What's it to be then? Small? Large? Or medium?
I'm talking of course about the possible size of cuts to the Official Cash Rate (OCR).
On Wednesday, November 27 the Reserve Bank's Monetary Policy Committee headed by Governor Adrian Orr makes its final OCR call for 2024, with the next decision after this one not due till February 19, 2025.
There seems virtually no chance that the RBNZ will leave the OCR unchanged, so logically we are looking at a choice between a 25 basis point cut, a 50, or a 75.
Most money's now on a 50 (the medium option).
So, if we do accept that 50 will be the choice, taking the OCR down to 4.25%, what else should we be looking for in this latest review by the RBNZ?
Well, this one's accompanied by a new Monetary Policy Statement (MPS) - the first since August. This means the RBNZ will be dusting off its forecasts and coming up with some refreshed ones.
And while it might seem odd for me to relegate the significance of a cut that's likely to be as large as 50 points, the new forecasts are going to be very important.
These forecasts will be our window into the RBNZ's thinking for 2025 and then beyond. Crucially we'll be able to get a steer on the RBNZ's view of inflation in the coming year and therefore how much further the central bank will be minded to keep cutting interest rates and at what pace.
At this point, let's take a few moments to remember where we've come from with all this and how we got here.
Starting with an emergency cut
The potted history is that in March 2020 the RBNZ made an emergency cut to the OCR as the pandemic took off, and dropped the OCR to a historic low of 0.25%. In 2021 inflation started to rocket, eventually reaching 7.3% by mid-2022.
In reaction to the hot inflation, and to take heat out of the economy, the RBNZ started hiking the OCR in October 2021, moving in increasingly bold steps (there was a jumbo hike of 75 basis points in there at one stage) to take the OCR all the way up to 5.5% by May 2023. And then the RBNZ holstered its guns and waited, and once it was confident inflation was on the run it started to cut. This was in August 2024 and we've seen 75 basis points worth of cuts so far, with the OCR currently standing at 4.75%
So that's where we are. Where are we going?
Market observers and economists seem to have somewhat pulled back in recent weeks from expectations (indeed, even exhortations) that the RBNZ should and will pull the OCR down rapidly.
The problem is that the global economic picture for next year is actually looking pretty murky. The prospects of rekindled global inflation are being mulled. And economists are now increasingly of the view that the RBNZ's approach next year will be much more measured.
So, any light the RBNZ can throw on the issue in its forthcoming MPS will be most welcome.
But, anyway, let's not completely ignore the OCR decision itself in the coming week.
In order to try to understand what the RBNZ's about to do, we need to have a look at what's been happening in the big wide world of the economy since the RBNZ last reviewed the OCR.
A week after the last OCR decision on October 9, Statistics NZ released Consumers Price Index figures for the September quarter. These showed annual inflation dropping to 2.2% from 3.3% in the June quarter, meaning that it had gone back into the officially targeted range of 1% to 3% for the first time since mid-2021.
In its most recent set of forecasts, in the August 2024 Monetary Policy Statement (MPS), the RBNZ forecast annual CPI inflation of 2.3% for the September quarter. So, the actual figures were lower than the RBNZ expected.
Moving in the right direction
Additionally, the RBNZ had forecast the annual rate of the so-called 'non-tradables', (basically domestically attributed) inflation to be 5.1%, but it came in at 4.9%. That's still too elevated for the RBNZ to feel totally comfortable about it, but it is now moving in the right direction.
So, that was good for the RBNZ. Subsequently, Stats NZ's Selected Price Indexes, which include food, rents and altogether items that make up about 45% of the Consumers Price Index, showed benign inflationary pressures for October.
Unemployment was up to 4.8% in the September quarter from 4.6% in June. That was a little lower than the RBNZ's 5.0% forecast, but the figures also showed a significant fall in the 'participation rate' - those in the workforce. So, there was nothing in the unemployment numbers to concern the RBNZ.
