Oil prices are down and the Kiwi dollar is up... that means cheaper petrol.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
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Good news for motorists, with oil prices slumping more than 7 per cent in the past week. Actually, that is good news for all of us watching and waiting for inflation to get back in its box.
The Brent Crude oil price dropped below US$80 a barrel at the weekend, after OPEC+ came to a deal to extend voluntary production cuts. You’d think that might have pushed prices up but no, the deal offered some plans for increasing production so the market reacted with a sell-off.
Oil prices have slipped back through the past three months from a peak above US$91 at the start of April. That represents a fall of about 14 per cent for the quarter, which should be good news for the inflation fight worldwide.
For motorists, the lower oil prices have already translated to a 6 per cent fall in the pump price of 91 octane, according to the consumer website Gaspy.
The equation for retail petrol prices has also been helped by the strength of the Kiwi dollar, which has risen more than 4 per cent in the past month.
Based on the events of last weekend, there should be more petrol price savings to follow in coming days.
Tradable v non-tradable
Of course, the direct impact of lower oil prices is through the “tradable” side of the inflation ledger. Tradable inflation is the stuff we import via the rising cost of commodities. It includes fuel and much of our food and consumer goods. It’s also the bit that the Reserve Bank (RBNZ) has the least control over and the bit that, right now, it is least worried about.
Non-tradable inflation, the locally produced stuff like rising rents, service costs and wages is what economists call “the sticky bit”.
Right now the official inflation rate is 4 per cent – 1 per cent higher than the RBNZ’s official target band of 1-3 per cent. But the tradable inflation side is already back in the box at 1.6 per cent.
We’ve started to see that reflected in more stable pricing at the supermarket, which is great news. I know many people still feel grumpy about high prices, unfortunately, low inflation doesn’t mean they are coming down, it just means they’re rising at a slow and manageable pace. Unfortunately for many people, they still feel high after the big spike through 2022 and 2023.
The real problem though, is that non-tradable inflation is stuck at 5.6 per cent. That’s lifting average overall inflation and forcing the Reserve Bank to keep interest rates higher for longer.
But it’s important to remember that tradable and non-tradable inflation are just categories used by economists to keep tabs on things. In real life, they are not entirely independent and often bleed into each other.
For example, the price for many non-tradable local services is impacted by transport costs as well as by the cost of imported raw materials.
Oil prices flow through everything in modern society affecting the cost of moving goods at each stage of production and also in the manufacturing of things like plastics.
When the oil price crashed by 40 per cent in 2014, it sent deflationary shockwaves around the world.
The RBNZ at that time had just started lifting interest rates (after some time at record lows in the wake of the GFC and then the Christchurch Earthquakes).
It was forced to reverse course in 2015 to head off the risk of outright deflation. An economy where prices are falling always sounds good but it seldom is.
The Reserve Bank is now facing a battle to reduce the overall money supply, suppress economic demand and reduce non-tradable inflation, lower oil prices will help.
It won’t get too excited (at least publically) about lower oil prices for the simple reason that it has no control over them and they could spike again any time.
But the direction of travel across the last quarter is good news. It will help.
The bad news in the inflation fight is that those tax cuts look like they’ll add to the Reserve Bank’s difficulties. Finance Minister Nicola Willis has assured us that the Budget was fiscally neutral, but economists are unconvinced.
In the short term, there are issues around the timing. The tax cuts land promptly in August whereas the spending cuts have a much longer lead-in.
Longer term, there’s a broader debate about whether “fiscally neutral” is good enough given the cost of ongoing inflation and delay in getting the Crown accounts out of deficit. Conservative commentators such as Matthew Hooton, who believe a more contractionary Budget was needed, have been decidedly unimpressed.
Alas, Smith and Jones...
Two of New Zealand’s most considered senior economists ASB’s Mark Smith and BNZ’s Mike Jones have digested it all and fear the net result is a problem for the RBNZ.
BNZ chief economist Mike Jones concludes that the Budget will have made the RBNZ “nervous” and highlights two “high-level wrinkles”.
