OPINION
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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.
Q: Hi Liam,
Why do you, banks and the Reserve Bank look all the way back to 1/4/23, and add in the June and September 23 quarters. These are so out of date. You are saying inflation is still around 4 per cent annually, but that is heavily influenced from April 23 to Sept 23, and the more recent inflation is nowhere near that level. From your article, it seemed like March 2024 quarter is expected to be around 0.8 per cent, December quarter was 0.5 per cent. So for six months that will be 1.3 per cent, or annualised 2.6 per cent.
Has someone tried pushing back on the RBNZ, and explaining that the annual formula isn’t really showing the real or up-to-date picture? - Ross Barnett
A: Great question Ross.
I made a similar point myself in my Sunday column earlier this year - although I admit I do go along with standard practice in my day-to-day reporting.
But yes, surely the inflation we are experiencing right now in the economy is the relevant bit. So why do we look so far back with data to decide whether we are in the official 1-3 per cent target band?
There’s convention, I suppose. It would be difficult for New Zealand to run monetary policy that’s wildly divergent from our (larger) international peers. The backward-looking annual inflation approach is commonly used in advanced economies like Australia, the US and the UK.
But the Reserve Bank (RBNZ) also points out that they do look at inflation data more holistically than it might seem at first glance.
Here’s their official response to the question:
“The RBNZ bases monetary policy decisions on the outlook for inflation over the medium term. We take into account a range of the most timely information available, including quarterly inflation data, to form a view on what OCR settings are necessary to return inflation to our target. Although we often report headline inflation figures in annual terms (because our remit is specified as an annual inflation target, annual numbers tend to be more easily understood, and quarterly figures can be driven by volatility and seasonal price movements), we closely examine high-frequency movements in key economic data series such as CPI inflation, and make judgments about whether recent movements will be sustained.”
Why so slow?
Okay, we aren’t going to get the RBNZ to change its policy any time soon. But why can’t we get our CPI data every month like they do in the US?
Last week KiwiBank economists poured cold water on market expectations for a rate cut in August, pointing out that the RBNZ will have only two more full sets of CPI data by then (including today’s).
“We think they need to see inflation below 3 per cent before they will contemplate cuts. And the earliest that will happen is October, when the [third quarter] inflation report is published. So that means the first reasonable chance of a rate cut is November,” Kiwibank said.
When you consider how costly any potential delay to interest rate cuts is for our economy, surely it makes sense to be getting this data every month.
I’m not having a go at Stats NZ, which I think does a fantastic job of gathering a wealth of data on all aspects of New Zealand life.
I have put that question to StatsNZ (and will run the response when it arrives) but I suspect the answer is funding and resources. On that basis, I’d love to see the Government specifically target funding to deliver monthly CPI data.
The payoff in this current cycle would be lower rates sooner. But of course, it might also have provided insight to have lifted rates sooner keeping inflation down in the first place.
Value for money, I reckon.
After all the talk about the death of paper money and the RBNZ’s efforts to save it, it is interesting to see the central bank turn its attention to the future of money.
This morning it launched its plans to progress a digital version of the Kiwi dollar.
“We are calling this ‘digital cash’. It would be a new type of money in addition to the banknotes and coins we have today, and the electronic money in your bank account,” director of money and cash Ian Woolford says.
“It would be the first digital form of New Zealand currency backed by the Government and available to the public. Physical cash in banknotes and coins would still be available, so people would have the option to use either digital or physical cash. “You would likely need a digital wallet, payment card or phone app to access your digital cash. You wouldn’t need a commercial bank account to use it.”
“It would also work via Bluetooth, so you could make payments without connecting to the internet. This would be useful in an emergency, or when the power is out.”
That sounds great to me. And it would go a long way to undercutting the monopoly commercial banks have on transaction fees.
But there is a long way to go. This is a multi-stage exploration until around 2030, the RBNZ says.
The RBNZ is kicking off the first round of public consultation today until July 26, but promises there will be plenty more opportunities for public feedback.
Concerns about World War III aside (I know that’s an insanely big thing to put to the side) news of Iran’s attack on Israel and escalating conflict in the Middle East had me and many others expecting to see oil prices spike on Monday morning.
But they fell. What gives?
Commentary for Rystad Energy senior vice-president Jorge León offers some insight into why traders are betting on de-escalation - at least in the short term.
“A spike in prices didn’t materialise because the response was well-telegraphed, meaning the market had time to bake in any risk to crude supplies,” León said.
“As the risk to supply is waning and a military response from Israel looks less likely as more time passes, prices are holding steady. Tensions are high, and either party’s next moves are hard to predict, but all the significant signs point toward an easing of hostilities and restraint in the short term. One thing is for certain: volatility is here to stay.”
