New Zealand’s central bank may signal it’s willing to begin tightening monetary policy later this year as a slew of strong data suggest the economy is overheating.
The Reserve Bank will leave the official cash rate at 0.25% at its review Wednesday in Wellington, according to all 24 analysts surveyed by Bloomberg. But economists at the country’s four largest banks now predict the RBNZ will start raising rates in November, and they expect it to tacitly acknowledge that possibility in its statement.
“The RBNZ can tick all its boxes — inflation risks have flipped firmly towards it being too high for too long, and we think the labor market is at least at, possibly past full employment,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “We don’t need any more demand in this economy right now. I think it is overheating.”
Investors ramped up rate-hike bets last week after a survey of business opinion showed increasingly confident firms are passing on higher costs by raising prices. At the same time, considerable risks remain. New Zealand’s border is still largely closed to the outside world and a slow vaccination roll-out has left it vulnerable should Covid-19 breach its defenses.
The RBNZ’s Monetary Policy Committee, led by Governor Adrian Orr, will publish its decision at 2 p.m. in Wellington tomorrow. It is an interim review, not a quarterly Monetary Policy Statement, so no new forecasts will be published and Orr will not hold a press conference. In May, the central bank projected it would start raising rates in the second half of 2022.
New Zealand’s success in eliminating the coronavirus from the community has given its economic recovery a head-start, putting the RBNZ at the forefront of stimulus withdrawal in the wake of the pandemic.
It has already dialed down its quantitative easing bond buying to a current rate of just NZ$200 million ($140 million) a week, and several economists say purchases could end within months.
While some other central banks are also signaling an end to ultra-loose policies by tapering bond purchases, in Asia only the Bank of Korea has said that rate normalization is in the pipeline this year. By contrast, the Reserve Bank of Australia last week said it doesn’t expect to increase borrowing costs until 2024.
The economy is running hot amid a shortage of goods and labor and surging demand. Gross domestic product jumped 1.6% in the first quarter from the fourth, three times the pace forecast by economists, while the housing market continues to boom despite government efforts to curb property investment.
The unemployment rate fell to 4.7% in the first quarter, and economists expect data due July 16 to show the inflation rate almost doubled to 2.7% in the second quarter, nearing the top of the RBNZ’s 1-3% target range.
The central bank will want to be sure that faster inflation is becoming entrenched, and may be wary of putting upward pressure on New Zealand’s exchange rate by tightening policy much sooner than its peers, said John Carran, an economist at Jarden Group in Auckland.
“They need to take a bit more time to see how long these labor market pressures and other cost pressures develop and whether they are going to flow through into significantly higher wages,” said Carran. “I don’t think there is enough evidence to say the spike in inflation will persist, and to justify the RBNZ raising rates.”
But Craig Ebert, senior economist at the Bank of New Zealand in Wellington, said inflation will continue to track higher over the course of the year and the jobless rate will fall further. BNZ forecasts inflation reaching 3.3% in the fourth quarter and the unemployment rate dropping to 3.8% by mid-2022.
“It’s the outlook for inflation, and the labor market, that will end up forcing the bank’s hand on the OCR,” said Ebert. “While risks of economic disappointment lurk,” there are now “palpable threats imposed by an overheating local economy,” he said.
— With assistance by Garfield Clinton Reynolds
Restarting a sustainable, export-oriented economy – Business in Vancouver
Clean, sustainable products and services will be key to B.C.’s economic recovery | Chung Chow
This column was originally published in BIV Magazine‘s Trade issue.
As B.C. looks to restart its economy, the demand for our province’s clean and sustainable products and services is surging across a variety of sectors, demonstrating the key role that trade will play in our economic recovery.
Exports increased 24% year-to-date for April – that’s up $3 billion over the same time last year. It’s a big boost for the provincial economy, with a majority of our exports being commodities in great demand. Our stringent environmental standards in wood exports, burgeoning clean tech sector and high standards in labour protections mean that when other markets buy from us, they’re also contributing to a cleaner and more socially responsible global economy.
B.C. was committed to international trade long before the pandemic. It creates new opportunities for businesses, and more importantly, it creates good jobs and prosperity for people in B.C. When businesses export, they are more resilient. Access to more markets means they have a more diverse customer base and aren’t as impacted by fluctuations in their local economies.
We have a program perfectly designed to help small businesses get their goods and services to new markets. It’s called Export Navigator. This program offers businesses free expert guidance on exporting. Businesses get connected with an expert advisor who will help “navigate” them through the export process. It’s hugely beneficial, helping businesses reach new customers for the first time and making the process a lot easier along the way.
We continue to support B.C. businesses in other ways as well. For example, we developed a series of grant programs to meet their unique needs, making over half a billion dollars available in direct supports. The Launch Online program helps businesses improve their online presence to attract and keep customers and meet demand as online shopping hit new heights during the pandemic. The Supply Chain and Value-Added Manufacturing grant helps B.C.-based manufacturers in the aerospace, shipbuilding, food processing and forestry sectors recover and grow, supporting them to seek efficiencies to continually keep goods flowing into the marketplace.
