BNZ economists are calling for "immediate" interest rate cuts by the Reserve Bank (RBNZ) and say the economy is "buckling".
And shortly after that call was made on Tuesday, Kiwibank economists reiterated their RBNZ "missteps and sprained ankles" theme of last week and now "recommend" a rate cut next week. There's more from the Kiwibank team further down the article.
In an Economy Watch publication, BNZ head of research Stephen Toplis said the RBNZ has two choices: cut the Official Cash Rate (OCR) now and build in progressive rate cuts thereafter or wait and, ultimately, "risk being forced into" a 50 basis point cut in November. He thought it unlikely that the easing cycle would commence in October.
The RBNZ has its next review of the OCR, which has been at 5.5% since May 2023, on Wednesday, August 14.
"...We strongly believe the Reserve Bank should be easing monetary policy as soon as possible," Toplis said.
"Indeed, we are on record as having said that it should already have done so. Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate that the Bank [RBNZ] starts a progressive easing cycle from the August meeting."
Toplis said the RBNZ is supposed to take into consideration the minimisation of volatility in output and interest rates when setting policy.
"To delay cutting much longer risks maximising such volatility," he said.
Toplis said that while, Ironically, the BNZ economists' rate call may seem "a tad aggressive" it’s not as aggressive as the financial markets are currently pricing.
"The market currently has 100 basis points of cuts by November compared to our 75. We think this unlikely.
"We doubt the RBNZ will want the market to rally any more than it currently has so don’t be surprised if the interest rate track it publishes [with its next OCR review] is higher than the eventual rate outcome.
"At the same time, any suggestion by the Bank [RBNZ] that it will not be moving any time soon is likely to be met with derision by markets which will likely reprice the near term but build in more aggressive cuts further down the track."
Toplis said "one way or another", BNZ's economists feel more confident with the view that the cash rate will be 100 basis points lower by February of next year than they do with the expectation that the RBNZ will pull the trigger in August.
"We’d have been quite confident about August had it not been for the RBNZ’s tilt to a tightening bias back in May.
"That shift completely threw us as we could see no justification for it," Toplis said.
"The reversal of that view in July seemed sensible and we can only assume that in the course of time the RBNZ will see the May shift as a mistake.
"Be that as it may, the Bank’s [RBNZ] propensity to surprise leaves us with a huge degree of nervousness about our call. With that in mind, we note the RBNZ’s focus on productivity in its latest MPS. Its concern about declining productivity was a key element in its hawkish tilt and there’s a good chance that productivity has fallen again.
"Putting all this together we are, with great trepidation but with a strong sense of what is appropriate, shifting our expected first rate cut from November to August with consecutive rate cuts thereafter heading to an unchanged low of 2.75%."
In an Our Take publication, Kiwibank's chief economist Jarrod Kerr recommends a cut next week, followed by a cut at every meeting until the cash rates hits 2.5%.
He said he is still not convinced, however, that the RBNZ will "pull the trigger" next week, but "they should".
"It would be hard to go from pushing out rate cuts and raising the probability of rate hikes in the May MPS [Monetary Policy Statement], to cutting in August," Kerr said.
"There’s a credibility issue for the RBNZ’s forecasting team. The RBNZ could always argue 'when the facts change...' but to be brutally honest, the facts changed long ago."
Kerr said looking at current financial market pricing, anything less than cutting in August will cause a large spike in wholesale rates.
"So even if they [RBNZ] hold in August and signal cuts from October, the market already has much more than that priced," he said.
"A 'hold' of any description would cause a big back up in interest rates."
119 Comments
Yes. This is a classic case of the vested interests, at the very tippity-top of the NZ housing ponzi, wanting to keep those huge mortgage interest payments flowing.
Reading between the lines, I suspect that the amount of stressed mortgage holders is reaching crisis levels and the banks need a much lower OCR in order to offer renewals, or similar, to stop significant further forced sales. All while adhering to the new DTI and lending rules.
NZ needs a really good recession which (in the history of capitalism) can't/won't be avoided without significant meddling from the govt or the RBNZ. Recessions are part and parcel of free market capitalism, they remove/flush out over leveraged borrowers as well as marginal and unprofitable businesses, they also tend to put companies that produce crappy products or services out of business. And it makes for much more competitive industries. the cost of building a house is likely going to drop meaningfully.
Not at all. As he went to pay the barista repeated my order of a medium soy latte. He replied "let's make it a small with regular milk."
