NZ Economy - BNZ Comment Nov 05
Again, more warning from the BNZ's chief economist. Bold items mine.
The Reserve Bank Governor made his first serious speech about the inflation problem on October 14. If we measure the passage of time since the RB’s overdue recognition of the magnitude of the situation in weeks then we are currently at the end of RB Panic Week 4. Realistically it is too early to expect that the Governor’s strong comments will have had much impact on household borrowing and spending behaviour. But for the record what do we know now that we did not four weeks ago?
First, from monthly Barfoot & Thompson data we know that the Auckland housing market was still characterised by rising prices in October with a record average sale price of $474,000 from $469,000. Seasonally adjusted sales were off a tad from September but that could be because listings were down 16% from a year ago.
Second, heading into his comments people were more confident about house prices rising than at any other time since late-2003 according to the ASB Housing Intentions Survey.
Third, wages growth has proved stronger than thought which helps explain why people remain willing to borrow and spend. An experimental series published by Statistics NZ puts annual private sector wages growth at 5.5% from 4.7% a year ago.
Fourth, car registrations were muted in October but the series can be volatile. Fifth, average export prices eased 0.7% in the month but still sat 22% above their long term average. This continues to suggest the RB will not be getting much downward pressure on growth this cycle from the farming sector.
Fifth, whatever negative impact on consumer confidence his comments have had may have been consumer reaction to falling petrol prices.
Finally we learned that in the September quarter the unemployment rate fel to a record low for NZ of 3.4%, that employment rose 1.3% in the quarter and not the 0.3% which had been expected. We also learned that a record proportion of the working age population is already in work, that annual productivity growth for the economy may now be negative, and that optimism about securing a job is at a record high (records starting in about 1986). These labour market results are extremely strong and not only make a 0.25% rise in the OCR come December 8 a virtual certainty, they also raise the question of whether a 0.5% move could occur. This looks more likely now than for any previous rate move this cycle. We examine the labour market data in The RB Will Win.
During the week we received some positive feedback on radio comments made about the Reserve Bank “winning” ther inflation fight and the only thing in doubt being what level the RB needs to push interest rates to in order to secure the low inflation victory. These comments and other similar ones are aimed at those people who instead of getting themselves ready for much weaker growth are moaning about -the need for low inflation in the first place -the nature of the inflation target -the fact exporters take so much of the pain -how the official cash rate is a very “blunt” instrument -having a Reserve Bank at all Suggestions for how to deal with the inflation problem are flowing thick and fast – with an emphasis on the thick. Some people have send long emails suggesting that instead of raising interest rates to slow economic growth the RB should lower them. The theory is that import prices will rise as the currency falls and people will somehow spend less so the economy will slow down. Actually the rise in import prices will directly boost inflation, the lower currency will boost export incomes and lead to greater spending on consumer goods etc. by exporters, while there will also be a lift in production, income and spending for companies competing with imports – again with inflationary consequences. Lower interest rates will also boost spending (people borrow more as interest rates get lower – go ask a student) and this extra borrowing will boost economic activity, resource use, and inflation. Someone else suggested raising GST so people cut back on their spending. Huhh? Higher GST will boost inflation and in a tight labour market lead immediately to higher wage demands – again driving more The suggestion of fixing the NZD to protect exporters when an inflation fight is on has also been made. But doing this means losing all control over interest rates which must be raised or lowered to enhance or stem flows of funds into the NZD. If you try to remove volatility in one variable you create greater volatility elsewhere – in this case including not just interest rates but the housing market and farm incomes in particular. The NZD tends to rise and fall with commodity prices and reduce the NZD in the hand impact on farmers of commodity price trends. Without the exchange rate offset the NZD payment fluctuations would be greatly increased – with implications for financing ratios. The RB Governor has “suggested” that we banks help him by being less willing to lend money. Would you like that? The suggestion seems to be that we should not run “sales’ as other retailers do, develop new products or run innovative advertising campaigns in order to try and grow market share, and instead keep pricing our loans at maximum rates. Perhaps the RB envisages us having some official role in implementing monetary policy – in whch case the laws against company collusion would need to be rewritten, and we’d need to negotiate what salaries we should be paid for this part-time work running the RB’s monetary policy. The Reserve Bank has known about the upward trend in loans at fixed versus floating rates since it started three years ago – they publish the data. They have known about the growng divergence between floating and fixed interest rates since they started tightening in January last year. RB staff borrow money as well – and again they publish the data. Can they not have read the comments from the Federal Reserve Chairman many months ago describing the continued low level of (US) fixed interest rates as a “conundrum”. The RB have also known about the growth in lending by non-registered banks for many years also. The Reserve Bank have their job and we have ours, and just as we take into account cyclical movements in interest rates and economic growth as we grow our business, so too does the RB need to take into account long running changes in mortgage financing when setting monetary policy. To those people who having read this section now feel like sending in a long email supporting their theory – don’t get too optimistic about a reply. Our focus is on what we believe “is” happening and what we believe “will” happen not what we and others might think “should” happen. Debating alternative monetary policy implementation methods can be interesting but ultimately is completely irrelevant when it comes to preparing for what is to come – and the more time one spends on such futile debate the greater the chance one gets blindsided by the rampant monetary policy machine. So deal with what the RB will do not what you want from them for Christmas, and where relevant batten the hatches. There is a storm coming and if you’ve only been in business since everything has been rosy from about 1999 then you’re going to get a lesson in the fundamental volatile nature of the New Zealand economy.
