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The Reserve Bank may pause its monetary policy easing in November as it watches for potential inflation flare-ups during the summer, according to a research firm.
In August, the central bank surprised commentators by lowering the Official Cash Rate from 5.50% to 5.25%, a year earlier than previously signalled.
Christina Leung, deputy chief executive at the NZ Institute of Economic Research, said she expected another cut in October but had “pencilled in” a pause in November.
“In our view, it makes sense for the Reserve Bank to be cautious now, and then cut by 50 basis points later on … than risk inflation reigniting, and having to hike, if it turned out the pace of easing was too aggressive.”
Leung said there had been growing expectations that interest rates would fall towards the end of the year, prompting households to opt for shorter-term mortgage rates. Nearly half of all mortgages are due for repricing in the next six months, up from 38% a year ago.
This shift towards shorter-term mortgage rates could lead to a faster transmission of monetary policy compared to when interest rates were rising.
“We should start to see the impact of that easing come through over the coming months, and that should help to continue to support economic activity,” she said.
Households have been “hunkering down and reducing discretionary spending”, which could be seen in weak retail spending data, but that might change quickly as mortgage rates fall.
Leung said many households would use the extra money, freed up by lower mortgage repayment and income tax rates, to do more retail spending.
“Generally, when New Zealanders have extra money, they go and spend it,” she said.
“So, there is potential for that rebound in demand to allow capacity pressures in the economy to reassert themselves and drive higher inflation.”
Ongoing job losses will discourage some spending but the Reserve Bank was likely to pause OCR cuts in November and resume in February, if the data shows the economy cool enough.
Other data
NZIER’s surveys have reported a broad economic slowdown, with a net 28% of firms indicating reduced business activity in the June quarter, and a net 35% expecting a deterioration in the general economic outlook.
Those numbers will likely look different in more recent quarters as the prospect of ongoing interest rate cuts has boosted business and consumer confidence.
But pricing intentions were promising, with businesses planning to lift prices falling even faster than those which were reporting higher costs.
Expectations for wage growth over the next year have declined from 5% a year ago to just 2.9%. Leung said she anticipated further declines as the labour market weakens.
Headline inflation was expected to fall within the target band this year, but non-tradable inflation was still elevated due to rising housing-related costs and energy prices.
35 Comments
“Generally, when New Zealanders have extra money, they go and spend it,”
Ahh. Yeah. Good assumption and / or hypothesis to make.
But what is particularly lame about this comment from Leung and the NZIER is the extent to which they actually measure it. They look at the relationship between the cost of debt servicing and retail spend. But you will see far more robust research from the likes of Unilever and P&G to understanding consumption and spending behavior based on market conditions and changing attitudes / behaviors. Why? Because if they don't understand this in detail they run into serious issues with demand forecasting and business outcomes.
So we have an OCR review on 27th November, then the next scheduled review on 19th Feb '25. Was anyone expecting the committee to interrupt their "hard earned" holiday break between these dates? There was always going to be a pause anyway- or did I miss something here?
MIT research shows that 42% of US inflation could be attributed to government spending. Make of it what you will. But don't be surprised if interest rates are slashed in the event of a global liquidity crisis. The experts and my water cooler bros say any liquidity crisis aint going to happen. Makes me think that the probability might be quite high.
https://mitsloan.mit.edu/ideas-made-to-matter/federal-spending-was-resp…
I wonder what the same research would show in NZ: the 6th Labour govt made out like bandits throwing an 80% increase in fiscal debt / helicopter money at all their squeaky wheels with nothing permanent to show for it, KO outbid homebuyers at auctions by $100k for several years, main councils all had to have new convention centres & cycleways while underground infrastructure ignored...
Other peoples money.
You do know that the current mob are borrowing more than Labour.f
If you look at their funding projections for their transport plans there is a massive gap between the projects they have announced and the funding that will be available through the NLTF which means one of two things, either:
- The things they have announced will never get built but they will spend a billion dollars on business cases for consultants like me to line our pockets or
- They get built and everyone pays billions more in tax to cover the cost (probably to private interests via PPP)
And you are mentioning cycleways?!??!? That made up less than 2% of the transport budget for a massive positive BCR and actually reduce congestion rather than add to it?
Nothing, absolutely nothing, that Labour did comes even remotely close to the fiscal fuckwittery that Simeon Brown just dropped on the nation (and I'm including the absolute shambles of a debacle that was ALR).
