Reserve Bank must now consider employment alongside inflation

A new Policy Targets Agreement requires Reserve Bank “monetary policy to be conducted so that it contributes to supporting maximum levels of sustainable employment within the economy” as well as still keeping inflation between one and three percent.

I have no idea how the Reserve Bank will influence employment levels.

It could be tricky if the objectives clash.

Grant Robertson: New PTA requires Reserve Bank to consider employment alongside price stability mandate


Finance Minister Grant Robertson and incoming Reserve Bank Governor Adrian Orr today signed a new Policy Targets Agreement (PTA) setting out specific targets for maintaining price stability and a requirement for employment outcomes to be considered in the conduct of monetary policy.

The new PTA takes effect from 27 March 2018, when Adrian Orr starts his five-year term as Governor. The new PTA has to be signed under the existing provisions of the Reserve Bank Act 1989, which has price stability as the Reserve Bank’s primary objective.

The agreement continues the requirement for the Reserve Bank to keep future annual CPI inflation between 1 and 3 percent over the medium-term, with a focus on keeping future inflation near the 2 percent mid-point.

The new PTA now also requires monetary policy to be conducted so that it contributes to supporting maximum levels of sustainable employment within the economy.

“The Reserve Bank Act is nearly 30 years old. While the single focus on price stability has generally served New Zealand well, there have been significant changes to the New Zealand economy and to monetary policy practices since it was enacted,” Grant Robertson said.

“The importance of monetary policy as a tool to support the real, productive, economy has been evolving and will be recognised in New Zealand law by adding employment outcomes alongside price stability as a dual mandate for the Reserve Bank, as seen in countries like the United States, Australia and Norway.

“Work on legislation to codify a dual mandate is underway. In the meantime, the new PTA will ensure the conduct of monetary policy in maintaining price stability will also contribute to employment outcomes.”

A Bill will be introduced to Parliament in the coming months to implement Cabinet’s decisions on recommendations from Phase 1 of the Review. As well as legislating for the dual mandate, this will include the creation of a committee for monetary policy decisions.

“Currently, the Governor of the Reserve Bank has sole authority for monetary policy decisions under the Act. While clear institutional accountability was important for establishing the credibility of the inflation-targeting system when the Act was introduced, there has been greater recognition in recent decades of the benefits of committee decision-making structures,” Grant Robertson said.

“In practice, the Reserve Bank’s decision-making practices for monetary policy have adapted to reflect this, with an internal Governing Committee collectively making decisions on monetary policy. However, the Act has not been updated accordingly.”

The Government has agreed a range of five to seven voting members for a Monetary Policy Committee (MPC) for decision-making. The majority of members will be Reserve Bank internal staff, and a minority will be external members. The Reserve Bank Governor will be the chair.

 

Reserve Bank Governor-Designate, Adrian Orr, said that the PTA recognises the importance of monetary policy to the wellbeing of all New Zealanders.

“The PTA appropriately retains the Reserve Bank’s focus on a price stability objective. The Bank’s annual consumer price inflation target remains at 1 to 3 percent, with the ongoing focus on the mid-point of 2 percent.

“Price stability offers enduring benefits for New Zealanders’ living standards, especially for those on low and fixed incomes. It guards against the erosion of the value of our money and savings, and the misallocation of investment.”

Mr Orr said that the PTA also recognises the role of monetary policy in contributing to supporting maximum sustainable employment, as will be captured formally in an amendment Bill in coming months.

“This PTA provides a bridge in that direction under the constraints of the current Act. The Reserve Bank’s flexible inflation targeting regime has long included employment and output variability in its deliberations on interest rate decisions. What this PTA does is make it an explicit expectation that the Bank accounts for that consideration transparently. Maximum sustainable employment is determined by a wide range of economic factors beyond monetary policy.”

Mr Orr said that he welcomes the intention to use a monetary policy committee decision-making group, including both Bank staff and a minority of external members.

Minimum wage and potential unintended consequences

One of the biggest risks with changes promised by the incoming Government is the rapid increase of the minimum wage, from the current 15.75 per hour to $20 by 2021.

There’s no argument that many workers struggle on low wages, so increasing them is a laudable aim, but there is real potential for unintended consequences, and it won’t be known what impact they might have until they happen.

Increasing wage costs for businesses means those costs of goods and services will need to be passed on to customers. It is also likely to result in lower employment to try to reduce costs where recovery of the costs isn’t possible.

The biggest problem may come the pressure on all wages to rise. Those currently earning $3-5 above the minimum wage will still want to be paid more.

And there are signs of this pressure already – NZH: Minimum wage threatens economy: Employers and Manufacturers Association

Campbell said businesses would be worried by what the cost increases would mean for them.

