Economists have more-or-less reached a consensus that the Reserve Bank of New Zealand (RBNZ) will leave the Official Cash Rate (OCR) at 5.5% in its final meeting before the summer break on November 29.
That’s where the agreement ends. There are two different schools of thought forming around where interest rates will go when the Monetary Policy Committee meets again in February.
Hawkish forecasters believe inflation has become embedded in the New Zealand economy and the central bank will have to lift the OCR further and hold it higher for longer.
Dovish forecasters think the meteoric monetary policy tightening will be more than enough to quell inflation and interest rates will have to be cut as economic activity buckles.
Both sides have good arguments. Hawks say net migration is boosting demand, the housing market is heating back up, and interest rates are not historically high.
The doves say monetary policy takes time, there are global headwinds, and sure signs the economy is entering a recession.
Bond traders are plotting a path between these two schools of thought, but with a bias towards the second narrative. Market pricing has fallen well below the RBNZ’s August projection.
Fat chance for February
Analysis compiled by ANZ Research suggests market participants have priced in a roughly 13% chance of a 25 basis point rate hike on February 28, followed by cuts not long after.
Pricing is set for lower rates from May 2024 with a cut to 5.25% fully priced in by August 2024.
But even this outlook is still too hawkish for some economists. BNZ’s research team believes the OCR will be on its way to 4.75% by then and subsequently drop to 4% next summer.
“That’s because we believe the economy will be moribund for the next five quarters, the unemployment rate will rise fairly rapidly, wage pressure will dissipate fairly quickly, and the RBNZ will become more quickly pacified that enough has been done,” they wrote in October.
Jarrod Kerr, the chief economist at Kiwibank, shares a similar view. He thinks the first rate cut will occur in May 2024 and gradually be reduced to 3% over the following two years.
Kerr said the full impact of the 5.5% OCR was still working its way through the economy and would prove to be high enough.
“On the frontlines we’re hearing more from customers and we’re seeing some major adjustments in spending patterns. Consumers are being hit by high inflation, high interest rates and falling house prices. Policy is working.”
The leader of the other school of thought is former International Monetary Fund economist, Kelly Eckhold, who became the chief economist at Westpac NZ earlier this year.
He believes the RBNZ will need to raise the OCR one step higher, most likely in February, and hold it there until the end of 2025 — it should not be cut below 4% until 2027.
Real interest rates may not be high enough to slow inflation quickly and the central bank will also need to stop it from flaring back up, Eckhold said.
“I think it will be difficult for the RBNZ to cut rates while inflation is running above 3% and house prices are rising. The risk there will always be that inflation merely bounces off the top of the target range as the economy recovers later next year and into 2025”.
Sharon Zollner, chief economist at ANZ, has also forecast another rate hike in February. She then expects the OCR to be cut to 5% during 2025 and stay there for the foreseeable future.
Middle of the road
Infometrics, an independent economic research firm, has forecast an interest rate track similar to market pricing.
Chief executive Brad Olsen said the RBNZ had paused its monetary policy tightening but wasn’t likely to lower the rate until inflation was under control.
“It’s one thing to take your foot off the brake. It’s a different thing entirely to put your foot on the accelerator by dropping the OCR to stimulate more economic activity and more pricing pressure”.
He said the central bank had used stronger language and OCR projections to discourage bond traders from pricing in rate cuts previously. It may do so again at its November meeting.
The yield on a 10-year government bond increased from about 4% in May to a peak of 5.55% in October, likely pleasing the RBNZ which wants wholesale rates to remain high.
A movement in wholesale rates acts in much the same way as a change in the OCR and the bank has suggested it will react to any market movements it doesn’t like.
We’ll find out on November 29 what the Monetary Policy Committee thinks about bond traders predicting a rate cut in the first half of next year.
82 Comments
Interest rates are, well, interesting, but what people really care about if the probability of deflation and in improvement in their standard of living.
Rates are not coming down as suggested by the banks self-interest. That experiment since 2009 has failed and we should not go back there.
IMHO the max rates will drop is 75bps as cheap debt is not the solution. We need consumption to be smashed and product margins to reset.
