While there is currently plenty of "market chatter" over the possibility that the Reserve Bank (RBNZ) will make a super-sized 75 basis-point cut to the Official Cash Rate (OCR) next month, BNZ economists are reminding everybody that there is a "high hurdle" to the RBNZ making such big cuts.
After cutting the OCR from 5.5% to 5.25% in August, the RBNZ followed up with a 50 basis-point cut on October 9, taking the OCR to 4.75%. With annual inflation as measured by the Consumers Price Index (CPI) having come in at 2.2% as at the September quarter, and below the RBNZ's forecast of 2.3%, financial markets are aggressively pricing in potential future cuts.
Currently wholesale interest rate market rates are pricing in 100 bps of cuts across the next two OCR reviews - on November 27 and February 19 next year. The markets are pricing in 58 bps of cuts for the November review alone, which means effectively they are giving a nearly one-in-three chance that there will be a 75 bps cut on November 27.
In BNZ's latest Markets Outlook publication, BNZ senior economist Doug Steel has examined previous occasions when the RBNZ has cut by 75 bps or more, and he found the following three reasons:
1. When the banking sector was in turmoil. New Zealand’s most aggressive rate cuts occurred around the time that Lehman Brothers collapsed and led the world into the 2008/09 global financial crisis. The environment today is massively different. There are no major liquidity issues in the banking sector and bank balance sheets look sound.
2. A massive external shock. The initial response by the RBNZ to the Covid pandemic was to slash the cash rate 75 basis points. For now, there is no major shock impacting New Zealand. That’s not to rule out another large external shock at some stage in the future but there’s certainly nothing like it in the offing now.
3. A big CPI miss. The Q3 2022 CPI proved to be 0.8% higher than the RBNZ anticipated resulting in a sharp reaction from the Bank. The recent 0.1% miss (this time on the downside) is not exactly in the same category.
All the above does not rule out a 75bp move at the November meeting, Steel says.
"...But it is a strong reminder that, typically, the hurdle for the RBNZ doing so is high. We stick with our view of a 50 bp cut in November, as we continue to monitor all incoming information."
Westpac economists also expect that "with inflation looking well contained", the RBNZ will deliver another 50 bp cut in November, with further but more gradual cuts next year, and taking the OCR to 3.75% by May.
In Westpac's Weekly Commentary, senior economist Satish Ranchhod said last week’s inflation data will have made the RBNZ more comfortable with the "step up" in easing they delivered this month "as they should have greater confidence that inflation can be maintained close to 2%".
"We are not so sure they would have learned much on whether pricing behaviour has shifted given non-tradables inflation landed close to forecast [annual rate of 4.9% versus RBNZ forecast of 5.1%].
"In contrast, market pricing continues to fully price in 50bp cuts at both the November and February meetings, reflecting market concerns that inflation could slip significantly below 2% next year.
"We think that the shift in pricing for next year is looking a bit overdone," Ranchhod said.
He said it is "certainly possible" that inflation will slip below 2% [which is the level the RBNZ explicitly targets] for a period.
"However, any undershoot is likely to be modest and temporary.
"That’s in contrast to the 2010s when inflation persistently fell well short of 2% as a result of weak global demand following the Global Financial Crisis and the related weakness in the price of imported goods."
Ranchhod noted that at the moment, imported prices pressures are soft, "and we’re keeping a watchful eye on conditions in China". But at this stage he doesn't expect "the same degree of weakness", especially with policy easing in many economies right now (including China).
In New Zealand there are signs that the downturn in the economic cycle is reaching a base, Ranchhod said.
While retail spending remains weak, the falls seen through the first half of the year have been arrested, with spending posting modest increases in the past two months. consumer and business confidence has been "tilting higher".
"Importantly, there are long lags with the transmission of policy changes in New Zealand with the vast majority of mortgages fixed for a period. By the end of this year, we expect the RBNZ will have delivered 125bp of easing in a relatively short period. Rather than pumping the gas, they will likely want time to observe how those reductions are propagating through the economy, especially as domestic inflation remains elevated.
