The "only discussion" for the Reserve Bank (RBNZ) at its forthcoming October review of the Official Cash Rate (OCR) is whether it should cut by 25 basis points or 50, Kiwibank economists say.
In the latest First View publication, chief economist Jarrod Kerr and senior economist Mary Jo Vergara said they would advocate a 50 bps cut at the October 9 review, followed by another 50 bps cut at the last OCR review for the year in late November.
The RBNZ began what's expected to be a series of interest rate cuts in August, when it dropped the OCR from 5.5% to 5.25%. Inflation, which peaked at an annual rate of 7.3% in mid-2022, is widely expected to fall back into the targeted 1% to 3% range in the September 2024 quarter.
"Restrictive monetary policy has done enough damage to restrain inflationary pressures. Enough is enough," Kerr and Vergara said.
"And the RBNZ are responding – late, but in earnest. A rate cut in October is as close to a done deal as you get," they said.
"We argue the RBNZ needs to get the cash rate below 4%, asap. It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates. And fixed rates need time to roll off. Effectively, the RBNZ are cutting today for an economy at the end of 2025, the start of 2026. Get moving…"
Last week the US Federal Reserve began easing monetary policy in the United States with a 50 bps cut to rates.
Kerr and Vergar think the RBNZ will "need to do more than the Fed next year", as the Kiwi economy requires more rate relief.
"Economic output has contracted in five of the last seven quarters," they said.
On a per capita basis, they said, last week's NZ GDP report for the June quarter was "miserable".
"We’ve seen seven consecutive contractions, with a sizable -0.5% in the June quarter. Activity per head is down 2.7% over the year, and down 4.6% from September 2022 – far worse than the cumulative 4.2% decline during the GFC. There is light at the end of the tunnel, and it’s burning brighter. We think the RBNZ’s decision to cut the cash rate in August, marks the turning point in this cycle."
In ASB's Economic Weekly publication, ASB chief economist Nick Tuffley noted that the decline in per capita GDP in New Zealand takes it back to the level it was at the end of 2020.
"On our current forecasts that go out to June 2027, we don’t expect per-capita GDP to get back to the 2022 peak in that timeframe. Unless growth surpasses our expectations (always possible!) we are staring at least 5 years of stagnation in living standards. After the Global Financial Crisis there was also a large ‘lost’ period, of 5 years," he said.
He observed that the US Fed’s 50 bps move has spurred greater speculation of OCR cuts in NZ as well.
"Over 80bp of cuts are priced over the last two [RBNZ OCR] meetings of the year (i.e. a done deal that one meeting will deliver a 50bp cut or a decent chance of both meetings delivering 50bp cuts)," Tuffley said.
"Pricing by the [RBNZ] February [OCR] meeting is over 125bp, in effect two 50bp cuts and a 25bp cut over those three meetings.
"That is a lot built in. It will be the data that dictates the pace, mapped against the implications for the RBNZ’s inflation outlook. Growing suggestion of inflation playing out weaker than the RBNZ’s expectations could indeed prompt the RBNZ to move more aggressively," Tuffley said.
78 Comments
New Zealand's economy is too fragile to cope with economic shocks and needs to position itself to be able to absorb those, whether it's manufacturing, exports, or otherwise. It punishes residents that live here and cuts its nose off to spite its face with liberal ideologies and simple yet destructive tax policies which prohibit investment and local production.
Amusing how people are calling for emergency interest rate cuts while inflation is in the target band because ‘high interest rates are hurting people’- and yet when inflation was exploding far higher than the mandated level most were supportive of a wait and watch response - and yet that same inflation was just as harmful at the current interest setting (while inflation is where it is meant to be).
So we use emergency style preemptive cuts now but never when inflation is rising above the mandated band.
Not I, I was laughing when they claimed inflation was transitory, they should have been jacking up interest rates straight away. They were too late that way because they make poor decisions, now they are too late this way... because they make poor decisions. Neither is good for anybody.
Inflation is rising above the mandated band? Ummm... headline inflation is calculated from the last 4Q's right?
2023-Q3 = 1.8
2023-Q4 = 0.5
2024-Q1 = 0.6
2024-Q2 = 0.4
And all that data is lagging, Q3 figures have already been compiled and calculated from existing prices. Guess what happens when the next quarters figure is like 0.6? Inflation is at 2-2.5% and OCR is at 5.25%... if you reaaaallly don't want people to be able to borrow, that's a great setting.