Nope. RBNZ is currently oblivious to how bad the economy really is (caused by Orr leaving rates much too high for much too long). Eventually, despite their incompetence, they will realise what a mess the economy is, and be forced to cut rates by much more than they ever anticipated.
The thing is that rates are currently low historically, but NZers got addicted to cheap money. Many borrowers didn't think rates would go back up again and were left exposed when they did. Many thought that the banks stress tests world protect them, when rates went back to a higher level than the tests.
House prices are directly linked to interest rates / affordability, the bank will lend when their "rules" allow them. But when the government halves the cost of lending, house prices double, how do they think that's going to end when two years later the government pushes up interest rates past the stress test and salaries haven't doubled also.
I doubt the economy would have got this bad if they left the OCR unchanged for COVID.
Would be an interesting concept for banks not to be able to pass on interest rates above their maximum stress test limit on the loan taken out at that time, perhaps not record profits offshore... Maybe they should take some risk... Or stand by it....
"House prices are directly linked to interest rates / affordability,"
Are they?
So you're saying supply has nothing to do with it? And what of population growth? Demand likewise, ay?
You statement only make sense at fixed point in time with both demand and supply likewise fixed in time.
Sorry, this is an excellent example of pub-economics at it's very finest.
"But when the government halves the cost of lending,"
The government can't do this directly - only indirectly and it takes ages.
I think you're referring to the RBNZ. The RBNZ is independent of the government and not actually part of it as they can largely do whatever they like.
US Govt spending still high. Lots of cash on the sidelines. Stocks n assets still near all time highs. The stink of stagflation still lingers. Inflation tends to come in waves. There’s still a chance we see higher rates next year if they stoke the animal spirits too early.
RBNZ's OCR neutral rate = 2.75%
Current OCR = 5.25%
That's a contractionary difference of 2.5% ... (5.25 - 2.75)
For the RBNZ to pause would be an outright admission that the OCR is a worthless tool to control inflation.
The sooner they get to neutral, the sooner NZ Inc. will get back to normal.
Conversely, the longer they stall, the further NZ Inc. contracts ... and the higher the likelihood that they'll need a stimulatory rate below an OCR at 2.75% ... Perhaps that's what they want? Ya' know, Bust, Boom, Bust, Boom.
The concept of a neutral OCR rate makes complete sense in a conceptual model.
In the real world, it can be conceived as a constantly fluctuating range within a slightly skewed normal distribution. The peak of normal distribution is the neutral rate. It's a bit like an electron - we know they exist, and roughly where they exist, but at any time their exact location isn't possible to establish.
The other tricky part is they're also an aggregate. Consider a single, and simple business, e.g. a landlord considering buying a rental property. That business would have an interest rate where they'd buy a property. But the next day, that interest rate may be too high, or low enough. Sample 1000 such LLs, and their lenders, on one day, then another, and then another. Plot on a graph. And there you have your slightly skewed normal distribution. Do that to any and all people, businesses or consumers or lenders, and you'd get another slightly skewed normal distribution. The peak is the neutral rate. But the shape of the distribution will stretch over time, and the peak will shuffle left and right.
Sounds as simple as quantum physics - I’m sure our Te Reo loving central bank will be all of the mathematics required to determine the neutral rate - or perhaps drawing some numbers randomly from a hat might be just as accurate!
(I get your point by the way but the idea that a central bank need to determine what a neutral rate is when they can’t even forecast inflation and recessions accurately is like a blind man trying to paint the Mona Lisa. It’s a waste of effort - in my opinion).
I don't waste time trying to establish what the neutral rate is. The RBNZ may however. I don't know.
I tend to look at the gap between a rough approximation of a neutral rate and have a 5 point traffic light system. Red = contractionary, pink = slightly contractionary, white = neutral, grey = slightly stimulatory, and black = highly stimulatory. Red and Black are bad (Sorry Cantabs.) Each economy, or economy within an economy, is different so they don't relate to explicit ranges. Further, the ranges change depending on the economic discipline (and doctrine) being displayed in each economy I monitor.
Using this approach I consider the RBNZ is holding us unnecessarily in the red zone. We should be at a light shade of pink by now.
A drop in mortgage interest rates is not going to give people enough money to go on spending sprees.
The cost of living to survive for the average family still remains high and any drop will just go back into living costs.
What I will say is that the coalition government we now have is just so much better than that last lot of incompetent. Socialists
And only very slightly left of centre.
But yeah it’s fucken boring hearing people calling anything left of centre as ‘socialism’ or ‘communism’. It usually comes from dumb right wingers
it would be just as silly to call the Nats, who are slightly right of centre, ‘fascists’
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