New Zealand drowning itself in a sea of red tape - Roger's Weekly FX Market Commentary 5 June 2022

Summary of key points: -

- NZ dollar sustaining its upward momentum?

- RBNZ “Remit” review needs to be broader in scope

NZ dollar sustaining its upward momentum?

The NZD has sustained its recovery against the US dollar over the last three week, albeit not without some wobbles. The NZD/USD exchange rate traded to a high of 0.6575 on 3 June, however it has since corrected back to 0.6515. Daily movements are being determined by the fortunes of US equity markets, that in turn seem to be driven by investor sentiment/expectations as to whether the Federal Reserve will need to do more monetary policy tightening to rein-in inflation (negative for equities and the NZD), or that they have done enough as evidence emerges that US inflation has already peaked (positive for equities and the NZD). Whether US inflation has peaked, or not, is therefore directly transferred through to the value of the US dollar. The US dollar index has stopped increasing over recent weeks and is now stabilising between 101 and 103 after reaching a 105 high in mid-May. The FX markets are now sitting on the fence in respect to whether US inflation has peaked. The markets are now not prepared to push the US dollar higher still, however they do not, as yet, have the economic evidence to aggressively sell it either. It will require emerging US economic data to be weaker than forecast to convince the US dollar bulls to unwind their long USD positions and become sellers.??

It was expected in some quarters that the May Non-farm Payrolls employment data (released last Friday 3rd June) could have been the first glimmer of weaker than expected US economic data. However, as it transpired, the increase of 390,000 new jobs was above the prior forecasts of 325,000. The next focus for the markets is the US CPI inflation data for May being released Friday 10th June. A monthly inflation increase below the +0.70% expected would reduce the annual rate of inflation to below its current 8.30% level. Would that be sufficient to convince the currency markets that US inflation has peaked? Time will tell. However, lead-indicators such as plummeting consumer confidence measures suggest that the dominating retail/services part of the US economy must soon lose some momentum.

The NZD and AUD exchange rates are positioned to react positively to a likely 0.50% hike in Australian interest rates on Tuesday 7th June when the Reserve Bank of Australia (“RBA”) make their interest rate decision. The Australian dollar has already recovered 50% of its April/May sell-off from 0.7600 to 0.6800 against the USD. At 0.7200 the AUD/USD spot rate has now broken up through its 30-day moving average line and a close above 0.7250 will see it above its 90-day moving average (refer chart below). A more strident RBA on Tuesday should result in further AUD gains and generate confirmation of its positive technical/chart directional picture, on top of Australia’s very positive economic story. Where the AUD/USD rate goes, the NZD/USD rate will diligently follow, and that direction is clearly upwards.??

RBNZ “Remit” review needs to be broader in scope

Over the next nine months the RBNZ are conducting the five-yearly review of their “Remit” for managing monetary policy (it used to be called the PTA – Policy Targets Agreement). The Remit dictates the rules of engagement and the dual objectives of the RBNZ’s Monetary Policy Committee to maintain low and stable inflation between 1%-3% and “supporting maximum sustainable employment”. Predictably, the review will take submissions and consider changes to objectives around the 1%-3% inflation limit, measuring what sustainable employment is, contemplating distributional outcomes and the omni-present climate change impacts. However, the author’s view is that the review’s scope should be broadened to incorporate some more basic and fundamental questions about inflation and its impact on our communities.?

New Zealanders should see the RBNZ as their independent guardian and watchdog, who preserves our consumer purchasing power and the value of our savings through maintaining low and stable inflation.?

To achieve that objective for the benefit of all, their inflation control “modus operandi” needs to be expanded to encapsulate “top of the cliff” pro-activity, not “bottom of the cliff” reactivity.?

Currently the RBNZ raise and lower interest rates to restrain/stimulate the economy to lower/increase inflation to guide it between the 1%-3% limits. It is all very reactive to current and forecast economic conditions and inflationary/price-setting behaviour in the economy.?