His comments are starkly contrasted by those of First Union, whose general secretary Robert Reid said in a statement the incoming Government acknowledged the huge economic pressure working people – especially low paid workers – had been facing for the last decade.

“Today marks a sea change. We now have a Government showing respect for working people.”

The union was especially pleased to see the minimum wage will move to $20 per hour by 2021.

“Business leaders often say the main thing they need is certainty. This announcement gives them that certainty and now they need to start factoring in significant wage increases for all their workers over the next three years.”

Reid added that the era of 2 per cent a year wage offers was over and employers would need to be looking at annual increases of about 8 per cent to stay at or ahead of minimum wage rises.

It was obvious this would happen – but an increase of all wages by 8%, well ahead inflation, will push up inflation, and possibly increase unemployment.

There is no way of knowing how much bumping up the minimum wage will have, but unintended consequences are certain, it’s just unknown to what degree they will impact on employment and the economy.

Inflation down to 1.7%

Inflation over the last quarter was flat and the annual rate has dropped from a recent high of 2.2% to 1.7%.

RNZ: Inflation slows to 1.7 percent

The consumer price index (CPI) was flat in the three months ended June, slowing the annual inflation rate to 1.7 percent from 2.2 percent, Statistics NZ said.

A fall in fuel costs and airfares offset higher prices for household basics such as food, rent, and power, while the housing boom lifted the price of a new house.

One of the main drivers of the lower annual rate was cheaper telecommunications products and services.

The relative strength of the New Zealand dollar also helped dampen inflation by making imported goods cheaper.

Housing rentals rose slightly (up 0.4 percent), held down by a 1.6 percent fall for Canterbury.

Prices for newly-built houses, excluding land, rose 1.8 percent this quarter.

Seasonally lower domestic airfares (down 14.5 percent), lower petrol prices (down 1.9 percent or and average 4 cents a litre), and seasonally lower prices for car rentals contributed most to a drop in overall transport costs.

Higher vegetables prices pushed food inflation up 0.7 percent in the June 2017 quarter to 2 percent for the June 2017 year. Vegetables prices rose 19 percent for the year, with higher prices for lettuce, kumara, and broccoli.

The inflation numbers were below market expectations and Westpac acting chief economist Michael Gordon said that would dampen any notion of interest rate rises by the Reserve Bank in the foreseeable future.

Good news for people with mortgages and other types of loans.

Lack of wage growth is not so good for wage earners.

Inflation since 1990:

  http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-inflation

Poor reports on poorest households

Things may not always be quite as they seem at first glance.

Stuff: Poorest Kiwi households face much larger cost of living increases than big spenders

A recent jump in the cost of living hit the lowest paid Kiwis much harder than the big spenders, new figures show.

In the first three months of the year, inflation for all households jumped 1 per cent, bringing annual inflation to 2.2 per cent, the highest since 2011.

On Thursday Statistics New Zealand released the household living-costs price indexes, giving a breakdown of how price increases hit different groups.

The figures showed that the rise hit the lowest earners the hardest. Beneficiaries saw their overall costs rise by 1.4 per cent, almost three times the increase faced by the 20 per cent of households with the highest spending.

That sounds like a significant disparity for poor households. But what comes next changes the perspective somewhat.

While overall inflation rose partly because of increases in the cost of fuel and food, Statistics New Zealand said inflation was especially high for beneficiaries because a greater proportion of their income went on tobacco. Each January, the excise on tobacco products increases by 10 per cent.

So inflation went up more for poor households that used a significant amount of tobacco.

Whether tobacco taxes should keep going up is another matter.

But one of the key pieces of information about households was not revealed until well into the item.

“Higher costs for cigarettes and tobacco had a greater effect on beneficiaries,” Statistics New Zealand’s Nicola Growden said.

“About 5 per cent of their spending went up in smoke, proportionally more than most other types of households spent.”

Predominantly Maori households faced a 1.3 per cent increase in inflation – higher than average – while superannuitant households faced a 0.9 per cent increase, slightly below average.

Maori are over represented in poorer households, and also smoke much more than non-Maori.

And superannuitants are also less likely to be smokers as they don’t die as young.

Meanwhile Labour’s finance spokesperson Grant Robertson put out this on the same topic.

Cost of Living increases hit those with least the hardest

Posted by on May 04, 2017

Beneficiaries, superannuitants and people on the lowest incomes continue to bear the brunt of higher inflation, according to the latest data from Statistics NZ, says Labour Finance spokesperson Grant Robertson.

So he’s also referring to the latest inflation data from Statistics New Zealand.

“Since National came to office (December 2008) inflation for those on the lowest 20 per cent of incomes has increased by 17 per cent. But for those with the highest 20 per cent of incomes, it has increased by only 10 per cent.