I'm lactose intolerant and spent my work day in the office bathroom crapping myself to unemployment.
The man is dedicated to his craft.
Well I called it months ago, however to be honest I didn't expect the banks to be making these kind of moves to pre-empt it and effectively force the RBNZ's hand. Will it move this month or will Orr try and prove he is the one in control and hold ? Its a long time to the next review and things are already going pear shaped.
Sure did, over a dozen times on here. I'm sure RP will be able to dig up the first one. I don't bother going down the rabbit hole digging for answers, sometimes life is much simpler than you think. Higher interest rates were always going to create a recession, the shit is finally hitting the fan.
You did to be fair - a good prediction on how much RBNZ would drag their heels. I went April/May 2024 because I thought RBNZ would at least be data driven. Chrisofnofame said gradual easing from November 2023 would have helped us avoid a deep recession. All fair calls.
The HFL folks simply don't understand how our economy works. As if we can have:
- 140% GDP private debt
- Govt with a positive net financial worth (meaning they collect as much interest / dividend as they pay out)
- Govt pulling in billions of budget under spends as they drop to 2% of GDP net spending this year
- current account deficit of 5% of GDP, and
- market interest rates on mortgages and business loans running between 6% - 12%
These numbers don't add up. Well, they do, they add up to rapid economic collapse.
Plenty of Kiwis are facing tough choices between keeping a roof over their heads, heating their homes in winter or put enough food on the table. More two-income families than ever are turning to food banks for support.
17 percent of Kiwi households are now spending more than half their incomes on rent alone.
Yet the media is sharply focused on interest rate relief for housing speculators doing it tough. There is no way we pull ourselves out of this one and go back to where were.
Agree. Dropping the rates will result in more elite savings and investor activity than good for those that need the money and will actually spend it.
Best help for the economy is to keep the ocr high, to make targeted payments to low income.. and control council rates better. Put limits on rent prices. Implement a blanket CGT. And stop immigration eccept limited high skilled visas.
We need affordable housing and wealthier low to mid class.
I doubt they would start cutting in Oct without an MPS. My guess is they start with either 25bps in Aug or 50bps in Nov, probably leaning towards Aug with how quickly things are falling apart. Either way it definitely isn't going to be the second half of 2025 like they previously said!
Fear levels on the increase across the board - which is the next phase of a bubble collapse (after the ‘return to normal’ that we’ve just had earlier this year)
May not play out per the usual graph but it is tracing the trends right now.
Following it would suggest capitulation later this year.
Yip crying for an interest rate bailout after selling mortgages to people using incorrect test rate settings 2 years ago.
We claim our banks are private entities but when all their risk is really held by the central bank it doesn’t really stack up. (and why do we pay bank executives so much to consistently make such a mess of things?)
My personal view is that even if central banks start cutting rates now , they could spend the next 12-24 months chasing the economic decline.
But I don’t view recessions in a negative contexts. Like we have days and nights, we need destruction of bad debts and zombie companies to renew for the next phase.
The problem we have had is that since 2008 central banks have decided that there shall be no recessions and they have completely distorted markets and people’s expectations of what is normal. How we get out of this I’m unsure but it could be painful (pain can’t be avoided, only delayed)
Yip and here we are.
But we created an economy in a tiny remote nation... where the highest paid jobs are selling real estate to each other.. and we propped up demand for said housing by importing tens of thousand low skilled workers. All whilst making credit so cheap that anyone with a low iq could get a huge loan to buy multiple houses and boast about their virtual wealth at a bbq.
Now prices are so high, and opportunities to make money so bad... that young skilled kiwis are leaving in droves.
So guess what. None of it was real. And definitely not sustainable.
Everyone points to lowering the ocr as the 'solution' to sub 3%... imagine the bigger mess that would make..... lol. It won't happen. There is only one way out and that's sadly very painful for many including the banks who gladly kept lending and taking peoples money in the boom but didnt realistically assess their risk - personally i think the banks need to take a haircut and stop whining.
Oh woe. Bank scared it's going to have mark loans at true market.
It took approx 10 years for Japanese banks to mark to market after their bubble bursts. There had been no legal or industry obligation to do so.
Japanese companies on Friday closed their books on the fiscal first half, the first period to reflect the implementation of mark-to-market accounting, with stock prices at levels that will cause a lot of pain but that all but a few companies are likely to survive.
