MNI INTERVIEW: RBNZ's Gai Sees Gradual Return To Midpoint

It is a priority for the Reserve Bank of New Zealand to return inflation to the 2% target midpoint, but only by around mid-to-late 2027 rather than as quickly as possible and not "at all costs," Monetary Policy Committee member Prasanna Gai told MNI.

The RBNZ is balancing price pressures against growth risks from the unique shock created by the closure of the Strait of Hormuz, Gai said, adding that it would adjust policy depending on the economy and inflation.

But Gai pushed back against the idea that the RBNZ was taking a gradual approach to raising the OCR, noting policy decisions should be driven by what is necessary to return inflation to the midpoint over the forecast horizon. If that requires firmer action to bring inflation expectations under control, the MPC will have to consider it, he said. 

Whether the RBNZ raises the OCR again in October or waits until November will depend on more than the third-quarter inflation data due Oct 22, Gai said. The MPC will assess how the economy evolves over the coming weeks before deciding whether to raise the OCR again or wait, he added, saying that he did not think in terms of specific inflation thresholds for the next decision. More forward-looking indicators, including inflation expectations and survey evidence on firms' price-setting behaviour, will be important in determining the policy outlook, he added.

GROWTH CONSIDERATION

Gai, a former Bank of England senior adviser who joined the Committee as an external member in 2024, said economic growth was a secondary consideration for the Bank, but that the Strait of Hormuz closure had created a particularly difficult policy challenge. (See MNI INTERVIEW: RBNZ Keeps Eye On Growth During Inflation Fight)

"It has characteristics of a supply shock, but it's not only and always a pure supply shock," he added. "What that means is that we're threading a needle through two different things. One is the risks of inflation, and the other is the consequences for output."  

"That's just whether you have a single mandate or anything else. Central bankers are very mindful of both consequences for price stability as well as output volatility. That's very natural. I don't think anyone on the committee would be classed as an inflation nutter."

Policymakers would be comfortable if inflation continued to track towards the midpoint over the latter part of 2027, he added, following the RBNZ's 25-basis-point hike to the 2.75% Official Cash Rate last week. (See MNI RBNZ WATCH: Breman Takes Cautious Stance On Further Hikes)

The inflation impact of disruption in the Strait of Hormuz is likely to be front-loaded, with higher costs potentially giving firms an opportunity to raise prices more than warranted. The consequences for economic activity, however, are likely to emerge more gradually as the economy recovers from its earlier weakness, he noted. 

"[The RBNZ] provided a fair amount of stimulus, and so we do expect to see that economy recovering. But we're clearly conscious that raising interest rates would potentially risk slowing that recovery." 

NEUTRAL RATE

Gai said the RBNZ's neutral interest-rate range is sufficiently broad for operational purposes, (see chart) but noted that global real interest rates have likely risen as the economic consequences of the conflict increase infrastructure and defence investment requirements.

To the extent that New Zealand's neutral rate is linked to global interest rates, there could be some upward pressure on the domestic neutral rate, although the magnitude is uncertain, he added.

While the OCR may already be within the neutral zone, the key point is that the Bank has gradually withdrawn monetary stimulus over the past six or seven months, bringing policy closer to neutral and guarding against renewed inflationary pressures, Gai concluded.

MNI INTERVIEW: BOE MPC Shouldn't Lead QT - ex-MPC's Saunders

The Bank of England’s Monetary Policy Committee is likely to vote this month to slow the pace of quantitative tightening to GBP50 billion, including just GBP20 billon of active sales, but it would be well advised to stop setting such precise targets and to transfer responsibility for asset management to its executive, former MPC member Michael Saunders told MNI.

While some members of the executive, including Deputy Governor for Markets Dave Ramsden, also sit on the MPC, the committee collectively lacks the expertise to assess such things as stresses in the gilt market, and does not have the remit to weigh interest risk, Saunders said in an interview.

Instead of setting a precise target, the MPC should set a broad range for QT, he said. It should also transfer a portion of the gilts acquired through quantitative easing from the Asset Purchase Facility special purpose vehicle to the Bank’s main balance sheet, he said. In addition, the executive should set out a long-term vision for those holdings, according to Saunders.