I_O, might I present another interpretation?
1. Dropped monetary controls to idiotically low levels in response to covid (while government was already doing enough) ...
2. Then far too slow - by almost a year - to recognize their idiotically loose monetary policy would/was/is causing inflation ...
3. Then held monetary policy tight, for too long ...
And here we are. By now we should have the OCR around the neutral rate (2.75%).
The only discussion should be whether to cut the OCR by 25 points or 50'...
You missed one David, where RBNZ hold interest rates. Interest rates are still too cheap.
How many times thus far have the property experts declared curtain raised only to discover no show?
It's sinking big time out there. For a growing number, finances are being ruined as jobs are being lost.. The confidence to borrow up large on an asset that in the past inflated away ones obligations is declining.
I think a recovery is certainly coming, although it's going to be a very slow recovery and unlikely to please the heavily leveraged and impatient pro-property cohort.
Where's the best resting place for these rates? Go too low and the housing stupidity starts again. The exchange rate will dip making imports more expensive driving inflation back up.
House Prices, house availability and OCR
Is it 2% ? 3% ? 4% ?
Yes the only impact will be preventing the market from getting stupid increases such as 2020-2021. You have to save people from themselves or they'll cry out for the government to save them these days like the banks and insurance sectors do when the worst happens.
All good SAH. I do like a good pisstake.....some people make it far too easy:) (not you)
All researched opinions are great to study. We all have vested interests, likes/dislike and some just care more for the unfortunate souls that others....
Love the diverse opinions here, some are very smart and some obviously just woke up and pulled themselves out of the scrub......
All good SAH. I do like a good pisstake.....some people make it far too easy:) (not you)
All researched opinions are great to study. We all have vested interests, likes/dislike and some just care more for the unfortunate souls that others....
Love the diverse opinions here, some are very smart and some obviously just woke up and pulled themselves out of the scrub......
I would personally disagree, as I expect the OCR to be at around the 3.5%-4% mark by August 2025, which by the way would be closer to what current swaps are expecting.
But you have been right many times in the past with your forecasts, so you may well be right again.
Sure cut untill the OCR hits a low of 3.5%.
Then simultaneously, cut the DTIs to 4x. This will snip the knackers off the current money grubbing speculators (who are sweating bullets) and bring affordable housing to the "left behind" FHBs.
No more Debt bubbles, rewards for speculators are finished, done, a sad relic only of the pre 2021 world.
This 3.5OCR, would be the new neutral rate, in a high inflation, increasingly deglobalised world, beset with expensive global wars.
So with borrowing costs of 5 to 5.5%.
DTIs of 4x.
Happy days!
You're right.
I'm building a new house and was chatting to the builder yesterday.
He was telling me the number of items that were changed in the last few years that make new builds more expensive. Thicker insulation and so on. Even a requirement to bury the earth peg underground.
New houses aren't going to be cheaper, the politicians can waffle on about it, but it isn't going to happen.
In the meantime the new shopping centre at Auckland Airport is creating traffic jams amidst the apparent 'recession'.
https://www.rnz.co.nz/national/programmes/checkpoint/audio/2018956753/t…
….thankfully. NZ has the crappiest houses in the western world. The standards still need lifting further. Blame overpriced materials and incredibly low productivity for expensive construction, not high standards…. Why do we have the lowest standards and the most expensive houses? It’s a national disgrace
Builders love the smokescreen of 'regulation' that allows them to jack up their prices while numpties believe their every word.
Case in point? "You need stainless hinges on all your windows because of sea-spray." I checked. The property does not need them. Further, on checking the existing 70 year old hinges I find they're in completely serviceable condition.
We might never see building costs come down. Still, that can just add to the factors that continue to drive down land prices. Ask yourself, if it cost $10m to build a standard house in a regional town excluding the price of land, what would the land price likely be? Bugger all to nothing because demand would fall through the floor. If it cost $500k what would the land price be? Who knows, but certainly more than the price you'd get if the cost of building is prohibitive.
Also, I'm pretty sure we're kidding ourselves if we pretend the cost of building (excluding land) isn't also influenced by final sale prices. There's a feedback loop that can go into reverse as well.
With a lot of room for land prices to fall it's entirely possible for new property prices to fall back into the realm of something realistic even with ongoing modest increases in build costs. Just not possible for developers that over invested in land 2-3 years ago. For them, rising build costs, increased debt servicing, and falling land prices, along with a big drop in the final sale prices even if they do pull off the development add up to quite a financial beating. I don't envy them.
