Monetary policy in New Zealand is at an interesting crossroads. The June quarter Cost Price Index (CPI) data on the surface looked positive. Overall, the CPI rose by 3.3 per cent in the year to June 2024. This was less than the Reserve Bank and most commentators were expecting. It is getting close to the top of the bank’s policy target range of 1-3 per cent. The CPI for the June quarter 2024 was only 0.4 per cent. That gives an annualised rate of just 1.6 per cent, which is below the mid-point of the reserve bank’s policy range.
Peter Nicholl
Based on this positive news, many commercial banks didn’t wait for the reserve bank to start lowering interest rates, they started lowering their mortgage and deposit interest rates themselves. It is interesting that as recently as February this year, some of those same banks were predicting that the reserve banks would raise their official cash rate at least one more time.
They have had a sharp change in their outlook. Is this change justified? It is certainly justified to believe that the reserve bank won’t raise the cash rate further. But there are still some elements in the CPI picture that may cause concern. The main one is that most of the downward pressure in New Zealand’s inflation rate was due to downward pressure on prices from overseas. Inflation in tradeable inflation was only 0.3 per cent in the year to June 2024. On the other hand, non-tradeable inflation, which is the inflation we are producing within New Zealand, was 5.4 per cent for that year, and had fallen only marginally from 5.8 per cent in the year to March 2024. This should worry the reserve bank.
It could worry the bank enough that they don’t lower the OCR at their next review on October 9 and instead wait to see if there is more downward movement in non-tradeable inflation when the figures for the September quarter CPI come out.
One other reason that they may wait until their OCR review on November 27 is that by themselves to pre-announce dates for reviewing their OCR, they have locked themselves into a very odd situation in October. Monetary policy is at a turning point with the question now being when will the turn actually occur?
The information that will be contained in the September quarter CPI will be important, possibly critical, for this decision. But the September quarter CPI data will not be released by the Department of Statistics until October 16 – seven days after the pre-announced date for the next OCR decision.
This seems very odd to me. Policy-making should be influenced by economic conditions and changes in these conditions don’t fit neatly into pre-announced timetables. A policy decision on interest rates is needed now. Given the reserve bank feels they have to wait until October 9, the commercial banks have decided to step in and take action. It is the commercial banks rather than the reserve bank that have decided that the turning point in New Zealand’s monetary policy cycle will be now.
So far, the reserve bank has not said or done anything to indicate they are unhappy with the commercial banks reducing interest rates. They have done this on at least one occasion in the recent past so I hope they are being consistent and we can interpret their silence to mean they do not object to mortgage rates coming down and that the turning point for monetary policy has arrived.