The new rules have two components. First, banks and other companies are supposed to post losses on their profit-and-loss statements for stocks that have fallen 50% or more in value, although the provision allows for some wiggle room. Second, the companies must subtract from capital a portion of any net losses on their securities portfolios, including losses stemming from shares that have fallen less than 50%.
Japan is CRATERING, The Rest Of The World Is Next...
Japan was the epicenter for a wave of liquidations in smashing financial markets all over the world. It had all the telltale signs of a collateral and margin call. This wasn't about Japanese banks or even Japan, rather the sudden realization over the US soft landing narrative going up in smoke triggered a monster repricing and revaluation. So, what does all that mean?
What we are seeing is the first wave, locally and globally. Bodies of the over-leveraged finance muppets will surface with time. Then the 2nd wave begins. If there is going to be global bailouts, markets need to deliver more pain fast. Remember that the war will continue, even though we have a little respite right now.
The carry trade is enormous, cheap yen based funding has allowed companies such as Suntory to purchase things like Frucor here in NZ etc.
So even that V or Pepsi you have from the service station, has been touched by the carry trade. This basically all kicked off 6 days ago as the BoJ hiked 15 points to sit at 0.25% which is a lot compared with less then zero...
https://www.reuters.com/markets/rates-bonds/bank-japan-outline-bond-tap….
Its the highest since 2008 and the BoJ do not rule out another hike later in the year (though they may be gun shy now)
this news is as big as when QE started, but reverse.
its a systematic global tightening
Hey folks, I'm pretty new to this site. I'm enjoying the lateral thinking and range of perspectives.
One question.. does anyone here have any idea what the most financially stable NZ bank is?
I currently have money with BNZ, but their urgent crowing for lower interest rates makes me wonder if they are in a worse position than the others.
I know it would be a unlikely event for a major bank to go down, but many possibilities seem to be on the table at this point in time.
Spread your money around many banks if you're worried.
Two banks saying the RBNZ has overcooked it will shortly become 3. then 4. etc.
Meanwhile, businesses in NZ will - as they already have - start saying the same thing but much much louder.
But the RBNZ won't know anything until their 3+ months out-of-date stats tell them what other are seeing now.
The bank won't fail completely because -
Under OBR, if a bank fails, the Reserve Bank of New Zealand (RBNZ) can quickly close and reopen it under statutory management. Depositors may face a temporary freeze on a portion of their funds to cover losses, while the rest remains accessible. This policy aims to protect essential banking functions and ensure the stability of the financial system without relying solely on taxpayer bailouts.
Temporary for who knows how long.....
So you $100k might become $75k...temporarily..
Feels like a coordinated effort from vested interests to put public pressure on the reserve bank right now.
Inflation is still above target and whilst it's certainly improving, it's hard to see much risk of it overcorrecting into deflation given the structural upwards pressures on non-tradable inflation from infrastructure deficits, demographic trends and the debt burden itself. What, therefore, is the point in cutting rates at all? To stop the recession from killing the unproductive extractive parts of our economy? Oh, now Jarrod's comments make sense...
Sounds like you’re in the anti-recession crowns Chris? Ie we must never let the economy slip into recession (ie falling profits and job losses) and yet recessions have happened before and they will happen again…so why such fear that a few businesses fail and people lose their jobs (it isn’t a new thing you know but everyone is acting like it’s the end of the world so we must avoid it at all costs).
Dropping interest rates now will not stop the recession, it's too late for that. It may hopefully minimise the pain for businesses and people losing their jobs. But there will still be pain. If interest rates are held at 5.5% for much longer, it simply means the RBNZ will have to cut more aggressively in 2025 and to a lower "low", which is worse.
There you have it Adrian - we're getting close to actually rescuing our economy from the grip of the parasitic housing market. Now is the time to hold your nerve and finish the job. Perhaps a few RE agents will have to look overseas for their next opportunity - but a lot of skilled young people will be more likely to stay.
Cuts now are simply too late. Even big ones of 0.5%.
The damage was done months ago. Back in November '23 we had signs - very clear signs - that inflation was heading down.
At the same time, the RBNZ had a 'neutral' OCR rate of 2.5% (the neutral rate is neither contractionary, nor stimulatory) but had the OCR at contractionary 5.5%.
That 3.0% gap has been contractionary for NZ Inc ever since. Even as inflation fell, further and further, the RBNZ kept the contractionary rate at 3.0% and ... contractionary pressures increased and economic activity declined even faster. I.e. the longer it stays in place unchanged, the greater its effect.