The MPC had a legitimate monetary policy interest in lowering the APF’s gilt holdings sufficiently to ensure there is sufficient room for the BOE to perform future QE if necessary, Saunders noted, adding that this point has now passed, with its size falling from a GBP875 billion peak to below GBP500 billion. (See MNI INTERVIEW: UK Fiscal Rules Allow Loan Lift- ex-OBR's King)

“That was a clear monetary policy reason. From here, that argument ... doesn't have much force because there's plenty of headroom," said Saunders, now senior advisor at Oxford Economics.

Another argument for doing QT has been to reduce interest rate risk, as the BOE hold gilts on one side of its balance sheet, and reserves remunerated at Bank Rate on the other. But this lies outside the MPC's remit, according to Saunders.

Reducing balance sheet interest rate risk is "a task of the Bank of England's executive. It's really nothing to do with monetary policy," he said.

"I just don't think the MPC has the expertise to judge the appropriate pace of QT. I don't think it needs to be that involved in it.”

Having the MPC set a range for QT would mean the existing arrangements would not need to be formally reset.

"They would still be setting the QT target, but they just wouldn't be setting it precisely as an exact figure. They'd just be setting a rough indication, and then let the Bank's executive get on with it," Saunders said.

FUTURE VISION

The September QT announcement will be made at an interim MPC meeting, with no press conference and no quarterly Monetary Policy Report, an arrangement which is no coincidence, Saunders noted.

"The original intention of choosing September was precisely that it was not an MPC month and this was a way ... of showing that the QT decision is as boring as watching paint dry," Saunders said.

"The logical thing ... would be for Dave [Ramsden] to give a speech soon after on the QT process, and [Executive Director for Markets Vicky Saporta] or the Governor to give a speech on the future balance sheet," Saunders said.

Saunders advocates transferring gilts from the APF to the Bank's balance sheet to match the currency stock and then holding them to maturity, which could assuage market concerns over future gilt sales. 

GILT TRANSFER

If the BOE does plan to transfer the gilts from the APF down the line "they might as well say it, because then that removes ... any upward effect on gilt yields from the perceived overhang of future APF sales," he said.

While transferring APF gilts to the Bank's balance sheet would raise questions over future losses, as the gilts were typically purchased well above par and current market prices, Saunders said this problem would be relatively easy to address.

Transferring at par "creates a loss to the Bank of England at that point, to which the Treasury then has to issue gilts to top up. So, if you want to avoid that, then you just transfer them at purchase price," he said.

When the bonds eventually mature there would be losses, but "those losses would average about half a billion per year, and would be comfortably exceeded by the interest income earned on the gilt portfolio," he said. (See MNI: Financial Tightening Complicates BOE Hike Calculations)

MNI SOURCES: ECB To Re-Stress Inflation Risks With Sept. Hike

The European Central Bank’s staff projections next week will revise headline inflation slightly higher for 2027, while reducing this year’s estimate, but these changes remain overshadowed by significant upside risks, with the Governing Council set to hike the deposit rate again in line with expectations, Eurosystem sources told MNI.

Uncertainty remains extreme, particularly with regards to gas prices, and the ECB will retain its meeting-by-meeting approach while flagging that inflation risks tilt higher as the crisis in the Middle East drags on, despite the absence of second-round effects so far, officials said.

“I cannot tell you for sure that this will be the last hike of the cycle. Nor that it won't, but this is part of our meeting-by-meeting approach,” one source said, adding that the steep rise in bond yields may also help to contain inflation.

“Financial conditions obviously remain tight, which effectively means our policy is being transmitted before we even move,” another official said. “We certainly have to keep an eye on the volatility for financial stability concerns, but that doesn't appear to be an issue at the moment.”

Upside inflation risks remain the dominant theme, and will be highlighted by Christine Lagarde, though even the more hawkish Governing Council members are unclear as to the timing of any further hikes following next Thursday’s almost-guaranteed 25-basis-point increase to 2.5%, around the upper bound of the ECB’s range of estimates of the neutral rate of interest.

PROJECTIONS

“We'll hike and [there’ ll be] little change if any in the wording of the statement. The latest inflation data underlines both the need to hike now and the upside risks," another national central bank official said, pointing also to slightly-better-than-expected economic growth. “If this resilience stretches out and inflation remains above target, we may need to be a little more restrictive in our policy settings. But that is a vigilance message. It certainly isn't a call now for further policy tightening later this year.” (See MNI SOURCES: ECB Closes In On Sep Rate Hike But Unclear Beyond)

September’s projections are expected to show headline inflation revised 0.2 percentage points lower for 2026 to 2.8%, reflecting a better-than-expected Q2 outcome, with 2027 nudging 0.1 percentage point higher to 2.4%, one source said, with others concurring on the downward revision for this year and upwards for 2027. Officials have been surprised by the resilience of the economy, with GDP growth seen revised 0.2 percentage points higher for 2026 to 1%. 