Somewhat less benign, and surprisingly so, I would say, was the latest quarterly Survey of Expectations, compiled for the RBNZ. This survey asks business leaders and professional forecasters for their views of where inflation will be in: A year, two years, five years and 10 years.
While all of the results indicated future inflation of 2 percent-ish (which is what the RBNZ wants to see) all of the timeframes other than the one year (which is the one that obviously is always going to be closest to what actual inflation is doing) showed increases from the previous survey.
I didn't expect that. And maybe the RBNZ didn't either. Even if the increases were not huge - ranging between 9 and 17 basis points - they were increases. And those results were before the election of the next Trump administration in the US, an event that certainly could have impacts on worldwide inflation.
Following on from the Survey of Expectations, we had the RBNZ's Household Expectations Survey - and the results again would not have been what the RBNZ was looking for, with households expecting inflation to be 3.7% in two years' time - which is a higher pick than the same survey produced last quarter.
The importance of all this is that expectations of rising future inflation can easily become self-fulfilling as people increase prices in expectation that prices will go up. The RBNZ doesn't want to see people expecting the rate of inflation to increase.
So, all a bit of a mixed bag for the RBNZ to digest.
How the RBNZ manages all this as it now reduces the OCR is a delicate balancing act.
The cuts have been bigger
The cuts already made by the RBNZ have already been of a greater magnitude than the central bank indicated it would make in its last set of forecasts in August. The RBNZ wasn't forecasting the OCR to be where it is now till the March quarter of next year, while the OCR was only forecast to drop below 4% in the December quarter of next year.
Wholesale interest rate markets have been much more aggressive in the pricing in of cuts - at one point giving a better than one-in-three chance that the RBNZ will cut the OCR by 75 points next week. However, the pricing has moderated more recently and at time of writing the markets are very much pricing in a 50 point cut.
And interestingly, the markets' previous collective conviction that another 50 point cut will be forthcoming in the February review has softened somewhat, though a 50 point move is still heavily favoured.
Where does this all leave us?
Well, the easiest option for the RBNZ appears to be a 50 point cut on the coming Wednesday. With the markets overwhelmingly expecting a 50bps reduction, such a drop will cause the least market reaction. And the RBNZ may want to avoid much of a market reaction.
For now homeowners and would be homeowners can enjoy some Christmas cheer that rates are coming down - and banks will likely quickly pass on at least some of a 50bps cut.
Then the RBNZ has the best part of three months to enjoy summer and contemplate the next move. Dropping the OCR quite swiftly thus far from the very restrictive 5.5% level has been the relatively easy bit. Next year the moves will need to be very carefully choreographed.
I'll leave you with these thoughts from Kiwibank's chief economist Jarrod Kerr and economist Sabrina Delgado:
"It’s a long time until we hear from the Reserve Bank again. Practically a whole season of waiting until their next rate decision in February. And a lot can happen between now and then. By then, we will have had a completely refreshed suite of data on economic activity, inflation and the labour market. Not to mention a Trump inauguration and God knows what else. But for now, if the data plays out how we expect it to, then we still think another 50bps cut in February should be delivered. With the 2% target inflation rate well within reach, we believe the RBNZ needs to get the cash rate below 4% ASAP. So why not get it to 3.75% in Feb?"
*This article was first published in our email for paying subscribers first thing Friday morning. See here for more details and how to subscribe.
88 Comments
A couple of things I'm thinking about:
1. The RB has forecast unemployment to top out at 5%. Where already at 4.8% with job losses still exceeding vacancies. What if unemployment exceeds 5% by the middle of next year?
2. Before the next OCR review in February, there's a CPI print in January. With what I'm seeing on Main St - very subued consumer and business spending - we could easily see inflation dropping under 2% which means it's headed towards the lower bound. Then what?
So the two alarm bells for me is the ongoing struggling labour market and the speed at which inflation has dropped from 7.3% to where it is now, with no signs it's about to flatten out.
