MNI INTERVIEW: Migrant Demand Poses Rates Risk-RBNZ's Conway

The changed makeup of New Zealand immigration means the demand shock from arrivals now comes with a greater delay, potentially presenting an upside risk to the Official Cash Rate in 2024 if levels continue to increase beyond expectations, the Reserve Bank of New Zealand Chief Economist Paul Conway told MNI.

“Traditionally, we thought the demand effects come first and then we get those positive supply effects in the labour market, but because the labour was so tight, we think that's around the other way,” he noted. "There's reasons to believe the nature of migrants has changed. They are from different demographics, different countries of origin. It's reasonable to ask ‘well, maybe they're having a different economic impact?’”

The MPC held the OCR at 5.5% last week, its fifth consecutive pause. At a press conference following the publication of the November Monetary Policy Statement, Governor Adrian Orr noted higher population levels had driven the increase in total spending across the economy, a departure from the Reserve's August view that the effect of higher levels was "uncertain."

Conway noted per capita consumption and overall consumption had diverged, with the former slowing considerably. “On an aggregate basis, there's still strengthening because there's just more people in the economy – more economic activity in the economy,” he noted. The higher migration flows added to the cost of housing, which directly feeds into the CPI calculation, he explained. “So we’ve really seen those housing components add to our CPI index compared to other countries where migration isn’t playing such an important role.”

Conway noted a stronger housing market and spending in H1 2024 could prove "problematic" as the window for absorbing greater demand pressures had narrowed. Stronger domestic demand due to higher than anticipated migration was a key risk next year, he added.

FISCAL UPGRADE

The RBNZ also pointed to increased government spending within its November statement, a fact which surprised some as the central bank has typically refrained from commenting on fiscal matters. In a recent interview, former Deputy Governor Grant Spencer said the recent change in government may have prompted the RBNZ's changed tone. (See MNI INTERVIEW: RBNZ Could Cut Next Year - Ex Dep. Governor)

Conway said the Treasury’s Pre-election Economic and Fiscal Update, released in September, had prompted the Reserve’s focus on fiscal conditions, noting spending was clearly stronger than when the RBNZ published its August MPS. "Particularly government investment in the second half of the projection period is stronger than it was prior to this prediction," he said. "So the data has been revised and it's been revised upwards. Government spending is still lower than it was during Covid, so it's still having a disinflationary effect, but it's less so than what was expected earlier."

A series of natural disasters forced the previous Labour government to increase spending earlier in the year. While the new centre-right coalition has not released detailed policy costings, it has vowed to provide fully-funded tax cuts and reform the RBNZ, reducing its mandate to a single price stability goal among other changes.