“Between the last meeting in July we haven’t had much new info. There is little evidence of second-round effects,” another source said.

One official pointed to IEA estimates suggesting oil could reach USD200 per barrel by year-end if current supply conditions persist -- an outcome that would add 1.5 to 2 percentage points to inflation. But others pointed to gas as the major concern.

“On energy, what worries me most is gas. I see it as difficult to recover production quickly and it could affect us more and more. The scenarios can change quickly if events do not improve,” one source said.

"BENIGN" WAGES DATA

While the lack of second-round effects so far, with “remarkably benign” wages data, removes some of the pressure on the ECB, the absence of any immediate prospect of a resolution to the Middle East is concerning.

"In the broader picture, the overall scenario picture is little changed, hovering around the baseline scenario. But duration is obviously becoming a greater concern as prices remain mixed and relatively high -- oil closer to mild scenario and gas closer to adverse," one source said.

Higher bond yields, though uncomfortable for governments, are not impeding the transmission of monetary policy across the eurozone, officials noted. (See MNI: Chance Of French 2027 Budget Deal With Limited Tax Rises)

President Christine Lagarde is likely to repeat her call for action to strengthen the euro area economy whilst maintaining sound public finances in her opening remarks, though the inclusion of any comment on the fiscal situation in the monetary policy statement is unlikely, an official said.

An ECB spokesperson declined to comment.

MNI INTERVIEW: China NEV Trucks To Accelerate Peak Oil Decline

China’s accelerating shift towards electric heavy trucks could hit oil demand significantly faster than passenger-vehicle electrification, reducing consumption further and posing a downside risk to expectations that peak oil demand will hold at roughly 16.1 mb/d through 2030, an analyst told MNI.

Diesel-equivalent fuel consumption displaced by the alternative-fuel fleet could reach about 1.8 mb/d if new-energy vehicle (NEV) and liquefied natural gas (LNG) trucks each reach 40% of new heavy-truck sales by 2030, leaving diesel with a 20% share, based on an average truck replacement cycle of eight years, said Anders Hove, China energy analyst at the Oxford Institute for Energy Studies (OIES).

Rapid growth in NEV and LNG trucks means changes in new vehicle sales can feed through to China’s diesel consumption relatively quickly, given the shorter replacement cycle for heavy trucks, he said, pointing to Beijing’s June announcement that NEVs should account for at least 40% of annual heavy-truck sales by 2030 and 20% of the total heavy-truck fleet, compared with about 29% of sales in 2026 and a fleet share of around 5%.

Hove noted a more aggressive scenario in which the truck replacement cycle falls to six years, with NEV and LNG shares each reaching 40% of new sales. In this case, displaced diesel-equivalent consumption could rise to around 2.3 mb/d by 2030.

However, he acknowledged considerable uncertainty around such estimates, as several factors will determine actual replacement rates. Improving truck quality and better maintenance could extend lifetimes beyond the eight-year average, while policy incentives, economic conditions and fleet-operator decisions could pull in the opposite direction, particularly if battery technology continues to improve and Beijing expands incentives to retire a wider range of older diesel trucks sooner, he said.

A number of industry analysts consider the government’s target too conservative, Hove noted, with market penetration potentially rising significantly above that level should current policy and technology trends continue. In this case, the target is acting more as a floor for NEV truck sales, Hove said.

Sinopec Chairman Hou Qijun publically said in August that China’s oil demand had “very likely” already peaked in 2025.

POLICY SUPPORT

To support its heavy-truck targets, Beijing has announced plans to build 30,000 km of zero-carbon freight corridors and around 3,000 charging and battery-swapping stations by 2030, expanding the infrastructure needed to move electric trucks beyond their current concentration on fixed and shorter-haul routes.

Lower operating costs are also becoming an increasingly important driver of adoption as charging infrastructure expands and battery costs decline, Hove said.

