RBNZ Potential Catalyst Of New Inflationary Cycle

Trend Analysis indicates that the RBNZ battle to temper inflation that was primarily driven by COVID responses is now entering a new inflationary cycle. The new cycle appears to be underpinned by debt restructuring, primarily attributed to the extended retention of high interest rates.

Analysis of the debt planning of 5 of the 11 region councils, 4 of the 11 city councils, and 8 of the 50 district councils (based on publicly available records) reveals substantive restructuring of debt is directly driven by the RBNZ OCR. All of the councils evaluated are planning substantive increases to rates and costs that will flow on to rate payers.

Therefore, councils across New Zealand are planning their rates increases based on the continuation of high debt servicing levels and increasing debt requirements, exacerbated by the ongoing high interest rates.

The paradoxical result is that the RBNZ retention of higher level OCR to reduce inflation has now created a new inflationary cycle, primary driven by increasing rates, insurance, and business operating costs.

The catalyst for the new inflationary cycle is higher interest rates.

INFLATIONARY INDICATORS

The RBNZ is among a number of central banks still relying on CPI (consumer price index) as one of the primary inflationary indicators. Prior to the GFC, CPI and other inflationary measures were effectively identifying real inflation.

However, in the post COVID macro-economy, most markets proactively hide inflationary indicators.

Prices have clearly increased, but in addition goods delivered, the type and level of services, and manufactured products supplied to consumers have also seen reductions in volume, scope, size, and quality. Moreover, trend analysis shows these hidden indicators are not integral to interest rate settings.

In the case of the New Zealand OCR, it appears that the inflationary cycle may have shifted to a new debt driven inflation rather than consumer driven inflation.

GOVERNMENT TAX RELIEF

Trend analysis shows that the government proposed tax cuts, even if substantive, will be supplanted by the rises in costs of business and council operations.

Tax relief will have no measurable impact on the overall economy, as trends indicate the inflationary pressures from rates rises alone will offset such measures.

NEW INFLATION AND OCR

Newly presented inflationary pressures are driving many sectors and will result in continued cost rises directly due to the longevity of the rates rises.

The trends indicate that an immediate tempering of OCR must combine with an injection of government funding to offset regional and local debt. Otherwise, this new inflationary cycle will have a degrading impact on the overall economic engine.

Analysis indicates that one feasible method for stabilisation of the New Zealand economy will be a return to non-extreme approaches to economic drivers, specifically focused on tempering the OCR and overall debt restructuring.

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