“The cost of core inflation items like food, fuel and rates are all soaking up an increasing chunk of the incomes of the lowest paid people. These are costs that Kiwis can’t avoid – and they are rising faster than other costs in the economy.

No mention of one of the most significant factors, tobacco use and tax.

“High housing costs, rising rents are all eclipsing the mediocre wage increases for New Zealanders. Yesterday the latest wages data showed that 67 per cent of Kiwis got a pay rise of less than inflation, which means they effectively are working harder for less.

“Rather than address these problems National doesn’t have a plan for the economy, to help boost our notoriously low productivity, nor to help Kiwi families.

“Only a Labour-led Government will help address the growing cost of living crisis in New Zealand for low income Kiwis and we’ll deliver the shared prosperity that all New Zealanders deserve,” says Grant Robertson.

Robertson either didn’t pick up on the tobacco part of the statistics, or he deliberately left it out of his post.

But the Stuff item quoted him in their article, and also managed to, eventually, highlight the impact of tobacco on poorer households.

 

Inflation up to 2.2%

After years of very low inflation the latest 12 month CPI inflation (year to end of March) has risen to 2.2%, with nearly half of that in the last quarter.

Interest.co.nz: CPI inflation of 2.2% in year to March beats expectations, with housing-related and transport prices on top of cigarette tax rise driving it

Prices rose at their fastest rate in five years during the last 12 months as housing-related costs such as new builds and rentals, transport costs and a cigarette tax hike helped push up the cost of living.

Consumers Price Index (CPI) figures released by Statistics NZ showed an annual increase of 2.2% in the year to March 2017. This was above market expectations of a 2.0% rise. CPI inflation in the March quarter was a whopping 1.0%, adjusted for seasonal effects.

This was significantly above expectations by the Reserve Bank in February, but most of the jump is due to two things, petrol, and cigarettes and tobacco which were bumped up by an increase in excise tax.

The cost of house building and rents were also a significant factor.

Indeed, there was a catch in Thursday’s figures. Excluding the impact of petrol, cigarettes and tobacco, the CPI only rose 1.5% during the year to March 2017.

Tradeable prices (imports and local goods and services in competition with imports) rose 1.6% over the year, its highest since September 2011. Non-tradeable prices (such as newly built houses and other goods and services that do not face foreign competition) rose 2.5%.

Inflation is still quite low and well within the range the Reserve Bank is supposed to try and keep it.

This might put pressure on the Official Cash Rate but economists predict that is unlikely to go up again until well into next year.

ASB economists said they still expected the next OCR increase to come in late 2018. “We expect the current lift in headline inflation will be temporary, as does the RBNZ, given there were several ‘one-offs’ in Q1,” they said. “Nonetheless, we expect annual inflation to hover around 1.5% and 2% over the next few years.

So it’s a bit unusual compared to what we’ve had over the last few years but it doesn’t seem anything to get very worried about.

Inflation up, no one cares

The latest Consumer Price Index is out today for the December quarter and it shows that inflation is on the rise – and no one really seems to care about it.

The quarterly rise was 0.3%, which gives an annual rate of 1.3%, the first time it has been in the target range for two years. This is still quite low.


The consumers price index (CPI) inflation rate was 1.3 percent in the year to the December 2016 quarter, Statistics New Zealand said today.

“This is the first time in over two years that price increases for household purchases have been over 1 percent”, prices senior manager Jason Attewell said. “Household price inflation is up from a historical low of 0.1 percent for the December 2015 year”.

Prices for tradable goods and services were 0.1 percent lower in the year to December 2016. Despite higher quarterly prices, petrol and international airfares were cheaper than a year ago. Non-tradable goods and services showed a 2.4 percent increase, influenced by housing-related price increases.

Housing-related prices continued to increase, up 3.3 percent in the December 2016 year. Prices increased for newly built houses excluding land (up 6.5 percent) and for housing rentals (up 2.0 percent).

“Housing-related prices in Auckland increased more than the national average, with new houses up 8.2 percent and rents up 3.2 percent from a year earlier,” Mr Attewell said.

inflationto2016q4

Quarterly prices rise 0.4 percent

The CPI rose 0.4 percent in the December 2016 quarter, following a 0.3 percent rise in the September 2016 quarter. After adjusting for seasonal effects, the CPI was up 0.7 percent.

“Higher prices for petrol, air fares, and new house builds were partly offset by lower prices for food and furniture,” Mr Attewell said.

Petrol prices made the largest upward contribution for the quarter, up 4.1 percent. The average price of a litre of 91 octane petrol in the December 2016 quarter was $1.82, up from $1.75 in the September quarter.

Food prices fell 1.2 percent in the latest quarter, with seasonally lower fruit and vegetable prices being partly offset by higher prices for dairy products.

Human error correction doubles inflation

After discovering a ‘human error’ Statistics New Zealand has adjusted the inflation rate for the year to September, doubling it to 0.4%.