It does seem like the supply side of things over COVID attributed to much of the inflation experienced. This is now stabilised to a decent extent (not withstanding the pressures of the conflict in Europe).
Potentially we haven't felt the full effect of the fiscal tightening much at all yet.
Consumption is a strong basis for most developed economies so if that gets shaky, expect lollies to be thrown. Super unlikely the fed will let lending costs damage the American consumer too much, it's over 70% of their economy.
"what people really care about if the probability of deflation and in improvement in their standard of living."
No, they should, but people care about inflation - most would welcome deflation right now (not realising everything else it entails....)
"Rates are not coming down as suggested by the banks self-interest. That experiment since 2009 has failed and we should not go back there. "
So it won't happen because it shouldn't? That's not how this game works.
Lol give away billions/trillions to every dick and jane to stay home not work and call it an experiment failure... it's like cutting off own leg then saying the experiment to become a marathon runner has failed... and it's just funny this tunnel vision focus on the interest rates... makes it sound like keeping the rates at this level will undo all the printing that occurred... the trillions that were printed out of nothing is earning more yield now, and the governments are printing more to meet the obligations, stealing even more from the future generations...
You forgot to mention the $600 plus billion that the banks just in NZ have created out of thin air and lent into the economy and we are also loosing $30 billion a year from our economy due to our current account deficit and this is money which must be replaced just for us to stand still. A government deficit creates a private sector surplus and adds financial assets to the private sector in the form of savings and so it is not an obligation for future generations it is private sector wealth.
https://theconversation.com/how-government-deficits-fund-private-saving…
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
Jarrod Kerr ... thinks the first rate cut will occur in May 2024
Much sooner than I had pictured based the public statements from the various aussie banks. The most recent was westpac this week saying not to expect lower rates before 2025
It's in their "interest" to pump HFL expectations while they clean up with oversized and growing profits.
New year resolution: buy an OO PPOR
immigration was meant to solve inflation (get wages down and supply up), but now we are being told it is going to cause inflation (extra demand). So why did we import an extra 100k people when we have too few houses, not enough health workers, and inadequate infrastructure? It makes no sense - unless you own investment property of course.
What does seem common amoung other business owners is a sense of stagnation or retrenching of operational activity given the deficit of labour. So businesses are curtailing growth, and/or increasing pricing and margins to make the same profit with less activity.
Not an amazing scenario for economic development.
The numbers getting older are higher than the numbers dying - so the population of NZ pensioners increase about 0.5%pa. But that includes immigrants like myself - arrived 21 years ago and have been receiving Super for a decade. The population increase by immigration (varying between 1% to 2%) is much higher than the rate at which we age. If the same as most developed countries, then legal immigration would be about 20k pa.
I havent had a same day appointment since around 2015 in New plymouth a few times.
A couple years back I moved to upper hutt and all the health centres were full couldnt take on patients so ended up with a lower hutt which has low ratings on google maps but always worked well for me except for the standard week wait for appointment.
The economic effects of those additional 120k people in our existing population of 5.5 million is way, way, way overstated. To the point of almost being an urban myth.
For example, they are being credited with helping to raise unemployment. But in fact, as anyone actually at the coal face knows, the increase in the availability of labor is much, much more to do with NZ businesses needing less labor, or needing no more labor, as aggregate demand has fallen ... and continues to fall.
They do not increase unemployment. The reverse is true since they provide a sugar boost to the economy needing not just accommodation but also transport, education, medical, food, etc - each extra immigrant adds a small demand for the need to have another checkout operator. The boost to the economy doesn't last but it does explain why high immigration causes a short-lived boom. Appreciated by politicians and businessmen but not necessarily every Kiwi and especially those on low wages.
The Kiwibank crew understand what is going on - they seem to have some economists that get how debt and money actually works.
To be fair, it is blindingly simple. The people that actually go out to work take home about $120 billion in wages per year. That's $10 billion per month. Interest payments on business loans and mortgages have more than doubled to $3 billion per month since rates started moving up. Pre-COVID they were around $1.6 billion.
