RBNZ played a straight bat - no hike, no cut - yet

0:00Reserve Bank Governor Anna Bremen spoke to journalists yesterday about higher inflation in the medium term. So what we are looking at right now is that the fact that fuel prices is already going up, that we're caused headland inflation to go up, but with higher fuel prices and other inputs into production like higher fertilizer costs, that will cause firms to face somewhat higher cost pressures. So we'll be looking into whether they pass on those costs to consumers or whether they expect to absorb them because they expect this to be passing over the medium term. But importantly, that's what we call first-round indirect effects. But very importantly, we will also watch out for what we call second-round effects. So that is if we see anything that threatens inflation expectations to become de-anchored or if we see a wage-price spiral going forward. And if we see that, then monetary policy will have to react to stop that from happening.

1:04In terms of medium term, we usually think about the next 18, 24 months. There's no exactness of that, but say over the coming two years. I'm joined now by Bernard Hickey, independent commentator from the Kaka. Bernard, what do you make of yesterday's Reserve Bank moves there? I mean, what was the point of that whole conversation? Yeah, I mean, she needed to come out and say how the Middle Eastern crisis was going to affect the New Zealand economy and how the Reserve Bank thought about it. And she did play a very conventional, straight bat, you know. If you were explaining cricket to her, you'd say you'd make a great opening bat because she wasn't flashing her blade at all. She's saying, I don't want to hike right now and I don't want to cut right now. Let's just wait and see what the impact will be. She does say there's going to be some stagflation, higher inflation, lower growth. But she had an opportunity to hose down some of the market expectations for significant rate cuts over the next year or so. Remember, markets are now saying that there could be three rate cuts before the end of the year.

2:07Now, she did hose down the ones that were saying we could have a rate hike early next year. Yeah. And early next month. And that's good, but still markets are still saying rate hikes later this year. And mortgage rates have been increasing. So we've seen the same kind of picture playing out a little bit that we saw at the end of Christian Hawkesby's tenure. At the end of last year, where markets kind of got over their skis a little bit, got ahead of where the Reserve Bank was actually going. And yet that hit households effectively and businesses with increased lending costs. Are we likely to see that same pattern playing out now and will people blame the Reserve Bank if that happens? Will they blame the crisis? Yeah, that's the problem for the Reserve Bank. They don't want the economy to slump back into a hole. And they also don't want to suggest there's going to be another person inflation. So it's a very tough job to walk that line. But we have seen banks put up their fixed mortgage rates because of this move in wholesale rates.

3:08And if the Reserve Bank really wanted to put a dampener on that, she could have come out yesterday and said, right, we're not having any rate hikes any time soon. All of this expectation of rate hikes, let's settle that down. As she did just before Christmas, remember the Reserve Bank got a bit surprised. I think about how aggressive the markets got in pushing up wholesale rates. And the same again now. I remember the markets are saying two rate hikes before the election. And that's going to be tough for a lot of people who were planning to buy a house or increase their loan or buy a car, maybe an electric car. And that is something she'll have to watch. Thinking, I suppose, about businesses and how they reacted to this. Her picture really was an 18 to 24 month medium term. That's where they're worried about where the costs showing up. The wage, price, spiral, reactions as businesses price up and so on. What was the message that a business should be taking from that? Get in quick and push your prices up now or do the right thing I suppose by the economy?

4:10Yeah, I mean, she's saying I hope that people don't pass on those prices. But remember, during the inflation spike of 2022 and 2023, there are a lot of businesses in New Zealand who maybe didn't have the competitive pressure that they should have. We know about fuel, about banking, insurance, supermarkets. And those market structures haven't really changed. They're quite concentrated places, aren't they? And they have a lot of market power as we know, right? So you'd expect that they will just basically take the ball and run with it? Yeah, and when you look at the correlation between diesel prices and what happens with consumer price inflation, it's very close. So diesel really is the fuel that runs the economy. And when that goes up and remember, we're talking about a doubling in the wholesale price. That is going to hit small businesses, transport operators. It'll flow through into all prices. Her concern is making sure it doesn't flow through for a third time, if you like. And people look around and go, hmm, the price just went up. I better put my price up, even though it's got nothing to do with the price of

5:10diesel. So while we were sort of seeing yesterday, a political reaction to the immediate short-term, the election basically, and saying we were going to try and help out target it in a targeted way, the homeowners and householders and workers that are most directly affected, there was nothing in there for businesses was there. There's nothing in there for the sole trade of plumber who's now facing a higher cost on diesel and maybe paying more for pipes as well because of the feedstocks for the plastics. Nothing in there at all. Is that the missed opportunity really to get ahead of that inflation spike? Yeah, I mean, the government and the Reserve Bank would argue, well, we're not in a COVID style situation where we have to throw the kitchen sink at it. But you know, it could be quite difficult in three or four weeks time if we are running out of diesel. And that's when you'd look to do things like cut interest rates or give subsidies, wage subsidies to businesses, but the government's not there yet. They could have, and in previous crises, other governments have, but this government is saying

6:11we can't afford it. And that means you're on your own a bit as a business, and if you've got some money, you're not going to get that $50 a week, and that is going to cool spending in the economy as well.