Meanwhile, Goldman Sachs analysts (via Bloomberg News) offered up four key geopolitical risks to watch:
- That OPEC+ may extend existing production cuts in the context of increased tensions
- That Upstream, midstream or downstream infrastructure could get caught in the crosshairs in the Middle East or Russia-Ukraine conflicts (as has already happened with Russian refineries)
- That Iranian oil supply may decline either because of disruption or because of a tougher US stance
- An interruption of oil flows through the Strait of Hormuz, which would lead oil prices to rise 20 per cent in the first month.
A plan to borrow for tax cuts turned out to be a career-ending move for short-lived British PM Liz Truss. Is our own Government about to attempt the same thing?
It depends on who you talk to. Finance Minister Nicola Willis says they are not. But economists see it differently, writes Business Herald Wellington editor Jenée Tibshraeny.
“The crux of the disagreement hinges on whether it’s fair to ring-fence one type of spending - ie, on tax cuts - and say any savings or new types of revenue are used specifically to cover that cost, all the while other types of new spending are at least partially debt-funded,” Tibshraeny writes.
The article quotes independent economist Cameron Bagrie, who says Willis’ argument “doesn’t stack up”.
Actually, I’m yet to read of any economist who thinks it does (feel free to get in touch if you do).
“It’s the same pool of money,” economist Shamubeel Eaqub told TVNZ.
Eric Crampton, chief economist at the pro-free-market think tank the New Zealand Initiative, has also expressed his scepticism and concern.
“The Budget Policy Statement claims that any tax reduction would not add to debt because reprioritisation, savings, and new revenue measures would fund it. But debt would be lower and the path to surplus would be faster if tax reductions were deferred until spending cuts provided room for them,” Crampton said.
“The bill for a longer period of larger deficits will come due.”
Despite claiming that the cuts would turbo-charge economic growth and pay for themselves, Truss was undone in 2022 by financial markets which took a dim view of her plans. The British pound and bond prices plunged, and the cost of borrowing rose. Truss sacked her Finance Minister Kwasi Kwarteng before resigning herself.
“I think it’s clear you can’t fund tax cuts through increased borrowing,” new UK Finance Minister Jeremy Hunt subsequently said.
The debacle is a reminder that it isn’t politicians or economists who’ll deliver the final verdict on National’s tax cut policy - it’s markets.
Unlike Truss and Kwarteng, I think PM Christopher Luxon and Willis will be likely to get away with their tax plan simply because it is much less ambitious in scale.
Ratings Agency Moody’s Analytics has published a “compare and contrast” report on the New Zealand and Australian economies. As you’d expect, it reads about as well as a match report from the recent transtasman cricket test series.
“It’s hard to think of a better start to the year for the Aussie economy given the circumstances,” write Sydney-based analysts Harry Murphy Crusie and Shannon Nicoll. “Inflation is easing faster than expected while the labour market is staying tighter than expected. What’s more real wages are finally rising.”
Meanwhile...
“Things are grim next door,” the pair write. “New Zealand’s economy finished 2023 by slumping into recession... We expect a slight improvement in 2024 as global demand picks up, inflation recedes and a potential cut in interest rates revives domestic spending. That said, monetary policy operates on a lag meaning economic conditions are unlikely to normalise until 2025.”
That stark divergence prompted one cynical observer to describe us as the Madge Allsop economy. Those who recall Dame Edna Everage’s sad-sack Kiwi sidekick will get the analogy.
Strewth cobber, I thought we’d put that one behind us last century.
Stats NZ has released the latest productivity statistics for (the year to March 2023). They weren’t flash. Labour productivity went backwards by 0.9 per cent. In other words, we produced 0.9 per cent less output for the same hours worked. It was the largest fall since 2009 and followed a rise of 1 per cent in the year ended March 2022.
BNZ head of research Stephen Toplis has wrapped up the economic releases of the past week with a grim but gripping overview that at least comes to an upbeat inflation-busting conclusion.
“Looking back over the last few days the business indicators are very worrisome,” he wrote on Monday.
The NZIER’s Quarterly Survey of Business Opinion showed heightened business distress and a sharp contraction in business activity expectations.
The BNZ-BusinessNZ Performance of Manufacturing Index (PMI) sank back into contraction territory in March, following what looked like a developing recovery in the previous two months.
The PMI’s sister survey, the Performance of Services Index, slumped to 47.5 from 52.6 in March. Apart from during Covid, this was the worst reading since 2009. Employment intentions across the surveys were weak.
Seek job ads continued to trend lower and job applications to job ads were more than double what they were this time last year.
“If all this wasn’t bad enough, Friday’s Electronic Card Transactions data revealed a 0.7 per cent decline in retail spending in March and a 0.6 per cent decline in core retail,” he said.
“The only good news that comes out of all the above is that inflationary pressures continue to diminish, and we are becoming increasingly comfortable with our view that annual CPI inflation will be within the Reserve Bank’s target band before the end of this year.”
Happy days!
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.
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.
Nearly 90% of new mortgage lending in October was floating or fixed for a year or less.