The effective transfer of billions of dollars a month from workers who spend money to savers and bank shareholders (who hoard it) is unsurprisingly crashing consumer demand. Business profits are falling, companies are downsizing, staff are being let go etc. Unemployment and underutilisation are ramping up quickly and building momentum. New migrants are taking (a) jobs that were mismatched to kiwi workers and (b) hours of work away from precariously employed locals.
People might argue that this is monetary policy working as intended. However, the purpose of higher rates is not to punish workers and crash the economy for giggles, it is to reduce inflation and it is NOT doing that. While lower demand for goods, services and labour might be slowing price rises and wage growth in some sectors, other factors are pushing back - local Govt rates, rents rocketing due to inward migration, wage pressures driven by mortgage / rent costs, insurance, businesses passing on higher debt costs to prices because they can etc. All of the relief on prices is coming at the border as import prices fall - and those prices are not affected at all by domestic demand!
We can cope with money disappearing quickly from the real economy if new money is being pumped in from either (a) housing / business loans being taken out more quickly than they are being paid back, or (b) Govt spending more than they tax back. Both of these taps are basically closed. That's why we are accelerating into a recession, and that's why we will be cutting rates like crazy in May when Govt, RBNZ, Treasury etc finally work out what is happening.
"While lower demand for goods, services and labour might be slowing price rises and wage growth in some sectors, other factors are pushing back - local Govt rates, rents rocketing due to inward migration, wage pressures driven by mortgage / rent costs, insurance, businesses passing on higher debt costs to prices because they can etc. All of the relief on prices is coming at the border as import prices fall - and those prices are not affected at all by domestic demand!"
Inflation?...or supply demand imbalance?
Id suggest the later....a situation likely to exacerbate into the future. Whether the creation of 'money' is increased at the same time is less certain.
Either way, distributional shortages will increase, and that is the real problem.
Def agree with the latter point.
My hypothesis is that as a country we are using our plentiful resources really badly and this is at the root of our supply / demand mismatch.
For example, we are desperate for good care staff and nurses, but you can't move in Harvey Norman without getting hassled by retail staff. We need to build homes at scale but our construction industry is fragmented and inefficient - structured to meet the needs of wealthy buyers' demand for renovations and custom builds.
I would also posit that this imbalance is a function of income inequality. But that's a longer story.
Ok, well I've been watching stuff get built for nearly 3 decades. What used to take 1 person now takes 2 or 3 (although they're not all necessarily on tools), and there's less and less of them.
Productivity doesn't ramp that well just by increasing the volume of the building. Unless it's like a warehouse or empty shell.
It's actually a short story. I use this one:
- wealthy (and typically older) people vote at Council elections
- Councils vote to restrict dwelling supply (daft zoning policies)
- House prices go up (wealthy people win)
- Banks win (offshore wealthy people win)
- NZ Inc loses ... That's most, if not all, of us ... including wealthy (and typically older) people.
(Kiwis aren't that bright. I think I've mentioned this before?)
Superbly good 2nd paragraph there, Jfoe. So good that I'm going to get people to reread it before asking a question ...
To be fair, it is blindingly simple. The people that actually go out to work take home about $120 billion in wages per year. That's $10 billion per month. Interest payments on business loans and mortgages have more than doubled to $3 billion per month since rates started moving up. Pre-COVID they were around $1.6 billion.
Now good people - Ask yourselves why no bank economists ever talk in such stark terms?
(Hint: They'd prefer you stayed mushrooms so their infomercials are never examined.)
Those people know the retirement clock is ticking and start saving more than before. The ones who were spenders try to make up for lost time, and the savers amongst the 50 plus group are already in the habit and just keep doing the same.
As for me I bought a business, so the spending on improvements is for upgrades and business efficiency.
My colleagues in residential who aren't flat out doing new subdivision housing are now flat out refurbishing and building for KO. Or retirement villages.
It'll definitely quieten down, but we were in a period of 18-24 month lead times.
Even during the GFC, things never really got bad, just migrated to other types of work.
Likely not in a significant way, because the reduced volumes will lean towards making more margin, not less.
As for activity levels, money needs to get cheaper or the political dynamic needs to change (incentives and less legislative restrictions).