Waiting for a small order myself, it was delayed waiting for a flight for a few days which you never see the rest of the year. I suspect that the flights are full this year. Got to be honest I practically buy everything online even my clothing. The last thing I bought from the Mall here was lunch and two pairs of prescription glasses.
I usually get one or two clothing items per year from Rodd&Gunn / Barker, usually in sales. As their clothing is so well made, don’t need to buy frequently.
And then top up on basics from Uniqlo every couple of years when in Japan.
Beyond those minor annual clothing purchases, I buy a good few books from the brilliant Unity / Time Out.
And that’s about it in terms of retail for me.
I love Temu/Aliexpress. You can get so many parts for things that NZ doesn't supply due to planned obsolescence or lack of financial viability, so you can fix and maintain your own stuff without having to throw away perfectly useful items. Perfect for picking things up at the tip shop or recycling shops, and ordering in the parts to get them up and running again. More money to be able to spend elsewhere on things you like, without sacrificing your lifestyle.
I wouldn't put too much emphasis on the headline unemployment rate alone, considering the high emigration of Kiwis and migrants. Many of these not counted in the stat would've lost their job (or have a partner who did) and are seeking economic opportunities elsewhere.
Underemployment is up sharply and labour force participation is down -1.2%. Those trends also don't reflect in the headline jobless figures but paint a bleak picture of how households are faring in this economy.
EDIT: Proportion of Kiwis on main benefits already reached GFC levels in September 2024 and that figure will evidently get worse in the next few prints.
True. We were sold a pipe dream that a bigger nation was a quick-fire way towards affordability (economies of scale) and prosperity. The reality is that over a million migrants have been handed out permanent visas, many of whom will likely not pay enough in taxes or make enough economic contributions to fund their own added demand on our infrastructure and public service.
Hence why we're seeing the trend of existing customers/taxpayers/ratepayers having to foot the bill for major upgrades (water and power networks more recently) despite worsening service quality.
No, not the road to prosperity, but successive governments have failed to adequately prepare for mass retirement and draw down of the pension fund. Hence, they are following the defunct theory that the next generation must aways be larger than the last to lump the future payments onto.
We have now had two quarters of producer input prices *and* output prices going up, while CPI has come down. This is very unusual.
A decent amount of business cost increases have been thanks to electricity prices (temporary?); but insurance, rates, etc are relevant too. Obviously, CPI is coming down because global price rises have moderated enough to offset rising domestic costs and some businesses can't pass on those cost increases to consumers because the economy has tanked (yay, monetary policy is finally working).
Ironically, a drop in the OCR would reduce business costs, which will help lower 'inflation'. That's how it works, right?
We are in a precarious place here! It would only take a surge in the oil price or a global shock to send 'inflation' back above target. And, what would we do then? Decide that the natural rate of unemployment (sic) is actually 6% or 7%, and that the economy is clearly running too hot? That the only answer is self-flaggelation?
On the 50 vs 75. Yorrn.
Europe is going to have to spend way more on defense technology , China and US probably are already,
I have 5 42inch mower deck belts on their way, in NZ Already, from AliExpress, $119 vs 1 at $99 from the NZ John Deere.
IMHO even NZ Retail is dead with no future.
Worrying that entire businesses are shutting up vs redundancies now.
Not sure NAct can ever get NZ back to normal again, normality has shifted east long ago.
He will go 50bps here, then all bets are off.
IMHO even NZ Retail is dead with no future.
I've been amazed that retail has survived as well as it has for the last 20 years in the face of the rents they pay. I always thought rents for retail would have to drop to enable them to compete, but there seems to be enough supply of willing retailers. I guess that's a slightly Auckland centric comment and it's had a lot of population growth. Small towns down south where I am atm have shops that shut decades ago and are still boarded up.
Many hospitality business face very high fixed costs (staff wages, rent, equipment lease, etc.) that a few weeks of slow sales can put them scarily in the red.
A mate at IRD said this will be a huge burden on the gov books as hospo businesses fold with next to nothing to their names and the leaving the taxman struggling to recover hundreds of thousands in unpaid taxes.
