Reserve Bank Governor Adrian Orr is highly likely today to fire another shot into Labour’s re-election chances when he unveils what most pundits are picking will be a 0.5 per cent increase in the Official Cash Rate.
That will take the New Zealand OCR to 3.5 per cent, while Australia, whose Reserve Bank yesterday raised its cash rate target by only .25 per cent, will end up nearly one per cent lower at 2.6 per cent.
That will surely incite the Opposition here to highlight that difference and its impact on mortgage payments.
They may be heartened by reports last night of a Roy Morgan Poll, which showed Labour had slumped to 29.5 per cent. National has moved up very slightly by half a per cent to 36 per cent.
The big movers have been the small parties; the Greens up 3.5 per cent to 12.5 and ACT up two per cent to 12.5.
The Maori Party has come off its five perc cent high from the last poll to drop back to 3.5 but add Labour, the Greens and the Maori Party together and the centre left block would have 45.5 per cent while the centre right — National and ACT — are narrowly ahead on 46 per cent.
When margins are this fine, things like interest rates, particularly mortgage rates, start to become critical.
Any hope Orr might not move by half a per cent went out the window yesterday when the New Zealand Institute reported a modest increase in business confidence against a background of rising prices, albeit that the rate of the rise is beginning to slow.
The problem facing the Government is that things in the economy are going (comparatively) a little bit too well.
The latest NZIER Quarterly Survey of Business Opinion (QSBO) suggests that businesses are still feeling downbeat in the September quarter, but they are also starting to see the light at the end of the tunnel.
On a seasonally adjusted basis, a net 42 per cent of businesses surveyed expect deterioration in general economic conditions over the coming months – a considerable decrease from the 62 per cent in the June quarter.
Labour remains the top primary constraint for businesses, with the proportion reporting finding Labour as their primary business constraint increased from 37 per cent to 43 per cent.
However, shortages for both skilled and unskilled Labour are easing from the historically high levels of the past year.
This suggests wage growth is likely to ease over the coming year, as the reopening of international borders allows more firms to employ workers from overseas.
These developments are flowing through to moderation in inflation pressures.
In the September quarter, the proportions of businesses reporting higher costs and raising prices both fell.
“Although the economic outlook is highly uncertain, these results support our view that annual CPI inflation will ease over the coming year,” the Institute said.
Looking at the survey, Westpac economist Satish Ranchod said that the economy still looked overheated on the inflation front.
“We did see a slight easing in the number of businesses reporting that their operating costs have increased,” he said.
“However, that was an easing from the multi-decade high reached last quarter.
“We’re still looking at a picture of rampant inflation pressures, and businesses aren’t expecting any relief over the coming months.
“That picture will be reinforced by the recent plunge in the New Zealand dollar and likely rise in import costs over the coming months.”
Today’s report doesn’t alter our expectations for a 50 basis points hike from the RBNZ at Wednesday’s OCR decision, and we also expect them to signal that there will be more to come.
Kiwibank economists Jarrod Kerr, Jeremy Couchman and Mary-Jo Vergara, pointed to one possible upside for the Government in the current situation; rising wages.
“Much of the cost pressure experienced by firms continues to emanate from the labour market,” they said.
“Demand for Labour is holding up well, all things considered.
“A net 13% of firms intend on lifting headcount in the coming quarter.
“ As a result, finding staff remains a bugbear for NZ businesses.
“ There remains a net long-term outflow of people from Aotearoa, which is adding to the difficulty in finding staff.
“And we don’t expect a net migration inflow to occur until next year as the flow of people across our border takes time to normalise.
“Skilled labour shortages are particularly acute in industries such as construction.
“The main outcome is rising wage growth.”
ANZ economist Miles Workman said the NZIER report was still showing strong forces pushing inflation.
“Fair to say, the signals on capacity and inflation pressures are most important for the RBNZ right now, and this data (the NZIER survey) should still be making them very uneasy,” he said.
“Capacity constraints easing at a snail’s pace isn’t enough to get core inflation back to an acceptable level in an appropriate time frame.
“And if monetary tightening isn’t getting the traction it needs to, the RBNZ will just have to keep on going.
“We expect another 50 basis points hike tomorrow (today), and see the OCR reaching 4.75% by mid-2023 (provided the wheels don’t completely fall off the global economy)”
And the fate of the global economy remains a worry.
A move to raise rates today by the Reserve Bank will come in the same week that a UN agency, the United Nations Conference and Trade and Development (UNCTAD), has warned in its annual report that continuing tightening of monetary policy could lead to recession.
“Monetary tightening poses additional risk to the real economy and the financial sector: given the high leverage of non-financial businesses, rising borrowing costs could cause a steep increase in non-performing loans (NPLs) and trigger a cascade of bankruptcies,” the report said.
“With direct price and markup controls ruled out as politically unacceptable, and if monetary authorities are unable to stabilise inflation quickly, governments might resort to additional fiscal tightening.
“This would only help precipitate a sharper global recession.”
That is the fine line that Orr walks, but for the Government, behind in the polls and with only about 12 months to the election to go, any rise is going to be a worry.