“The promised tax threshold changes were delivered, alongside spending cuts, to ensure broad fiscal neutrality. Nonetheless, and despite big cuts to future operational spending allowances, the weaker economy and tax take saw the return to surplus delayed to 2028,” he writes.
“Even then, the forecast surplus is a) wafer thin [0.3 per cent of GDP] and b) susceptible to disappearing given the Treasury’s tax take and economic forecasts look a touch optimistic to us.”
So, overall, there will be a consistent contractionary impact over the Treasury’s five-year forecasting horizon, he says. And it is roughly along the lines he had anticipated.
“The question, though, is whether it will be contractionary enough to give the Reserve Bank comfort its inflation objectives won’t be unduly impacted,” he writes.
“We’re not sure the bank will be thrilled in this regard.”
Those two high-level wrinkles:
The RBNZ’s assessment of these fiscal matters could be hard to gauge, Jones writes.
“Our suspicion is that any unhelpful changes in the fiscal picture may well end up lost in the wash of all the other strongly disinflationary pressures in the economy.
“In short, we think it unlikely that fiscal settings will cause the Reserve Bank to raise interest rates again. However, near term, the bank will be a tad nervous about the move in the fiscal stimulus.”
On hold for longer
ASB senior economist Mark Smith has also done a lot of work crunching the numbers.
But he also sums things up with an “in short” conclusion... which is where I’ll begin quoting!
“In short, the RBNZ will be extremely disappointed that the earmarked fiscal consolidation occurs later than was signalled in the 2023 HYEFU projections,” Smith writes in new analysis published yesterday.
“A delay of the tax cut package (or a smaller-sized package) would help. The worry for the RBNZ could be that the fiscal consolidation occurs later or is smaller in magnitude.”
Budget 2024 has increased the possibility of further OCR hikes by the RBNZ, although this still looked unlikely this late in the cycle, he writes.
“We expect the next OCR move to be a cut (likely from February 2025) but note that a less tight-than-expected fiscal stance increases the risk of the RBNZ being on hold for considerably longer than this.”
Smith says he suspects that the hawkish turn of the RBNZ in the May Monetary Policy Statement could have been in preparation for “a less stringent than hoped-for Budget.”
Politically, that would be a clever move for the RBNZ (not that they are supposed to care about politics). By pushing its forecast for the first cut out to September 2025 it is likely it can absorb the impact of the tax cuts into its equations without having to make any awkward policy shifts or public statements that blow back on the Government.
The prospect of a cut this November (as markets had been picking) or in February might now be more unlikely, but as the RBNZ never had it baked it... that’s not its problem.
ANZ’s monthly Business Outlook was somewhat buried last week, coming out on the eve of the Budget. But it offered some promising progress on the inflation expectations of business people (generally viewed as a good indicator of where actual inflation will track).
Business confidence fell four points to +11 in May. It followed falls of eight points in April, 12 points in March and two points in February. That is technically bad.
But the upside was that pricing intentions fell five points to 42 while inflation expectations eased from 3.8 per cent to 3.6 per cent.
In fact, it was so promising it caused ANZ chief economist Sharon Zollner to comment: “We’re optimistic that they’ll be able to cut the Official Cash Rate [OCR] earlier than they expect as slowing domestic demand continues to weigh on CPI inflation pressures.”
“Also encouraging for the RBNZ, there was finally a fresh low in the net proportion of firms intending to raise their prices in the next three months,” she said.
“There’s still a long way to go, but any step in the right direction is welcome.”
I realise, that when it comes to the inflation trajectory, this column has already offered up two steps forward and one step back, I guess that just reflects the complexity of it all.
Okay, so buckle in, mortgage rates are unlikely to fall anytime soon. Unless something dramatic happens and they do?
Or something different could happen and they might rise again. The trouble with predicting the future is - as former UK Prime Minister Harold Macmillan once said: “Events dear boy, events.”
But analysing the past can provide interesting insights if not any guarantees.
NZ Herald property reporter Ben Leahy has done a deep dive into historical mortgage rate numbers and worked the mortgage fixing strategies that have performed best across the past 20 years. Read the full report here.
