The Reserve Bank is set for a "complete about-face" on its interest rates forecasts, "leaving many within the RBNZ with sprained ankles", according to Kiwibank economists.
The Kiwibank economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say in their latest First View publication that in its Official Cash Rate Review on August 14 the RBNZ will "lower all their forecasts and signal rate cuts by year end, rather than late 2025".
In its last set of forecasts released in May the RBNZ gave a surprisingly 'hawkish' view, actually giving an increased chance of an OCR HIKE and not forecasting any cuts till the second half of 2025 - which was later than it had earlier forecast.
The Kiwibank economists now describe that May stance by the RBNZ as a "massive misstep".
"...We see the need for rates relief now, not later. If we were setting policy, we would have cut already. But for August, we’d cut 25bps [basis points], and signal 25bps at every meeting thereafter. And we’d highlight the potential use of 50bp moves, data dependent."
However...
"At this stage, we don’t see the RBNZ buckling fast enough to do what’s needed (yet). Even though we think they should cut, we think it’s a step too far for the RBNZ."
The economists say that if the RBNZ favours seeing official confirmation that inflation is back within it’s 1-3% target band, then November is the earliest kick-off date for rate cuts.
"Because we see this box being ticked by the next [inflation] print released in mid-October.
"Our current call remains a 25bp cut in November. Risks however are strongly skewed to an earlier move."
The Kiwibank economists say the weakness in the recent economic data "has definitely been playing on our minds".
"And no doubt the RBNZ’s too. We do think there is a case where weaker than expected data – whether that be the upcoming employment, GDP, or QSBO [NZIER Quarterly Survey of Business] reports – could tip the scale towards a cut in October. Because such outturns should be confirmation in itself that inflation will fall below 3% in the September (current) quarter.
"August would be too early for the RBNZ, and quite the 180° move – to go from signalling a rate hike in May to cutting well ahead of expectations. The debate on timing will continue as more data comes to light. And more volatility is to come as the RBNZ likely under-delivers on (currently) over -priced market expectations."
56 Comments
RBNZ can push their OCR lever this way or that, the damage is done, the recession has momentum, and it will take big fiscal to pull us out of the nosedive. History fans might enjoy this graph. We've been here before.
He was always going to deny deny deny CUT
I think to kill the Ponzi he had to go pretty hard to convince people, trouble is he has killed the Ponzi and massively dented the remaining non Ponzi businesses confidence.
I think he goes in August, NZD is screaming it thinks so.
I think to kill the Ponzi he had to go pretty hard to convince people, trouble is he has killed the Ponzi and massively dented the remaining non Ponzi businesses confidence.
He can't kill the Ponzi. He should know that. The boffins in his flock will be reluctant to point this out, despite their fancy pants educations and models.
What they need to do is for money growth to expand north of 10-15% pa. How that can happen, I don't know as money growth is primarily delivered through credit creation for the Ponzi.
Change what we use Debt for; anything but The Ponzi, and cut the OCR to whatever anyone likes. And if we are really courageous, we CAN do it.
No. The nation's wealth is tied up in the property sector. It's politically unpalatable and economically disastrous to wreck this private capital base. Essentially it's now too big to fail.
Yes, it is NZ, it was part of a series with references at bottom. The data source is monthly filled jobs (stats NZ, info share) seasonally adjusted, all industries. The data starts in 1999. It has gone negative year on year three times - 2009, 2020 (briefly), and 2024.
Anyone with a connection to the real economy knows that September CPI will be lucky to get to 0.5%. When the September 2023 quarter of 1.8% drops out we are at 2% or lower annual inflation. A 0.25% cut in August is 100% necessary. If only to give businesses some hope that surviving to 25 is possible.
So you reckon giving a business that has $1,000,000 of Debt a cut of $208 per month; $2,500 for the year the difference between survival and receivership? That's a lack of risk management if it is. But of course, to a property speculator, it might be the crucial factor. After all, Capital Gains isn't Inflation, is it?
And where pray tell is all that Debt concentrated? Yep. In the Residential Property Market. That's the problem, fix that, and all else becomes easy.
Do those sums again as if Property Debt was, say, 1/4 what it is today - roughly about what it was 20 years or so ago, and see what a massive noose we've placed around our necks.
Business will get some relief on debt servicing costs pretty quickly so a 0.25% reduction on interest payable on $200bn of business loans = $500m per year of reduced business costs. Great. However, the average interest rate payable on $360bn of mortgage loans will probably increase for 3 - 6 months after the OCR cuts as fixed rates work through. It will be a year before we see a few billion of extra disposable income hitting the economy.
More importantly, the above only covers the business cost / disposable income side of the equation. The other side is bank money creation stimulus - the amount of money that NEW mortgage loans inject into the economy (net of repayments). When the economy is running in its usual Ponzi style, private sector debt increases by around 4% per year in real terms. It will be year or so before we see any real terms growth at all.
Yes, I was modelling exactly that last night. Private debt is back down from 155% to around 140% of GDP now ($550bn). This means interest payable on private debt is around 10% of GDP ($42bn per year). Whenever interest costs get above about 8% of GDP the economy falls to bits. So, for us to go through another cycle of the housing ponzi, we would need the OCR to be back around 1%. We could then continue to grow private debt at 4% and GDP at 2% for 20+ years without interest payments getting above 7% of GDP. Unless of course we have another bout of OCR hikes, in which case we have another reset until the next phase.
Just because the above is true, doesn't make it a good idea!
" We could then continue to grow private debt at 4% and GDP at 2% for 20+ years without interest payments getting above 7% of GDP. "
What is your formula?...I ask because by longhand I get private debt at 342 billion (usd) and a current servicing cost of.7.2% of GDP more or less, assuming OCR rate is used.
Basically increase private debt by 4% per year and GDP by 3% per year. Then assume interest payable on that pile of private debt is OCR+200pts. If OCR drops to 2% and stays there, you can limp along for years. Here's that data visualised.
Sept quarter might still be closer to 1.0% imho but because it’s made up of effectively tax like hikes (rates & insurance) that are hard to avoid it’s not the kind of inflation the RBNZ should be concerned with. It’s nothing to do with monetary velocity and everything to do with draining much needed cash from household budgets which will lower future inflation.
Just one opinion, of course. From 2023...
"Respectfully, Kiwibank's chief economist has been reading from the same song sheet all year when predicting rate cuts from the RBNZ. Time that we had some commentary from an economist who actually knows what he's talking about."
https://tmmonline.nz/article/976522626/ocr-rates-cuts-should-dominate-n…
The fact that RBNZ has STILL not cut the OCR is astonishing.
KiwiBank economists have been calling this correctly for quite some time now. They understood the extent to which the NZ economy was suffering to a far better extent than RBNZ.
As an aside, Adrian Orr has been so liberal and frivolous with his jawboneing that he has lost all trust.
The Aussies have a similar debate going on:
"The prudential regulator will not relieve borrowers of the 3 per cent interest rate buffer they must absorb before qualifying for a home loan because the economy faces too much uncertainty from inflation, geopolitics and leverage."
And the predictable response from a bank with a vested interest - along the lines of Kiwibank's pleading:
"ANZ chief executive Shayne Elliott says regulators are “locking out middle Australia” from being able to access home loans, in the latest warning from a major bank boss that there is a disproportionate focus on shrinking financial system risk."
Vested financial self interests to regulators:
Your macro prudential measures for financial stability for the entire financial system and the country are interferring negatively with my personal bonus / profits.
The vested financial self interest forgot to thank the central bank for being a cause of their rising profits due to their interest rate cuts since 2008. Instead many claimed the profit rises due to their own innate skills and ability.
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