There is a huge difference in the quality of belts for those ride on mowers. We had a Husqvarna for years and never changed the belt, mind you the build quality was better than the Dear John (Oh I hate to write, but I need a new belt) we had way back that was total shit. The electromagnetic belt engagement was far better than anything mechanical. But its true if what you are buying is the genuine part that's now made in China and you can source it on AliExpress its the way to go.
Santa Orr's getting our Christmas treat ready
Don't speak for me thank you. I have no debt; an OCR cut will reduce my income and spending into the economy going forward. It's really just help [a treat] for the leveraged, not everyone in the economy.
If you want to help people make financial decisions, talk about the problem rather than symptom relief.
I don't think being a "producer" (however you've defined it) is relevant to whether or not debt is held. ATM on the NZX produces IMF without debt. A farmer without debt produces meat and wool without debt.
"Most businesses carry debt"...so we should conclude what exactly based on that fact? Debt is helpful? Debt is good? It won't be debt is required due to the 'Most'.
Mortgage relief is just a marketing ploy. The true intention behind OCR cuts is that households will take on more debt to buy houses (and consume stuff) that they cannot otherwise afford, and thus stimulating the economy.
May have worked in the aftermath of GFC, but surely not a sound strategy right now for a constrained economy already racking 6-7% of current account deficit to GDP.
I think they'll keep cutting all the way back to zero to keep the debt growing unfortunately. It's the RBNZ's only trick and we have politicians that refuse to meaningfully talk about taxation reform.
Provided enough people keep faith that debt is repayable, then up with debt and articles salivating at the prospect of ever lower interest rates it will be...sigh.
The game is up now. It's why Trump and musk are so focused on cutting the deficit. Or at least plugging the leaks quickly.
Nz will have to follow suit. We have to accept that the era of running an economy on the back of rising house prices is over - it's obviously unsustainable anyway.. but now it ìa just driving social inequality and leading to an exodus of our brightest kids overseas.
As per the usa we need some leadership... and a strategy to shift our economy to something that will support our desired way of living in 10 to 30 years.
So you're relying on interest bearing deposits for income?
No, I never said that at all. Even if I was, what would be wrong with that?
I think I see NZ's problem right there.
What that Chris? Putting words into other mouths? Jumping to conclusions without enough evidence to do so? Too many people shooting from the hip? People like me being so frugal that leveraged businesses can't stay afloat?
investing rather than savings is better
I get the gist of what you're trying to say, agree that lower OCR will likely incentivise investing over bank deposits (and that *could* be beneficial). But I would pull up short of that being 'better'.
The risk of investing may not make the return 'better'. Also, if the investing is into housing, and it was mostly that during the low OCR of COVID, then that wasn't better for people that only owned one home or less. It was better for banks (FIRE sector) and short term for general businesses, but not medium term (now) or long term.
Murray you just need to get your head around keeping some of that in an account like the BNZ Rapid Save and just spending it when needed. Just rolled my TD over today onto a 5.25% 6 month and kept a few thousand out for a rainy day. People out there need mortgage relief right now, so I'm happy to suck up the lower rates.
I'll leave it to Chris to educate you on the ills of holding TD's. I put some into SBS while they had that 6.1% special on, but after that not sure, might move more back into shares.
It's not that I want to withhold "mortgage relief", it's that lowering rates doesn't fix the problem of people having to take on too much debt in the first place.
You won't see me celebrating a fall in house prices when those articles publish here. That's because the same fundamental taxation rules exist that will enable/encourage the next uptick in housing debt. Then we get the articles complaining about the repercussions of said debt rather than asking why we need so much debt in the first place.
I want houses to be homes first, second and third. Rentals will always be required, but anyone with a full-time job should be able to outbid an investor (I don't want investors displacing FHB's).
In most cases in ChCh at Auctions, first home buyers will normally outbid a professional investor!.
Owner occupier buyers are the ones who tend to force up the prices as they buy on emotion whereas any decent investor buys on yield or buys when it is selling under true market value.