Stuff: Rego error at Statistics NZ doubles inflation, complicates life for Reserve Bank

Human error has been blamed for a mistake in official figures about the cost of living, creating a new headache for the Reserve Bank on whether to cut interest rates.

On Monday morning Statistics New Zealand blamed a “manual processing error” for its decision to correct its estimate of the increase in inflation in the year to September, from 0.2 per cent to 0.4 per cent.

The mistake related to how much the agency believed the cost of licensing a small car – commonly referred to as registration or ‘rego’ – had dropped in the September quarter.

I’m surprised that one mistake on one class of car registration makes that much difference.

This change may complicate this weeks Official cash rate annoiuncement.

Although the correction may appear minor, and inflation remains below the official target, it adds weight to the arguments against the Reserve Bank lowering the official cash rate (OCR) on Thursday to a new all time low of 1.75 per cent.

Most bank economists were already questioning the need for a further cut even before the correction was announced.

“I still think the Reserve Bank shouldn’t be cutting rates,” Bagrie said.

“If it were me, I’d be biased towards holding [the OCR at 2 per cent]. But I think [the Reserve Bank’s] forward guidance has been so strong that they’re going to find it hard to step away [from cutting].

I’m not sure what difference it will make whether the OCR is lowered or not as banks have already indicated that mortgage rates are likely to go up anyway due to international rates.

 

Negligible inflation

The latest Consumer Price Index shows inflation at a negligible 0.2% for both the past quarter and the past year (to September).

This remains outside the Reserve Bank target range of 1-3%, as it has been for the past two years.

With mortgage interest rates at record lows many people will be benefiting from price stability, except for those wanting to enter the inflated housing market or having their rents pushed up.

Some see problems with ongoing low inflation rates but it’s a lot better than the days of rampant inflation.

Low inflation continues

Negligible inflation continues with the latest quarterly rate being 0.4%, and that is also the last 12 month rate.

This is a bit lower than expected and increases the chances of further interest rate cuts with the next announcement on that due on Thursday.

ODT: Inflation lower than expected

Statistics New Zealand noted higher petrol and housing-related prices were countered by lower prices for meat and domestic air fares.

Petrol prices showed the largest upward contribution, up 5.3% for the quarter, which followed declines in December and March of 7% and 7.7% respectively.

Housing and household utilities prices rose 1% for the quarter, influenced by higher prices for newly built houses, excluding land, which was up 2.1%. Electricity was up 1.8% and rentals for housing were up 0.6%.

Meat prices, down 2.7%, made the largest downward contribution for the quarter, followed by domestic air fares, down 9.9%. Domestic air fares have fallen 14% since the December 2015 quarter.

Inflation to June 2015 was also 0.4% (it went down 0.5% in the December quarter), down from 1.6% from 2014.

key-graph-inflation-since-1990

This hasn’t been updated with the latest quarter yet but shows the trend.

Very low inflation and record low interest rates (which are expected to drop further) means expenses are relatively low for people with mortgages, but those wanting to buy, first home buyers in particular, will be finding it tough with house price inflation continuing to run very high.

Inflation from 1920:

Inflation1920-2016

Those wanting to return to the good old days pre ‘neo-liberalism’ should consider the inflation rates through the 1970s and 80s.

OCR unchanged

The Reserve Bank has left the OCR at it’s record low today, as expected.

Official Cash Rate unchanged at 2.25 percent

Statement by Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today left the Official Cash Rate unchanged at 2.25 percent.

The outlook for global growth has deteriorated over recent months due to weaker growth in China and other emerging markets. Prices for some commodities, including oil, have picked up but remain weak.

Monetary conditions are extremely accommodative internationally, with considerable quantitative easing and negative policy rates in some countries. Financial market volatility has eased in recent weeks, but markets continue to watch closely the policy settings of major central banks.

Domestically, the economy is being supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. Dairy export prices have improved slightly, but are below break-even levels for most farmers.

The exchange rate remains higher than appropriate given New Zealand’s low commodity export prices. A lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector.

There are some indications that house price inflation in Auckland may be picking up. House prices remain at very high levels and additional housing supply is needed. Housing market pressures are building in some other regions.

There are many uncertainties around the outlook. Internationally, these relate to the prospects for global growth, particularly around China, and the outlook for global financial markets. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration, and pressures in the housing market.

Headline inflation remains low, mostly due to low fuel and other import prices. Annual core inflation remains within the target range. Long-term inflation expectations are well-anchored at 2 percent. However, as we have previously noted, there has been a material decline in shorter-term expectations.

We expect inflation to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build. Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.

New Zealand still has hardly any inflation and it’s expected to take until the first quarter of 2018 until it gets up into the target range:

CPIForecast