"None of this detracts from the argument that monetary policy needs to be eased over the coming months – while inflation is looking benign, economic growth remains soft and the policy rate is still at a restrictive level.
"However, it’s likely the RBNZ will want to move more cautiously next year as interest rates head back to more normal levels."
Ranchhod said the RBNZ will also be mindful of the experience from the past few years when rapid rate cuts super-charged the housing market.
"We’re already seeing tentative signs that the housing market is thawing, with agents reporting increased interest from potential buyers and a modest 0.2% rise in prices in September – the first increase in five months."
The key area to watch will be the labour market, Ranchhod said.
"Unemployment has already picked up to 4.6% in the June quarter, and both we and the RBNZ expect it will have increased to 5.0% when the September quarter figures are released on 6 November.
"A sharper than expected deterioration in the labour market would be a concern for the central bank, especially if more timely indicators point to further weakening ahead."
36 Comments
Its interesting how everyone thinks that lowering the OCR is going to stimulate the housing market and make us all richer via the wealth effect. People living in 2024 who think its 2010. I think there are going to be some disappointed people out there. The NZ economy has more structural problems.
Or is the stream of people refixing at lower rates going to feed thru to higher consumer spending as they get a bit of breathing room from the repayments at higher rates, and can see the light at the end of the tunnel? I wouldn't think it'll be a boom, but certainly a slow increase as they catch their breath.
Those under real stress would have asked to switch to interest only. Will those customers be asked to switch back to repaying principal when their interest rate resets lower? With those customers managing to service P&I keep their repayments the same to pay more principal when their interest rates reset.
Plenty of large 700-800K mortgages out there HM so yes that's hundreds of dollars a week in your pocket. The RBNZ is going to go another 50bps minimum in November or even 75bps, its that or 50 then another 25 in Feb, either way watch it drop 75bps total in the short term. That's going to be huge relief for big mortgage holders.
Its interesting how everyone thinks that lowering the OCR is going to stimulate the housing market and make us all richer via the wealth effect.
Who knows? But check this out. US retail investors bought 50-70% of USDT issuance in the last 3 years (2y, 3y, 5y, 7y, 10y, 20y, & 30y). All yielding <5%. Why did they buy? Likely because of the prevailing dogma and narratives from the experts.
Former Treasury Secretary Larry Summers calculated inflation using pre-1983 methods and the data suggests it peaked at 18%.
If you don’t know who the sucker at the card table is, it’s you.
Pension funds have to keep a certain % in gilt edged investments and government bonds qualify. And because government bonds are quickly and easily turned into cash (and they have upside as rates fall) they're also held by other funds, including 'cash' funds. Quite a useful hedge too if you earn in another more volatile currency. And at currency level, buying / selling US govt debt helps keep one's own currency where you want it. Pundits in the USA often overlook the fact it is not just the USA that buys US government debt.
I suspect he is 'more correct' using older measures to understand what actual inflation could be. If you think that inflation measurement is somehow more accurate over time, I would like to know why. Even polling indicates that a majority of Americans believe government-reported inflation figures understate the reality of rising costs. For instance, 53% of respondents in a YouGov poll expressed skepticism about a reported 3% inflation rate, suggesting they believe the actual rate is higher.
https://today.yougov.com/economy/articles/45918-americans-belief-govern…
"It's interesting how everyone thinks that lowering the OCR is going to stimulate the housing market and make us all richer via the wealth effect. I think there are going to be some disappointed people out there"
Donny, you sound very much like you don't have a mortgage.
Haven't asked for one yet. I posted on an economics forum and got feedback like, "WTF" and "tail wagging the dog, much?" and "tenuous" and some "interesting"s. It'll be a while before more in depth comment comes back.
In any event, I'm not expecting anything like 0.75% from the RBNZ (unless they do just one in the next three). More like 3 lots of 0.25%. Like I've said, they should have started cutting ages and ages ago.