Electric heavy trucks can save an estimated RMB0.53 per kilometre in energy costs compared with diesel trucks, equivalent to around RMB95,000 (USD14,000) annually for a vehicle travelling 180,000 km, according to Hove.

The economics are more favourable for large fleets able to install dedicated charging infrastructure and use off-peak electricity. Dedicated charging can potentially cut all-in charging costs per kilometre by 40-50% compared with public charging, further improving the total-cost-of-ownership advantage of electric trucks, Hove said.

Subsidy support further strengthens those economics, with owners that scrap eligible older heavy-duty freight vehicles early receiving subsidies of up to CNY45,000, while replacing them with an NEV heavy truck can attract an additional subsidy of up to CNY95,000, Hove added.

Beyond direct subsidies, authorities are prioritising freight electrification through zero-emission targets for ports, cities and industrial applications, construction of charging corridors and preferential road access for NEV trucks. Tighter emissions standards could also accelerate the retirement of older diesel vehicles, Hove said.

However, long-haul freight remains a major constraint on further electrification due to battery weight, charging times, cold-weather performance and gaps in charging infrastructure, Hove cautioned.

MNI INTERVIEW: Fast Services Growth Augurs Renewed Hiring- ISM

U.S. services activity sped up in August as demand surged and costs remained elevated, while workers scrambled to keep up with orders in a way that suggests employment will expand again soon, Institute for Supply Management services chair Steve Miller told MNI Thursday.

Miller expects the PMI to continue to rise into the end of the year. "I can't see the employment number continuing to be in contraction with the way the new orders, business activity, and backlog are." 

The ISM services index increased 1.3ppt to 55.4 in August, above market expectations. New orders rose 3.7ppts to 60.9, the highest since February 2023, while the backlog of orders rose 4.7ppts to 55.6, the highest since February. But the employment index remained in contraction and the price index rose 2.3ppts to 72.6, the highest since August 2022. 

"We're seeing considerable strength overall across the services industry," he said, expecting a pickup in employment. "Otherwise, you're going to lose sales, and we're not in an environment where people want to lose sales, because despite all the tariff and Middle East conflict uncertainty people want to hold on to what they've got." 

The business activity index increased 2.6ppts in August to 61.7, the highest since November 2022.

CONSIDERABLE TIME

Miller expects the strength in new orders to continue "for a considerable amount of time" and for demand to continue at a strong pace. 

"I'm not seeing any signals that they're saying it's not going to hold up. I'm expecting that to continue and increase from the expansion standpoint," Miller said. "We were already high and I'm not seeing any indication that things are dropping."

Elevated backlog of orders also gives some support for new orders continuing, he added. 

Miller was disappointed by a still-weak employment index and price measures that increased due to energy prices. Fifteen industries reported an increase in prices paid in August, while no industries reported a decrease in prices. (See: MNI POLICY: Fed Hike In Doubt, Despite Pressure To Deliver) 

Tariffs and the Middle East conflict returned as the most cited issues impacting respondents’ supply chains, he said. 

The vast majority of survey respondents said they are not filling positions as quickly and they are having difficulty finding talent to fill roles, Miller said. 

"The percentage of respondents saying that they're reducing headcount has gone down from 19% to 17%," he said. "A lot of the commentary on employment is about delayed hiring."

The number of industries that are expanding went from 17 in May, to 14 in June, to 13 in July, to 12 in August, but the percentage of GDP that is in expansion has increased, Miller said. The average percentage of GDP represented by expansion in the services sector moved up to 69, versus a 62 last year.

MNI POLICY: Fed Hike In Doubt, Despite Pressure To Deliver

Federal Reserve Chairman Kevin Warsh is running out of reasons not to follow through on hawkish rhetoric with an interest rate hike as soon as this month, but the arguments for staying on hold that prevailed in July remain in place and a core group of FOMC members still prefers to wait and see how inflation plays out in the second half of this year. 

Warsh’s strong words on inflation at Jackson Hole, which made clear that the price stability side of the mandate is the Fed’s primary focus and that there might be "work to do" there, could make it increasingly difficult for the new chairman to justify another hold, particularly against a backdrop of heavy political pressure from the White House that has clouded perceptions of the central bank’s independence.  

But ambiguous PCE inflation data last month, on the heels of a softer-than-expected June report, and measures of underlying inflation at roughly 2.5% do not so far make a compelling case for immediate action. Key FOMC members appear to be holding on to hopes that the bulk of what's keeping inflation above target is due to temporary supply factors.    