From natural resources and agrifoods to manufactured goods and high-tech goods and services, B.C. has a lot to offer to the world. We are a responsible, low-carbon producer of natural resources and manufactured goods, and we are working hard to make sustainability a larger part of B.C.’s brand and our global competitive advantage. Our priority is to help B.C.-based businesses start up, scale up, access global markets and succeed in the highly competitive world marketplace. The more we export, the more new dollars we bring into B.C. and generate revenue that supports government investments in health care, education and critical infrastructure.
We stand behind the high-quality goods that B.C. has to offer to the world. Globally, companies large and small are increasingly applying environmental, social and governance filters to their investment decisions. We are committed to growing our economy in a sustainable way, and are working on a new trade diversification strategy that will provide us with the opportunity to develop an updated, forward-looking and ambitious approach that aligns closely with these principles, while ensuring that our exporting businesses are maximizing the opportunities afforded to them through Canada’s existing free trade agreements. Our recently announced Mass Timber Demonstration Program is an example of how we are advancing technologies that can showcase to the world the possibilities of building with a more sustainable and environmentally friendly product from B.C.
The pandemic leaves behind many lessons and creates a once-in-a-generation opportunity for B.C. to redefine itself. We know the pandemic is not impacting everyone equally, with women and visible minorities being disproportionately impacted. This is why we are committed to continuing to grow strong, robust industries that can provide good jobs for all of B.C.’s diverse populations.
Growth in trade will be a big part of our economic recovery, and as we transition through our restart plan, we will continue to engage with businesses, industry and key stakeholders to ensure we’re supporting their efforts to expand globally.
Our goal is to diversify our trade sectors to include not just our natural resources, but clean tech, high tech, agritech and advanced manufacturing. We need to support our exporters and encourage new exporters to expand our opportunities in global markets and strengthen our resilience.
We’re committed to invest in people and in businesses to restore economic growth and we are confident that the entrepreneurial spirit of B.C.’s business community will rise to the challenge as we work together to build a better future with meaningful jobs and a strong, sustainable economy for all.
Ravi Kahlon is B.C.’s minister of jobs, economic recovery and innovation. George Chow is the province’s minister of state for trade.
This column was originally published in the July 2021 issue of BIV Magazine. The digital magazine can be read in full here.
ECB Lifts Restrictions on Bank Dividends as Economy Rebounds – Bloomberg
The European Central Bank said it will lift a cap on how much lenders can return to shareholders with dividends and share buybacks, while urging them to remain cautious given uncertainty in the pandemic.
The ECB “decided not to extend beyond September 2021 its recommendation that all banks limit dividends,” the central bank said in a statement on Friday. “Instead, supervisors will assess the capital and distribution plans of each bank as part of the regular supervisory process.”
Reopening economy buoys B.C.’s job market – Business in Vancouver
B.C.’s labour market outperformed most of the country in June with a 1.6% (42,100-person) monthly gain and outpaced the national increase of 1.2%.
The province moved through steps 1 and 2 of its restart plan, highlighted by the reopening of restaurant in-house dining and larger organized events, travel and other recreation. The labour market has fully recovered employment losses from the previous two months, exceeding pre-pandemic levels by 0.6%. The latter marks the best performance among all Canadian provinces, reflecting shallower economic restrictions from the pandemic, solid performances in the commodities and technology sectors and a robust housing market.
However, full-time work has similarly lagged, with levels 1.6% lower than in February 2020, while part-time work rose 9%. B.C.’s unemployment rate fell to 6.6% from 7% in May and marked the lowest level since the pandemic began.
Metro Vancouver performance was consistent with employment growth of 1.5%, although unemployment remained higher at 7.4% of the labour force.
There was strong rehiring for accommodation/foodservices (up 12%) employees as dining restrictions were largely lifted. This contributed half of the net monthly increase. Significant gains were also recorded in finance/insurance/real estate (up 4.1%), health care/social assistance (up 3%) and business/building/other support (up 5%). Gains align with broader business and office reopenings. A drop in resource employment and construction were partial offsets to services-driven growth.
Hiring momentum will continue with Stage 3 of the restart plan underway, which allows for larger events, fairs and trade shows, reopenings of casinos and normalization of fitness classes and gyms, while domestic tourism partly offsets international travel restrictions.
The Lower Mainland’s housing frenzy continued to cool through June as affordability erosion and satiation of demand pulled forward by the pandemic cut sales. Meanwhile, both buyers and sellers are likely taking a step back to pivoting attention to other activities as social restrictions ease.
Multiple Listing Service sales spanning Metro Vancouver and Abbotsford- Mission (Lower Mainland) reached 6,007 units last month. While still up a lofty 46% from a year ago, this is compared with a 217% increase in May. •
Bryan Yu is chief economist at Central 1 Credit Union.
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