The Reserve Bank Monetary Policy Committee has agreed to keep the the Official Cash Rate (OCR) on hold at at 0.25 per cent for now.
OPINION:
You might not be able to hear it behind the masks, but New Zealand's homeowners breathed a collective sigh of relief on Tuesday after a speech from assistant Reserve Bank governor Christian Hawkesby suggested the Bank would take its time with forecast interest rate hikes.
Rates will still goup - but most now anticipate hikes will be slower than expected.
We may finally stop working for home, but those lucky enough to own homes, will still find their homes continue working for them.
The Bank's decision to signal hikes is understandable. Inflationary pressures are clear and the Bank thinks it has met its employment mandate (although that was before the latest lockdown), with employment "at or above its maximum sustainable level".
Politically (yes, the Bank is political), there's an understandable desire to return to a more normal monetary policy, which would beget (gasp) more affordable and even lower house prices.
The Bank has found itself mired in the political fallout of the housing crisis, and following the vapidity of its many and varied pronouncements on "sustainable," "affordable" or "lower" house prices, its most recent monetary policy statement was clear: housing is unaffordable, and prices will fall.
The Bank's tightening cycle will deprive the housing market of oxygen in the form of cheap credit, reducing the housing fire to embers, before putting it out entirely in a couple of years (well, insomuch as the housing market will ever go out - house prices are only meant to drop slightly, and will still be up on this year).
New Zealand is a price taker in monetary policy as it is in almost any other area of the economy. Despite this, our Reserve Bank insists tightening monetary policy ahead of nearly all of our major trading partners.
The Reserve Bank of Australia will begin tightening rates in 2023, and the US Federal Reserve is only set on winding back its money printers - not hiking rates, and the European Central Bank's key interest rate will remain unchanged until 2025.
One of us is bound to be wrong - my money (well, the money I plough into the mortgage each month) is on it being us.
Even if the Bank hikes rates, it creates two ancillary problems.
The Reserve Bank will begin hiking interest rates. Photo / Mike Scott.
The first is the obvious one; winding down the monetary stimulus and cooling the housing market kneecaps the key driver of domestic demand, which is house price inflation. With the Bank unable and unwilling (for good reason) to stoke another housing boom, it's not clear which part of the domestic economy will supply the demand pressure needed to keep the economy moving ahead during an uncertain recovery.
The other problem is more uncertain.
Rising interest rates here while rates remain low overseas would likely put pressure on the currency, which would be bad news for exporters.
This would risk choking off the other success story of the recovery, which is primary industry exports holding up, despite a relatively high dollar and international trade disruption.
This isn't a huge concern at the moment. The whole milk powder price - the most important number for Fonterra - has fallen slightly from the high of March this year, but is still well above its five year average. In May, Fonterra announced an opening forecast Farmgate Milk Price for this season, of $7.25 - $8.75 - a record.
Aukus has put out trade policy in an awkward position. Photo / Australian Defence Force via Getty Images
Times are good. Exports are saving New Zealand.
But an appreciating dollar could put that at risk. Without housing, without those exports, the story could quickly becomes one of deflationary pressure, rather than inflation. That might be what the bank wants - particularly if the problem is inflation.
And while a cooler economy could take the steam out of inflation driven by mounting construction costs and wages, there are other parts of the economy that won't be as receptive to interest rate hikes, namely inflation from disrupted supply chains and, most importantly, inflationary pressures from higher oil prices.
A massive error in either direction is unlikely, if it looks like the Bank has erred one way or the other, it can quickly pivot and correct - that's why there's still some scepticism that this hiking cycle is everything its cracked up to be.
Regardless, the Bank's tightening cycle is a political problem for the Beehive. They would probably like a bit less heat on the housing market, but could do without a higher export-crunching dollar.
But ministers have some control here, a higher dollar is one thing, but its effects can be mitigated with a sensible trade policy. Unfortunately, with the rest of the world losing its mind, a sensible trade policy is more challenging now than it ever has been.
You can see this in New Zealand's delicate dance around China's application to join the CPTPP, and the fallout (let's hope the only fallout) from the awkward Aukus nuclear submarine affair.This will continue to be an awkward geopolitical relationship, particularly if we continue to see little appetite from the US to rejoin the CPTPP. New Zealand's security and trade policies are pulling it in two very different directions.
John Key was known to be frustrated that New Zealand's security relationships failed to translate into strong trade relationships. The positive aspect of this is that it forced successive governments to diversify away from old markets towards the new - the negative is our new friends come with compromises of their own.
Either way, as the Reserve Bank drags homeowners, kicking and screaming, towards some kind of new normal, the Beehive and our diplomats will find themselves increasingly dependent on an increasingly uncertain trade environment.