The RBNZ still have their extremely heavy foot firmly on the brake even though it is well past the need for rapid deacceleration.
What the RBNZ should have done was to reduce the contractionary interest rate gap - the gap between a neutral OCR at 3.0% and the still current OCR at 5.5% - down as inflation fell.
That time that should have started was November 2023.
And now? Now the RBNZ is likely to be forced into an expansionary interest rate gap where the OCR falls below the neutral rate. This shouldn't ever happen except in exceptional circumstances like the GFC (but not covid).
So thanks RBNZ ... Boom, Bust. Boom, Bust.
Worse. Central. Bank. Ever.
Agreed. While Chris and I have differences of opinion on whether monetary policy is a good idea, I think we can both agree that the RBNZ have done a terrible job of it, particularly since Orr has been in charge.
Its hard to see how anyone can provide stability by yanking the OCR lever back and forwards, and it looks like he might need to yank it yet again. I thought it was reasonably obvious at the start of this year that inflation was under control, and as Chris said it was a time to head back to neutral rather than keep the foot on the brake.
Nailed it Chris 👍
I am blown away by how strong the tinfoil hat brigade is amongst the interest.co community…followed the website for a while & really enjoyed the articles, thought the comments would be a great place to discuss the economy…the comments section is however largely just a shitshow of a few loud voices preaching anti or pro property viewpoints with the odd actual gem thrown in by the likes of Chris, JFoe, IT…that being said, the articles are still great & the rest of comments are funny so it’s still great 🤷🏻♂️😂
This is a great post
I wonder could this be related to the government requirement of them to simply focus on inflation and getting that in range?
If this is the case, I would imagine they cannot consider any other economic data other than inflation being back in range. Seeing as it is not in range, by the government's own expectation, they have been keeping the foot on the brake until it is.
Is the problem the RBNZ or how they are required to operate?
We're only just touching the 1-3% CPI range again, really need a few quarters of CPI embedded in the 1-3% range to confirm the direction (especially with the sticky domestic Non-Tradables inflation element).
The FED will hold until September to save face. Any drop in August here will reduce the $NZD value and increase the Tradables CPI component (which is the only reason we're near 3%).
As predicted they are too late to leave the party. They will probably need to get the OCR down quickly from here so 0.5% cuts (or bigger) might be needed. It would have been much easier had they made a couple of 0.25% cuts already. 2 consecutive quarters of inflation within target should have been enough to start easing, let alone 3.
its only this week that the market has totally discounted a US soft landing.... RBNZ could never have seen that coming this month, though it did seem likely. They have to deal in facts not probabilities.
I see cut now at every meeting going forward 25 and a 50 to start things rolling
Markets are not going to recover and from here on in will sell on any bad news.
That said I see US weakness not disaster I see cuts not QE.
unless its a meLtdown and they have to start rescue programs such as TARP, CRAP, WTF, OMG, OHSHITE etc
The biggest risk is that we do not really understand deglobalisation
I see the Nikkei opened up ~11% this morning. A second chance for those who got caught long yesterday to get out? Now 'only' up 8%....
And that, ladies and gentlemen, is the point re any mortgage rate falls here. Will they be the last second-chance to get out? And if so, how do you get-out before everyone else? You drop your prices to attract what buyers there are.....
"Success of traders depends for 10% on their trading strategies and 20% on money management. The remaining 70% of the success is psychology and emotional balance"
And it's that 70% that amateur traders, like most residential property 'investors' in New Zealand, find hard to control.
"Kiwibank's chief economist Jarrod Kerr recommends a cut next week, followed by a cut at every meeting until the cash rates hits 2.5%". "Shifting our expected first rate cut from November to August with consecutive rate cuts thereafter heading to an unchanged low of 2.75%." .... Well I guess we will see how realistic those expectations are... in the meantime i'l whack on Barbara Streisand " The way we were " and reminisce the low rate era....lol
I am surprised that bank economists are allowed to call out the RB. Especially when in the past they have been shown to be wrong. I remember at the start of the pandemic they predicted that house prices would fall, but the opposite happened. I don't recall any of them predicting that.
Banks seem really desperate to get rates lower. Maybe it is hope that they can then lend more and house prices will increase, as lower rates correspond to people being able to afford to service a higher mortgage, and hence pay more for a house. But we saw what happened with the emergency low rates, and how this backfired with a house price crash.
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