If you had any idea of the cost involved in applying for and developing land you'd know that wasn't true. Land prices won't be coming down.
Here's an example. And it hasn't been approved by the Auckland Council.
https://www.aucklandcouncil.govt.nz/UnitaryPlanDocuments/06-pc100-app-4…
Yes I agree - in the post 2008 world we should have had DTIs in place to limit excessive leverage as interest rates continued to fall - preventing debt bubbles from forming and creating systemic risk we wouldn’t have Was talking to people about this at the time but the assumption was that rates would never rise again….as in never go up again so the leverage would never be a problem because the interest rates would forever be going down.
@GV 27 - I am looking forward to the next two announcements - for once this old spruiker can grab the popcorn - for me go big and go big again - give everyone a bit of a break for XMAs and hope for 2025 - i feel two big cuts and NZ will get back on track for 2025 - get our MOJO back so to speak
Why would we want to get our mojo back?
Mojo = creating unsustainable debt bubble and house prices are greater levels of debt to incomes.
Mojo = riches for the leveraged while increasing financial and social instability.
I don’t want us to get this form of mojo back. Bu apparently if you support financial and social stability then it’s the views of a doom goblin.
We have a far greater wealth gap now than 30, 50 years ago and an impending cost crunch for superannuation and healthcare. Adding more private debt will not fix this, it will only add to greater instability and risk. Wealth begets wealth so the fewer percentage who have greater wealth and influence in society will always seek to protect what benefits them at the expense of the majority. CGT? Go for it, I'll pay it, and so will everyone else so we can maintain a standard of living and healthcare. Everyone seems to have a mentality of having something 'taken away' from them at present if we make wide scale necessary changes. Yes some will not win when these changes are made, but they will need to be made by necessity sure enough as the can is only able to be kicked so far.
Wealth inequality in the western world is back to where it was in the 1920’s leading into the Great Depression.
The economic policies of recent decades that have enriched the few at the expense of many (debt size or no possibility of prosperity in this country) do come with consequences - which I don’t think have yet fully manifested themselves.
Socialist..not at all. You might have missed my discussion on here recently with Agnotism about me once upon a time being centre left but no more. I’m now firmly centre-right. I’d rather Trump wins than Kamala and I was glad to see the end of the last Labour government and their socialist type policies. Some socialism is good, too much causes widespread misery.
If you think being a debt gambler in the property market makes you an entrepreneur or advocate for capitalism and a warrior against socialist evil then good for you - but then you need to see the damage that our overpriced housing is having on society. The taxes I’m paying are being used to prop up your bad investment choices in the form of a few billon each year into accommodation allowances. The benefits instead of staying in the pockets of the poor, end up in the hands of the landlords via increased rents. My position is that the property investor class are the biggest welfare recipients in the country - but they also like to bash socialist policies - which is quite the hypocrisy!!
@IO - I do like your points however I just don't see it that way. The property market employs 15% of NZ - that is substantial. Its not a bad investment choice - To be honest I rented a house in Te Atatu South about 3 months ago - the amount of people applying for the property was probably 60% applicants from HNZ ie single moms with 4 kids and two dogs all paid for by goverment - you over simplifying things in my opinion where will HNZ peeps live?
Flood the market with your rental portfolio listings, allow prices to drop, help those people who are struggling into home ownership.
But you won’t - because your greed for more than what you need (ie one home to live in) is greater than your charity towards those in society who are struggling.
And this is the crux of the problem in NZ - excessive greed. It didn’t used to be this way 30-40 years ago until we have this weird property investment cult show up in the country.
It is impossible to have rational discourse with people who cannot see beyond their need to have have more than what they need - they think excessive gain is justified and it is called free market capitalism. ‘I am just playing by the rules. Rule I didn’t not make. I’m just reacting to the incentives of government policy. I am not responsible for the morality of my own actions - the government is by the legislation they create that determines my behaviours.
If this is what free market capitalism has turned into well then I think it is a terrible concept - and yet I am certainly not pro socialism either. Quite the contrary. I just cannot stand greed.
@IO oh yes the ethical argument . “You must determine where you are going in your life, because you cannot get there unless you move in that direction. Random wandering will not move you forward. It will instead disappoint and frustrate you and make you anxious and unhappy and hard to get along with (and then resentful, and then vengeful, and then worse).” JP
Nice quote - Jordan Peterson I’m guessing? I’ve read both his most recent books and listened to nearly all his podcasts so familiar with his views/teaching.