"My decision on the appropriate stance of policy will be heavily influenced by what we learn about August inflation. If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level," Governor Chris Waller said Thursday. (See MNI: Warsh Puts Hikes On Table But Not Assured - Ex-Officials)

HAWKISH SET UP

Two points in Warsh's speech Friday indicated rate hikes could be forthcoming, even if one is not delivered in September. The Fed chairman downplayed key dovish arguments for looking through high inflation, namely that wage growth and inflation expectations are contained. By saying the Fed cannot count on either of these for inflation relief, Warsh bolstered the sense of inevitability around rate increases.

The second was his description of financial conditions, which Warsh said he would be “hard pressed” to describe as restrictive. The implication there was that policy rates could well need to be higher in order to effectively dampen price pressures. 

Warsh was also very positive about the outlook for growth, employment and consumer spending. While he does not see the Fed’s two mandates as in conflict with one another, a strong underlying economy does remove potential impediments to higher rates.

Many policymakers are worried that disruptions to supply are no longer temporary but a continuous part of the landscape that alters the behavior of businesses and households. In that environment, the conventional approach of looking through such shocks might prove inappropriate, and the new normal neutral rate may well be higher.   

In addition, markets are raising the pressure on the Fed, with long-term bond yields surging at least in part due to concerns about the central bank’s commitment to inflation fighting. (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It) 

WAIT AND SEE

The arguments for holding depend heavily on the newest inflation reports that are expected to show tariff effects waning and the energy shock contained. If there are no more shocks, inflation should resume its glide path down to target without needing more restrictive policy. 

Tariffs are estimated to have added a percentage point to inflation over the past 18 months or so, but the much feared second-round effects have not materialized, and the run-up in oil prices has also not broadened out beyond directly-affected sectors. The surge in demand for the AI buildout that has driven prices higher for certain goods is expected to subside when supply catches up. 

On the services side, housing inflation continues to cool while difficult-to-measure categories like brokerage services appear to account for a large portion of the rise in non-housing services categories. 

Not wanting to weaken the economy unnecessarily, many FOMC members would prefer to put off tightening for now if disinflation is already in train.

"I think that we have to wait and see,” New York Fed President John Williams told CNBC this week. “There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”

MNI: EU Debates Whether 'Made In Europe' Includes Canada

Early European Parliament debate on legislation designed to bolster the European Union’s manufacturing sector as it faces an existential threat from China has centred on how to define “Made in Europe” requirements for public procurement, with some centre-right politicians pushing even for countries like Canada to be included, parliamentary sources told MNI.

This week's public hearing on the Industrial Accelerator Act showed MEPs at odds on Made on Europe as they took advice from industry experts and think tankers.

"There seems to be some consensus to include the UK and the EEA while some are proposing to create new categories for candidate countries and even states with which the EU has concluded FTAs,” the source said. "In terms of labour costs and environmental standards there is already a level playing field (between EU and UK). This legislation is to correct for where there is no level field."

That said, Canada's remains an “open question,” the source said.

The centre-right EPP bloc, especially those members from The Netherlands, the Nordic countries and Poland are pushing for a more expansive definition of Made In Europe in the legislation, whose prime objective, whilst not openly declared, is generally acknowledged to be defence of European industry against China. (See MNI: EU Aims To Reduce China-Dependence, Avoid Trade War)

"How does one evaluate non-EU or even non-European states' eligibility to join the club. How do you evaluate them, what criteria would we use?” the parliamentary source said.

BATTERIES TOO EXPENSIVE

Then there is also the definition of how much of a product can be manufactured outside the EU. The European Commission originally proposed the place of manufacture as "the last place where significant change was made to a product" but this has not satisfied some of the key MEPs managing the legislation's progress. 

 The hearing also revealed pressure from Germany's Volkswagen to maintain some flexibility over the outsourcing of batteries for smaller and cheaper cars. 

One industry representative suggested to MEPs at the hearing that a maximum of 30% of a product's components could be made outside Europe. 

The Parliament is due to issue its draft report on the legislation this month with amendments coming at the end of September to early October. A vote is likely in December. The EP and member states are due to agree their own positions on the legislation by the end of the year but the law, which Beijing has said could discriminate against Chinese products, is only likely to be finalised after negotiations between the parliament and Council next year.