“If you had to choose only one fixed-rate interest deal for your home loan over the past 20 years, it should have been the one-year rates,” writes Leahy.
Herald analysis showed a person who paid $248,000 in 2004 for a median-priced New Zealand house could’ve saved $33,000 or more by 2023.
According to the analysis, the home buyer would have so far paid $204,255 in interest had they always chosen to fix on the one-year interest rate every year from 2004 to 2023.
By contrast, the five-year fixed interest rate proved the most expensive.
For what it’s worth, I was very happy with the results as they roughly matched my personal mortgage rate strategy. As I wrote in this extract from my book BBQ Economics I generally take the lowest rate available at the shorter end of the market. That’s had me on one year fixed for several years now.
I’ll admit I learned the hard way that fixing for a long time can be costly, being caught out by that 2015 RBNZ U-turn I mentioned in the oil price story above.
Longer rates always look great if you imagine locking in at the right time. Everyone was talking about 30-year US mortgage rates a while back. (You can read more about why we can’t get those rates here.) It would be amazing if you took out a 30-year mortgage during the ultra-low rate Covid period, but you wouldn’t be so keen to lock in for 30 years right now – US mortgage rates are pretty similar to ours, up near the 7 per cent mark.
I have also long suspected that the local market (i.e. the banks) has some influence over the terms we pick because the money will often go where the best bargains are. But it is a bit circular. The bank bosses might argue that the best bargains just follow the weight of money.
In Australia, where more people choose floating rates, it is cheaper to float than it is here.
Anyway, all the usual financial disclaimers apply. You need to pick a rate that suits your own financial situation and seek advice from a professional if you need it...
With rising winter power prices offering another step in the wrong direction for inflation last week’s big announcement on the Tīwai Point Smelter was really great news.
The 20-year deal which secures the future of the smaller, jobs in Southland and the export earnings as well as a plan to ensure a stable power supply and avoid spikes looks like a big win-win.
The new Government, big power companies (especially Meridian) and Rio Tinto seemed to have nailed the negotiations on this one, although the plan to use the smelter to regulate power at peak times dates back to June last year, so some credit to the previous Government. Bouquets all round.
This column took a deep dive into China’s economic troubles a couple of weeks ago. While manufacturing has kicked into gear and China is experiencing an export-led recovery, a depressed property market and high unemployment continue to dog the domestic economy.
China’s youth unemployment rate had been worryingly high – above 21 per cent. This was solved to some extent last year decided to stop reporting that figure, changed the methodology and came back with a new figure, at around 14 per cent.
But concerns about the socially disruptive impact of high youth unemployment obviously can’t be resolved that easily. The powers in Beijing – having grown up in the youthquake of the Cultural Revolution – seemed to recognise this last week with a change in messaging.
China’s President Xi Jinping sounded a sympathetic note last Tuesday, ordering the Communist Party’s politburo leadership group to make the provision of “high-quality full employment” an economic priority, the Financial Times reported.
This was in stark contrast to his comments to youth last May when he told them to “eat bitterness” and that they should embrace difficulties as he did in the 1960s when, as a teenager during the Cultural Revolution, when he was sent to the countryside to do manual labour, including shovelling manure.
For all the doom and gloom out there some key data suggests things aren’t really that bad (yet, at least).
Last week I highlighted a US poll that showed a big disconnect between public perception and economic reality it prompted some angry reactions in the comments. Some even suggested I was shifting the blame for the poor economy. That’s not my intention. But I do think it helps to put the current situation in historical context.
According to Centrix data levels of mortgage arrears (above) and consumer credit arrears have both peaked below what we were seeing in 2018. It is safe to say that levels of actual financial distress out there are still much lower than in the wake of the Global Financial Crisis. I suspect it has a lot to do with the unemployment rate, which (despite high-profile job cuts) still sits below the historical average. If people still have their jobs they can find ways to keep paying the mortgage, even if higher rates are putting the squeeze on our lifestyles (and making us feel gloomy).
If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz... or leave a message in the comments section. He’ll try to answer in Inside Economics, a new column published every Wednesday.
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