I don't really understand the logic of the exceptional circumstances here? If you look at a total 125 boss cut, realistically this should have been on three to four cycles, but started earlier.
So all 75 bps cut does is make up for the lost time due to the delay and/or pull forward 25 bps from February.
All this does to the one year mortgage rate at possibly 4.99% as ANZ already gave away a bit more margin after the 50 bps cut.
Falling interest rates are not a sign of good things happening. The faster and lower they go, the worse things are. China, and today's % rate changes to record lows, is as good a contemporary example as we have. As some are writing elsewhere, "that the end of the Debt-Speculation Super-Cycle is upon us is obvious to many of us, but hotly denied by the multitudes counting on The Everything Bubble never popping." and the key to that isn't being right, but being able to survive being wrong.
Reminder, it's not really the 'wealth effect vibe' that provides the stimulus, it's (a) banks creating new money to help people buy houses (the sellers spend some of the money they receive & some buyers release cash for renos), (b) lower debt servicing costs for households and businesses - meaning they have more money to spend on other things, and (c) Govt deficit spending.
Taking each in turn...
Bank credit (monetary) is running at $14bn (net) per year - a bit under 4% of GDP. That's how much more money the banks are pumping into the economy than they are taking out (and destroying). If house sales and therefore prices pick up over the next year we might get that up to around 7% of GDP (2019 level). A proper housing ponzi celebration year (eg 2016) would be 10% of GDP but that seems very unlikely
Lower debt servicing costs are coming through to businesses already - watch prices fall as a result ;-). Households in aggregate will have to wait another 4 - 6 months before we start to see the effective mortgage rate on all mortgages start to come down. Long and variable lags my friends - again, late 2025 and moderate impact.
Govt deficit spending (fiscal). Govt plan to cut deficit spending from nearly 5% of GDP in year ending June 2024 to 2.1% of GDP in year ending June 2025. So, that will wipe out \around 3% of GDP of that monetary stimulus. Great coordination guys!
The big unknown in the room is our current account deficit, which acts as a drag on domestic aggregate demand. But, that doesn't look like reducing much at all.
Either way, the current stimulus outlook is 'pish'. Have a look at the data - crude and unweighted.
Yes, understood and agreed, though the question remains....if you look at the prospects for those deals to provide the desired return youd have to ask yourself is the risk worth it given the makeup of the NZ economy?
Not to mention the lack of capacity/capability within NZ to enable such development....Id suggest that we would be way down the list of investment targets from offshore.
The risk depends heavily on how close to the crown balance sheet the debt is doesn't it? In the UK, PFIs had poor credit ratings (but high returns) because they were not on the Govt's books. In Canada, the private finance debt instruments were AA rated because the Govt explicitly backed them (on balance sheet).
Great question. Monetary stimulus is crudely measured by new lending minus loan repayments (net credit growth). We have had positive nominal credit growth throughout the last two years but it has been negative in real terms, which is a key reason the economy is on its knees. RBNZ publish a graph of the nominal figures here.
I don't personally believe we will see negative credit growth over the next year - even if house prices fall a bit more. The pent-up demand for housing will take care of that. The question is whether the credit growth will be enough to offset Govt deficit spending reductions. If it is not, then we will stay in the slump we are in.
Using your houses example, (why don't we give up on measuring things in the NZD and just measure things in houses?), we create new houses every year, some 20,000 to 40,000 (although this bounces around due to our love of the boom / bust building cycle in NZ). And renovators increase the value of existing houses, which is creating something 'new' too.
Each new thing created needs to be paid for. In the houses example, that's a whole heap of new mortgages, some of which will be new bank credit.
Thus, it quite possible (and has happened much more frequently than many realise) that house prices fall in real terms, but much more bank credit is created and can become stimulatory in its effect.
Meanwhile, inflation results in nominal price rises, and the new money, to satisfy the higher prices, comes from bank credit, government debt, etc. (until the punch bowl gets removed.)
Central bank indepedence?
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