Appreciate that, but 'most' and 'normally' aren't good enough for me. Someone missed out on owning their own house with security of tenure because a professional investor wanted another house they didn't need. Next minute mental illness, declining birth rate and lawlessness will be getting talked about....[some dots that aren't joined]
Nice to see you acknowledge investors do drive up house prices though, not many investors would be as honest as you.
Post an OCR -0.50 cut, I'd suggest best get used to the status quo of low productivity, a vulnerable currency along with rising unemployment folks and at best, a continuation of the moribund real estate market. This is certainly the new normal.
The economy is on it's knees. Central and Local Government are fiscally up against the wall and clearly bordering on austerity. The LGFA will likely continue to pass on stubbornly elevated funding costs to Councils as more time passes. Councils are allowed to borrow even more - here, and here.
Things are actually looking more positive IT, dairy as usual will be fine. In our case, as red meat producers, I worry about the cost of maintaining production. With a falling NZ and world volatility things like fertilizer and chemicals could rocket up in price.
NZs reliance on imported fert is critical and at some point even hort and dairy could be seriously affected.
Santa has already emptied his sac into a highly priced rental and housing market.
He is spent.
The NZ economy is also drained and increasingly derelect.
Best pressie from an already full drained Santa.......will be another -20% drop in home prices and similar drop in rents in 2025. Then it's a happy new year.
Geckos rejoicing in the leaf litter!!!
IMHO the issues are structural not solved with monetary policy, though the medicine may hide the symptoms.
Party its PDK, partly its the rigid dogma of both the right and the left, neither willing to make the changes necessary to at least right the ship short term.
- We are almost out of electrical power capacity.
- We are desperately short of gas.
- Most cannot afford retirement.
- Most can not afford healthcare, especially in retirement.
- Most cannot really afford housing any more, its distracting from our short life cycles.
- Our high minimum wages have destroyed most export markets.
- Too much focus on increasing wages vs reducing costs.
- A tax system that rewards speculation vs long term infrastructural investment.
Sure NAct we will be back to normal any time soon......
though the medicine may hide the symptoms
Thank you. So much time wasted on this site talking about symptoms (I do it to, but I'm not claiming to help people make financial decisions).
Most of the list we've done to ourselves (NZ) at this point. I mean higher wages, why? To mainly pay for shelter. Shelter that we have called open season on between would be homeowners and investors with the banks acting as referee (for a modest fee).
The PM is wanting to open up NZ for more foreign investment...you know, because the endless growth is starting to wobble, and he'll be damned if it will fall over on his astute watch.
My two cents: Should be 0.75% coupled with a drop in the DTIs (especially for 'investors') and a rise in the LVRs (especially for 'investors').
There! ... Business costs dropped, and house prices under better control, while banks are forced to lend more into the productive economy to maintain profits. I.e. we re-focus on creating stuff (and maintaining stuff) rather than use cheap credit to buy existing stuff and imported toys.
We can then wait about 30 years as the middle class is gutted, civil unrest and poverty has got to the revolution stage (and my guillotine manufacturing IPO is in full swing), and our government finally realizes where the real problem is and re-balances the tax system.
I don’t think we can afford to not slash the OCR. In the absence of significant fiscal stimulus, the sickly economy will remain sickly, and possibly get sicker, unless the OCR is slashed.
I also think the impact on inflation on our OCR moving lower while the Fed keeps theirs up is also probably exaggerated. Having said that, this is why I think the OCR will probably only go to circa 2.5-3.0. If that is the case, we will see the NZD weaken anyway, yet we will not see significant economic stimulus, either. So the worst of both worlds.
I think deflationary forces from China will mitigate inflationary forces in terms of a weakening NZD.
If I was the Governor I would cut to 1.5-2.0 by September 2025. Then keep a very careful eye on inflation, and be ready to hike again if needed.