The Reserve Bank Governor made his first serious speech about the inflation problem on October 14. If we measure the passage of time since the RB’s overdue recognition of the magnitude of the situation in weeks then we are currently at the end of RB Panic Week 4. Realistically it is too early to expect that the Governor’s strong comments will have had much impact on household borrowing and spending behaviour. But for the record what do we know now that we did not four weeks ago?
First, from monthly Barfoot & Thompson data we know that the Auckland housing market was still characterised by rising prices in October with a record average sale price of $474,000 from $469,000. Seasonally adjusted sales were off a tad from September but that could be because listings were down 16% from a year ago.
Second, heading into his comments people were more confident about house prices rising than at any other time since late-2003 according to the ASB Housing Intentions Survey.
Third, wages growth has proved stronger than thought which helps explain why people remain willing to borrow and spend. An experimental series published by Statistics NZ puts annual private sector wages growth at 5.5% from 4.7% a year ago.
Fourth, car registrations were muted in October but the series can be volatile. Fifth, average export prices eased 0.7% in the month but still sat 22% above their long term average. This continues to suggest the RB will not be getting much downward pressure on growth this cycle from the farming sector.
Fifth, whatever negative impact on consumer confidence his comments have had may have been consumer reaction to falling petrol prices.
Finally we learned that in the September quarter the unemployment rate fel to a record low for NZ of 3.4%, that employment rose 1.3% in the quarter and not the 0.3% which had been expected. We also learned that a record proportion of the working age population is already in work, that annual productivity growth for the economy may now be negative, and that optimism about securing a job is at a record high (records starting in about 1986). These labour market results are extremely strong and not only make a 0.25% rise in the OCR come December 8 a virtual certainty, they also raise the question of whether a 0.5% move could occur. This looks more likely now than for any previous rate move this cycle. We examine the labour market data in The RB Will Win.
During the week we received some positive feedback on radio comments made about the Reserve Bank “winning” ther inflation fight and the only thing in doubt being what level the RB needs to push interest rates to in order to secure the low inflation victory. These comments and other similar ones are aimed at those people who instead of getting themselves ready for much weaker growth are moaning about -the need for low inflation in the first place -the nature of the inflation target -the fact exporters take so much of the pain -how the official cash rate is a very “blunt” instrument -having a Reserve Bank at all Suggestions for how to deal with the inflation problem are flowing thick and fast – with an emphasis on the thick. Some people have send long emails suggesting that instead of raising interest rates to slow economic growth the RB should lower them. The theory is that import prices will rise as the currency falls and people will somehow spend less so the economy will slow down. Actually the rise in import prices will directly boost inflation, the lower currency will boost export incomes and lead to greater spending on consumer goods etc. by exporters, while there will also be a lift in production, income and spending for companies competing with imports – again with inflationary consequences. Lower interest rates will also boost spending (people borrow more as interest rates get lower – go ask a student) and this extra borrowing will boost economic activity, resource use, and inflation. Someone else suggested raising GST so people cut back on their spending. Huhh? Higher GST will boost inflation and in a tight labour market lead immediately to higher wage demands – again driving more The suggestion of fixing the NZD to protect exporters when an inflation fight is on has also been made. But doing this means losing all control over interest rates which must be raised or lowered to enhance or stem flows of funds into the NZD. If you try to remove volatility in one variable you create greater volatility elsewhere – in this case including not just interest rates but the housing market and farm incomes in particular. The NZD tends to rise and fall with commodity prices and reduce the NZD in the hand impact on farmers of commodity price trends. Without the exchange rate offset the NZD payment fluctuations would be greatly increased – with implications for financing ratios. The RB Governor has “suggested” that we banks help him by being less willing to lend money. Would you like that? The suggestion seems to be that we should not run “sales’ as other retailers do, develop new products or run innovative advertising campaigns in order to try and grow market share, and instead keep pricing our loans at maximum rates. Perhaps the RB envisages us having some official role in implementing monetary policy – in whch case the laws against company collusion would need to be rewritten, and we’d need to negotiate what salaries we should be paid for this part-time work running the RB’s monetary policy. The Reserve Bank has known about the upward trend in loans at fixed versus floating rates since it started three years ago – they publish the data. They have known about the growng divergence between floating and fixed interest rates since they started tightening in January last year. RB staff borrow money as well – and again they publish the data. Can they not have read the comments from the Federal Reserve Chairman many months ago describing the continued low level of (US) fixed interest rates as a “conundrum”. The RB have also known about the growth in lending by non-registered banks for many years also. The Reserve Bank have their job and we have ours, and just as we take into account cyclical movements in interest rates and economic growth as we grow our business, so too does the RB need to take into account long running changes in mortgage financing when setting monetary policy. To those people who having read this section now feel like sending in a long email supporting their theory – don’t get too optimistic about a reply. Our focus is on what we believe “is” happening and what we believe “will” happen not what we and others might think “should” happen. Debating alternative monetary policy implementation methods can be interesting but ultimately is completely irrelevant when it comes to preparing for what is to come – and the more time one spends on such futile debate the greater the chance one gets blindsided by the rampant monetary policy machine. So deal with what the RB will do not what you want from them for Christmas, and where relevant batten the hatches. There is a storm coming and if you’ve only been in business since everything has been rosy from about 1999 then you’re going to get a lesson in the fundamental volatile nature of the New Zealand economy.
posted by Prognosian | 8:53 am
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