Well, it's taken three and a half years of eye-watering interest rate hikes, but we got there.
The capture and placement of the inflation beast well and truly back into its 1% to 3% cage (at 2.2%) is certainly something to be happy about.
But what now?
It's not like returning the inflation rate back to its targeted levels is in itself a panacea. It won't make people spend again. It won't stop people who are struggling financially from struggling financially. It won't kickstart the economy overnight. It won't stop the current wave of job losses. Etc, etc, etc.
No. We NEED low inflation, but the reality is we've paid a substantial price to get it. And the woes from that won't just fix themselves.
So, what is supposed to happen next?
Well, for a start, get those pesky interest rates right down. NOW! Do you hear me?!
And, no, those are not actually my sentiments. I'm just giving a representation of what seems to be an increasingly strident wall of sound around inflation and interest rates.
Walking a dangerous path?
It already seems to me that some folk appear prepared to believe that whacking interest rates back down as fast as possible will fix if not everything, then certainly a lot of things, and quickly.
Well, interesting. But isn't there a bit of danger down that path as well?
Some context is needed.
When the inflation rate first veered dangerously out of the 1% to 3% zone in mid 2021 the Reserve Bank started to act by calling on its weapon of choice the Official Cash Rate, which at that point was at the historically low 0.25%. Between October 2021 and May 2023 the RBNZ drove the OCR up, at record speed, to 5.5%.
Inflation was stubborn. Domestic inflation fired up. We naughty people started getting pay rises. Prices went up. The RBNZ was forced to go higher and faster with the OCR moves than it expected. Ultimately Governor Adrian Orr conceded the central bank was deliberately trying to engineer a recession. That took a little while to arrive, but mission eventually accomplished.
Fast forward to August 2024 and the downward leg of the journey began, with a 25 basis point cut from the RBNZ to 5.25%. This was in short order followed by the 50 bps cut this month.
It's well worth mentioning that in the RBNZ's August Monetary Policy Statement (MPS) our central bank was forecasting the OCR would be cut to 4.75% by the end of this year.
Guess what? We're already there and there's one more OCR review for this year to go yet! And the expectation (or is that a demand?!) is for another - at least 50 bps - cut before the lights go out on 2024. Yes, you read that right - 'at least' 50. There are those suggesting the next cut should even be 75.
How fast?
For example, Abhijit Surya, Australia & New Zealand economist with independent economic researchers Capital Economics said with the NZ economy as weak as it is, "we can’t rule out the possibility that the RBNZ opts for a larger 75bp cut in November, as opposed to the 50bp cut that both we and markets are expecting".
Greg Smith, head of retail for investment management firm Devon Funds was suggesting (and this was ahead of last week's 'mere' 50 bps cut) that the RBNZ should get the OCR down to 3.75% by Christmas.
The rationale is that the OCR is currently still at very restrictive levels, so, now that inflation is back in the box, the OCR should be as quickly as possible restored to a 'neutral' setting.
In the world of central banks a neutral interest rate setting is a Goldilocks measure - not too hot nor too cold, it's neither restrictive nor stimulatory.
How the 'neutral' interest rate is arrived at is as clear as mud and there are various ways of measuring it and over various timeframes. But we'll have a go.
The RBNZ's most recent depiction of a 'short term' (one-to-two years) 'neutral' rate for the OCR is 3.8%. So by that criteria the current 4.75% OCR is still restrictive and if we follow the logic that neutral should be arrived at as soon as possible then a 3.75% OCR by Christmas does make sense.
The financial markets as ever are gagging for it. Current wholesale interest rate pricing has 55 bps worth of cuts priced in for the next OCR decision on November 27. That's a bit confusing, but it means the markets are convinced the next cut will be at least a 50-pointer and there's about a 20% chance it'll be a 75-point jumbo cut. [Update, as of later on Wednesday the market was now pricing in a 40% chance of a 75 pointer - so, nearly 50-50!]
Everybody seems to think we need to be in a tearing hurry to get interest rates back from non-restrictive levels. But do we really?
Yes, some businesses and people are doing it really tough out there.
But some are not.
The worry would be if we really slash interest rates now, people who've been sitting on the sidelines with pockets full of cash will make hay. The obvious area to worry about would be the residential property market. It's slow now, but we've seen before the way falls in interest rates can act like petrol on a fire with the housing market.
And look at the banks at the moment. They are accustomed to being able to gorge on residential mortgage business and the way they are really jostling for position with mortgage cuts currently tells you they want the housing 'machine' to be 'switched on' again. They NEED it.
Unfortunately the impacts of high interest rates have not fallen uniformly. Remember, the RBNZ reckons only something like a third of us have mortgages.
Have patience
The risk as I see it with dropping interest rates too far too fast is that we get a very uneven recovery. We could be faced with the sight of businesses and individuals still struggling, even as cashed-up people try to start another housing boom. And what might that do to inflation?
Domestically-sourced, or 'non-tradables' inflation came in at an annual rate of 4.9% in the September quarter - which was down from 5.4% previously and was lower than the RBNZ's pick of 5.1%. This was encouraging news and does perhaps back up sentiment that the domestic inflation IS now going to start to really fall.
But 4.9% is still too high and offers no room for complacency, particularly not when you see big contributions within that coming from rents and local authority rates and payments.
Having spent the last three-and-a-half years battling to get inflation under control, and by sinking into a long-running, grinding recession to do so, we should not lose patience now and assume we can just 'fix everything' by dropping interest rates like a brick.
More patience will be needed, I feel. Surely safety first is the best option. We got inflation down. We need to keep it down.
Oh, yes, plenty of people are already saying inflation's kicked and it's over. Don't worry about it. But are at least some of these the same people who said not very many years ago that inflation would never be a 'thing' again and nor would high interest rates?
We need to see inflation stay in the target band and we need to carefully get the economy back on its feet again - and don't try to rush it. It may take time. And we can't just assume that rapidly lowering interest rates will actually speed up the recovery. As mentioned above, there's a few ways we could hit 'speed bumps'.
And if all this seems unreasonable, let's just ask ourselves how we would feel if having gone through all this, we then find sometime next year that inflation's not in fact dead and we need to look at higher interest rates again.
No. Let's do this once. And let's do it right.
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