidence rating fell 5.1 points to 104.5. Most of the components saw declines, including expectations for the economy (down 8 points to a net 13% expecting bad times) and whether it is a good time to buy a major household item (down 20 points to a net 7% saying it’s a bad time).
Inflation expectations were steady but remain elevated at 5.1%. House price inflation expectations eased very slightly to 6.1%.
Job ads stable.
After falling in August, job advertisements were up 0.3% in September according to the latest BNZ-SEEK Employment Report. Job ads also remained well above levels same time last year.
Almost all regions saw month-on-month increases but Auckland had another big drop, with ads down 8.0% after a 12.5% drop in August. Canterbury’s ads were up 9.5% and Wellington’s up 3.9%. Manawatu (up 12%) and Tasman (up 10%) had the biggest increases.
Unsurprisingly, hospitality and retail had the biggest drop in ads (down 22%), followed by sport and recreation (down 14%). Ads for jobs in farming, animals, and conservation were up 1%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 7 October) shows most of the country’s soils with about average or wetter than usual moisture levels for this time of year. Gisborne-Wairoa, Marlborough, North Canterbury, and Central Otago are significantly wetter than usual. There are only a few small, scattered pockets of dryer than usual areas.
The NZ Dollar was a little stronger this week, up 0.4% against the Trade Weighted Index. It was up against the US Dollar, the Euro, the Yen, and the Renminbi but down against the Pound and the Australian Dollar.
Source: Reserve Bank of NZ
Wholesale Interest Rates
The OCR was increased this week to 0.50%. The yield for the 90 Day Bank Bill was stable over the week at 0.65%, while the 10 year Government Bond rose 3 points to 2.00%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 24 November.
|This Week (7/10/21)||Last Week (30/9/21)||Last Month (7/9/21)||Last Year (7/10/20)|
|90 Day Bank Bill||0.65%||0.65%||0.52%||0.28%|
|10 Year Government Bond||2.00%||1.97%||1.91%||0.50%|
Source: Reserve Bank of NZ