Economic Weekly: Another global risk to add to the pile

The RBNZ duly delivered the first lift in the OCR in seven years last week. Markets barely blinked and, indeed, no one should have been particularly surprised. It was one of the more well-signalled and widely expected RBNZ actions in some time. The accompanying Statement was also (commendably) clear. The plan is to keep going with stimulus removal. Things can change of course, and the economic pain and uncertainty associated with COVID restrictions was rightfully acknowledged. But, for now, we’re left with little reason to change our existing views on the OCR (another 25bps lift in November), fixed mortgage rates (slow trend higher to continue), and wholesale interest rates (ditto).

The more significant economic news last week was global. Parking COVID for a moment (ah, if only), soaring global energy prices captured most of the attention. They’re further muddying the growth/inflation implications of the global recovery, something that naturally has implications for NZ.

Since the start of September, crude oil prices have jumped around 15%, to hit 7-year highs around US$80/barrel. US and UK natural gas futures are both up in the order of 65-70% since September. Coal prices are not far behind. As with many of the other sources of global inflation at present, supply bottlenecks are a major factor. The key question is how long these price spikes will last. No one is really sure, but they’re coming at a difficult time. Central banks globally are already walking a tightrope, balancing higher inflation against a still-fragile economic recovery. The energy price spike will make the balancing act even more difficult, giving another leg-up to inflation concerns while taking some of the shine off global growth momentum as consumers pull back on spending to pay higher petrol/heating bills.

We think there’s enough of a buffer from huge pent-up savings to keep the global recovery on track. But, in the least, higher energy prices are another blow for those in the ‘inflation is all transitory’ camp. And, indeed, global central banks continue to edge towards following the RBNZ’s lead in starting to reduce stimulus. Global interest rates turned noticeably higher last week. US 10-year yields are at the highest level in four months, and this helped pull NZ 10-year wholesale rates up to 2½ year highs.

Of course, there is a silver lining in all this for NZ. Soaring commodity prices haven’t just been limited to energy. As our own commodities scribe recently flagged, NZ commodity export prices are at all-time highs. The combination of solid global prices and a flat-to-falling exchange rate is proving to be a boon for farm-gate returns in NZ.

Inflation will remain in focus this week, particularly with the September read on US inflation expected to print above 5% on Wednesday night. In NZ, there’s a couple of key events to keep an eye on. First, the preliminary read on October ANZ business confidence will likely show underlying business sentiment taking a knock from September. But key for us will be how labour market and inflation indicators fare. Finally, we’d of course be remiss not be mention this afternoon’s update on NZ COVID restrictions.  Stay safe.