Building was the domain of extremely practical approach. Now there's so many handbrakes and impractical thinking applied so as to lose focus from the core task.
Couple of observations:
1. They may be both right. It wouldn't surprise me if the MPC actually increased by 0.25 in Nov to quell any Christmas exuberance and then dropped earlier to stop further damage. Jfoe could be right, May. I'd like to see earlier. But earlier may ignite foolish house price rises at the end of summer but will house prices rise like they have in the past? Read on ...
2. I wish these economists predicting house price rises would have a good look at the effects of Auckland Council's Unitary Plan of 2016. Between 2016 and RBNZ-inspired-covid-madness circa 2020, house prices in Auckland actually flatlined. Read that again.
They flat lined. Don't believe me? Use the graph here:
https://www.interest.co.nz/charts/real-estate/median-price-reinz
Select Auckland. The flatline is evident. Compare to Wellington. Compare to NZ. (Canterbury is an outlier as the earthquake effectively forced Council to do what Akl did, but earlier.) There are graphs around that go back to 2000 and the flatline is even more evident.
The Auckland Council Unitary Plan of 2016 facilitated a massive rise in dwelling densities.
A section that previously only allowed one dwelling could now have 3-6. That's a massive increase. And there are huge numbers of properties yet to be developed - so many that developers are having no problem picking them up at reasonable prices. (Note that many new house coming on stream now may actually include land bought at inflated prices during covid-madness. I.e. in two years, prices for new could be cheaper still.)
And since 2016 we have an updated NPS-UD that forces the main Council's to allocate more land to 6-8 storey apartment buildings. And we have the MDRS that Labour and National backed but National (foolish, selfish idiots) have said they'll back out of. Of note, the MDRS standards aren't much different to two zones in Auckland that cover about half of Auckland.
3. Don't forget that the RBNZ signaled and started vicious rate rises way before major markets overseas. 3-6 months earlier. There are established timelines in how long it takes for inflation to fall in the face of rate rises above the previous prevailing rate levels (and this nonsense about 'average interest rates' that go back 30+ years is just that: nonsense. Lookup r*.). And while this cycle has been confused by people saving money and creating 'buffers' to meet higher prices, for most, these buffers are exhausted.
So where to?
After Christmas, by February/March 2024 the debate, will be over. And the starkness of which bank economists can be trusted, and which should not, will be evident.
Young people should be the ones consuming in my mind. The older generation should be the ones maintaining or upgrading. This goes for most consumerism, but in construction I’ve really noticed a downwards trend when it comes to working with people below 40. Maybe it’s the area that I live, but it seems boomers take the lions share of my business (air con and electrical) I don’t doubt there’s a good portion of people under 40 in their homes but they aren’t spending, only fixing. No heat pumps or new kitchens for them, at least for the forseeable future.
Just anecdotally, it took me 15 years or so after buying my first house to pay someone else to make any decent capital improvements on a property I lived in. Partially because i couldn't afford it, and also because upgrading existing kitchens and bathrooms never seemed like a justifiable expense - it's a nice to have, not essential. That and being younger, anything I did do, I did myself.
Both sides are sort of correct; the hawks are right when they say that inflation will not be back to 2%, and the doves are right to say that the economy is on its way to tanking and unemployment will rise.
I can only repeat my view that many central banks won't be able to reduce inflation to their target range, and that they will have to reduce interest rates and accept higher (3-4%) inflation, because of the pain (recession) the current interest rates are inflicting on the highest level of debt in history, at private, company and government levels.
Whilst we all wait & watch for the wonderful gdp numbers to arrive, remember, not all gdp is good gdp. There's a lot of sub-prime gdp in Wellington for example. It's like a burger from one of those big burger joints - looks great on tv, tastes f......... awful. NZ today!
I have been in the market for a number of years and one thing I learned when the whole market thinks rates are coming off .. You can bet they will not. There is to much demand side press from immigration and firms putting prices up to counter others doing the same .. It takes quite a while for that to settle. We are starting to see impacts of things slowing but I believe we need much more bad news before the RBNZ loses its rage and cuts.
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