Instead, they should have the remit and objective to cut-off inflationary behaviour at its source in a much more risk-preventative, proactive way.?

In the private sector, the most efficient way to ensure low and stable inflation from the source is to have unfettered, dog-eat-dog, free-market competition in the economy. In the 30 plus years of dissecting the regular RBNZ Monetary Policy Statements, the number of times I have read the word “competition” in the documents would be less than 10. The RBNZ needs to be working with the Commerce Commission and Government to ensure that we reduce monopolistic price-setting behaviour that will always increase inflation or keep it higher than where it should be.?

As the history of the consistently high (3% to 4% pa) domestic “non-tradable” inflation tells us, the public sector has been out of control with their price-setting behaviour for a very long time. It is easy to blame the Local Government Councils or Government departments for always increasing their rates and user-pays’ prices. However, the real culprits are the politicians who ladle ever-increasing legislative and regulatory requirements/costs on to these bodies (and the economy) with no regard to who ultimately pays for it.?

To illustrate this major inflation problem, which the RBNZ appears oblivious to, I analysed one cost-line in our six largest Local Government Councils over the three years to 30 June 2021. To understand why local government rates have increased by 4% to 7% every year for the last decade, you must analyse what cost increases have occurred that requires them to recoup these through higher rates/charges on property owners and indirectly on renters. Local Government rates are a relatively minor 3.5% weighting in the CPI inflation index; however Council charges also impact construction costs which makes up most of the consistently high domestic inflation. Local Government cost blow-outs is just one example of public sector excess that sees New Zealand downing itself in a sea of red-tape that keeps domestic inflation high.

The Councils’ cost-line chosen was personnel/staff costs: -

• Wellington City Council – Personnel costs increased by 22% ($20 million) to $106 million over the three years (June 2019 to June 2021). The population within the Council’s boundaries was static at 210,000. Wellington may have had some challenges with earthquake-prone buildings, but that $7 million per year additional staff cost is close to 70 extra people per year at a salary of $100,000 each. What do all these additional people do? Council provided services such as rubbish collection, water, sewerage and local roads would all have been at the same level over the three years.??
• Auckland Council – Personnel costs increased by 11% ($97 million) to $1,716 million over the three years. The population increased by 3.7% to 1,715,500.??
• Christchurch City Council – Personnel costs were well under control in the garden city, static at $203 million per year over the three years. Population was also static at 390,000.?
• Dunedin City Council – Personnel costs increased by 15% ($9 million) to $66 million over the three years. Population was static at 132,000.?
• Hamilton City Council – Personnel costs increased 18% ($14 million) to $91 million over the three years. Hamilton’s population increased by 6% to 178,500, so some justification for additional staff.?
• Tauranga City Council – Personnel costs increased by 27% ($17 million) to $80 million over the three years. Again some justification for more Council staff as their population increased by 9% to 155,000.?

All these Councils (except Christchurch) have either chosen to or been forced to hire additional staff to undertake additional legislative and regulatory requirements (e.g. highly contestable RMA processes) imposed on them. Ever increasing rates bills are the result. Increased rates may be justified if there were increased Council services on the other side, but that does not appear to be the case.?

It is time someone stopped this bureaucratic nonsense that is hurting household finances and well-being throughout New Zealand. Perhaps, at this October’s local government elections we will see a change where ratepayers vote to say, “no more”.?

If the RBNZ are our true guardians of inflation, they would be strongly advocating that the politicians have to meet a strict “non-inflationary test” on every piece of legislation/regulation they pass. How else do you control this excessive and unfathomable price-setting behaviour?

This document has been prepared by Roger Kerr of Barrington Treasury Services NZ Limited (“Barrington”). The views expressed are Roger's personal opinions. Whilst all reasonable care has been taken to ensure the facts stated are accurate and the opinions given are fair and reasonable, neither Barrington nor any of its directors, officers or employees shall in any way be responsible for the contents. No liability is assumed by Barrington, its directors, officers or employees for action taken or not taken on the basis of this document.