I think the OCR will be 2.5% next September. But I still don't think it will make much difference. We got out of the 1991/92 recession by dropping borrowing costs and boosting the housing market, but a big drop in oil prices helped a lot, and our private sector debt was 70% of GDP compared to 140% now. There is much less headroom now.
I think our current position is a lot closer to 2009 when the Key/English fiscal investment got the economy (very slowly) back on its feet - with, again, quite a bit of help from cheaper imports.
I'd say 2.5 / 2.5 respectively. Basically because things need to be exceptionally bad to drop below neutral.
And then if things are exceptionally bad, fiscal policy works far faster and can be targeted far better at those that actually need it. E.g. tax the wealthy more to stop the The Cantillion Effect and distribute to those that actually need it, and will spend it quickly.
I don’t get how we will fix housing if we put the brakes on investment. Sure some of it ends up in speculation, but also some of it will be used for new houses, and almost all of it will be rented out. If we genuinely had too many investors we’d have very cheap rent.
I am starting to think the only way out of this mess is stupidly high house prices (so that building makes sense again) and stupidly low interest rates (so we can afford the stupidly high house prices). I can’t see any other way that a meaningful number of houses will be built.
Will they own them or sell them? If they own them, it’s a massive investment from the government, they would either need a big tax increase or a lot of borrowing. To build say 100k houses over 10 years would cost $50 billion and that’s assuming they already own enough land for that. If they sell them, it would probably make more sense to not bother; just give the land away (eg 100 year very cheap lease) and let private build on it.
EDIT: sorry just noted the shared equity. Maybe still better just to give the land away though via a cheap lease instead?
The "stigma" with leasehold is that you pay to own the depreciating improvements that need continuous R&M, and then then you pay again in the form of rent for the ground, which is the appreciation part you do not own. Said rent will also increase over time, whilst the value of your improvements decreases.
Yet, it’s a valid way to get people in to home ownership. Also if it’s government-led, increase in ground rent can be limited to CPI to avoid the valid concern with horrid increases in ground rent.
It’s worked pretty well in some countries eg. Singapore.
Having said all that, I prefer shared equity (with the opportunity to attain full equity over time)
I had some involvement with the NZ Housing Foundation Puhinui development. Very popular - long waiting lists - and I know quite a few police, teachers etc live there. Yes, it needs decent funding from government, but I would argue it’s worth it. We want to keep police, teachers, nurses as much as possible, don’t we???
And kills all incentive to ad value or even maintain your house so end up with broken down shit boxes a bit like Mangakino was until a company went in there brought the whole town then proceeded to freehold them. Then sold them and people started improving them looking after them and caring about their neighborhood
Adrian Orr is the grinch that stole Christmas. The upcoming rate change will take rates from very high to quite high. OCR should be 3% today. At a time when inflation is running cold and the economy is on its knees, I can only put Orr’s approach down to the fact that he robotically follows old data, with no real acumen or intuition of what is really going on out here.
Hole in one. We are paying the guy ridiculous amounts of money to manage the future not to reactively look at the past. Sure he may not have a crystal ball but someone in this position should be getting paid because they have a knack at predicting where the market is going and manage things accordingly. You could put a Chimp in the position otherwise.
He doesn't need a crystal ball, he has the Monetary Policy Committee, it's not all about Adrian Orr.
https://www.rbnz.govt.nz/about-us/our-people/monetary-policy-committee
Is inflation defeated though? It is defeated at the current OCR, it may not be if he starts slashing. His mandate would definitely err him on the side of caution, I think it will be fairly slow unless CPI starts dipping under 2%. Keep in mind they specifically took the employment mandate away so he didn’t have to think about the economy.
Maybe tough for businesses that rely on government spending and for individuals employed by government. On the flip side interest rate decreases will start flowing through to businesses and mortgage holders pretty quickly next year. I’m not sure if it will be as bad as 2024
The reserve bank OCR and the governor have become like a key player in a rugby game - like a 1st 5
Rather they should be like the water boy, maybe a touch judge having minimal impact on the game and letting the players get on with it and playing free flowing rugby.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.