Perhaps you’ve picked a direction and good for you. It’s easy to pick a path but picking the good path is the hard part. Straight is the gate and narrow is the way as Jesus said.
If promoting higher house prices for your own debt leveraged gain/self interest is your path good for you. But that doesn’t help our nations issues around financial and social stability. It creates wealth for you but not much for those poor people you’ve already mentioned.
One of the biggest cause of suffering in this country is overpriced housing and large mortgages - and yet you are on here promoting even higher house prices and by default bigger mortgages for your own financial/gain personal benefit.
Perhaps your own behaviours/combined behaviours that are like yours (debt speculation) is a bigger cause of suffering than the socialism you appear to dislike, and yet are a beneficiary of (via accomodation allowances for your rentals).
Perhaps your greed at needing to own multiple properties is a cause of suffering for those who only want to own one to have stability and raise a family? Why is your desire to own more than what you need greater than the needs of those who simply just want one? These are not socialist views, they are moral views.
I would say one of the biggest causes of suffering in this country is young people, on low incomes with no significant work skills, pumping out kids.
And very bad financial management. There's a large number of NZers with very expensive debt.. They teach them maori language in schools, but don't teach them how to manage their own financial affairs.
I agree with you on these issues Wingman.
People should be more responsible with having children but they get stuck in a cycle of intergenerational trauma and poverty.
Don’t get me started on the push for Te Reo - I like that we have multiple languages in this country but there has been a strange push/agenda the last few years to force Te Reo upon everyone. If you have Māori ancestry I think every opportunity should be given to you to learn your native tongue and culture - but for the rest of New Zealand I don’t think it’s great. Not trying to offend anyone but just how I see it (as a stale, pale, male…part of that nasty white patriarchy that have done so many bad things!)
@26main - yip perhaps - sadly above is a true story, and one of many - 60% of applications for my house was from people on some sort of benefit - I was amazed of how many benefit applicants outweighed working families or individuals trying to rent. Also the rent from HNZ was guaranteed from the government. All the best from a real life troll - your half thought out comment above falls very short of what is happening in TRW.
Recessions in USA normally follow the first rate cut (after a hiking period) by approx 18 months. The reason they cut is to stimulate the economy so it makes sense.
At the same time the fed sees the cuts as stimulatory to the housing market. Which isn't supplying enough housing. And they are already seeing shky unemployment figures.
[And interestingly there is a urgent conflicting need need to inflate away record debt and not increase public spending via debt to stimulate the economy..... and thus cant supply housing and has a need for increasing tax take to service its debt.]
All other significant global economies (china uk Europe etc are also struggling and don't have reserves ready to fight a prolonged recession)
So watch the ensuing mess from afar.. Whilst trying to ride out the global economic storm relying our tiny and unprepared national economy to avoid the inevitable fallout.
The glo al economic issues have potential to be far worse than gfc and wars may expand further as a result. There is a lot going on and potential from a lot of defaults by entities carrying a far too much debt.
Our immigration numbers are falling off a cliff, unemployment is rising and we are in continued state of recession with falling productivity per Capita.
Must be time to invest in housing.. but I am favoring gold for some reason and making sure the bunker is stocked up... just in case.. lol
Our own govt will struggle and cgt and other taxes on the wealthy will have to follow to ensure we can pay bills and avoid social unrest. The arguement the wealth will leave will be redundant as other countries will be forced to do likewise.
Incidently i do see property rising as rates fall and people get excited possibly for 3 to 5 months maybe if rbnz drop rates at next meet. But then early next year into winter it will get difficult and drop back below where it is now.
I see it as short term ppain for long term gain. It's the delayed fallout from economic policies in the pandemic and the outcome of the rich poor divide over the last 20 years or so.
Enough free advice for one day.... lol. Back to counting the cash under my bed....
According to this website, Auckland property is cheap.
We're number 140 on the list.
https://www.numbeo.com/property-investment/rankings.jsp
Meanwhile, over in the US inflation is now reaccelerating. Here comes a repeat of the 70's ....
“The survey’s price gauges meanwhile serve as a warning that, despite the PMI indicating a further deterioration of the hiring trend in September, the FOMC may need to move cautiously in implementing further rate cuts. Prices charged for goods and services are both rising at the fastest rates for six months, with input costs in the services sector – a major component of which is wages and salaries – rising at the fastest rate for a year.”
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