Economists at the country's big banks see the latest NZIER Quarterly Survey of Business Opinion as providing a green light for a 50-point cut to the Official Cash Rate next month.
After the Reserve Bank (RBNZ) cut the OCR from 4.75% to 4.25% at the end of November, RBNZ Governor Adrian Orr gave surprisingly explicit indications that another 50 point cut would follow at the next review on February 19 this year, saying the central bank's forecasts were "consistent" with another 50 point cut in February, which would take the OCR to 3.75%.
However, there's a considerable amount of data to be released between now and February 19 that could yet have an influence, including December quarter inflation figures coming out on January 22.
The NZIER's QSBO survey is the longest running such survey - having been started in 1961 - and it is closely watched by the markets and indeed by the RBNZ itself. So, the latest QSBO, released on Tuesday, was keenly anticipated.
And the big bank economists say there's nothing in the latest survey to cause the RBNZ great concern.
Kiwibank senior economist Mary Jo Vergara and economist Sabrina Delgado said the NZIER survey results had confirmed the continued easing in inflation pressures. Fewer firms reported higher costs over the last quarter, and the share of firms that raised their prices also remains historically low.
"The weak demand environment continues to reduce capacity pressures. And that’s good news for tackling (homegrown) inflation. More firms are reporting the ease in finding labour. And now, the lack of sales is the main constraint on business," they said.
"The outlook has improved. But the here and now demands further rate relief from the RBNZ. We continue to expect a 50bp cut from the RBNZ in February.
"The lift in business confidence is underpinned by the expectation of more rate cuts. The RBNZ must deliver," Vergara and Delgado said.
ANZ senior economist Miles Workman said the NZIER survey data showed that the RBNZ's previous monetary tightening "has engineered a significant degree of spare capacity in the economy" and that this is working to contain inflation pressures.
"And while the recovery in activity appears to be under way, these [survey] data aren’t exactly suggesting the economy is about to go gangbusters," Workman said.
"For the RBNZ, rebounding activity expectations from such a weak base isn’t likely to derail OCR cuts provided indicators of spare capacity and price setting evolve as required.
"On that front, there isn’t much in [the] data to suggest the RBNZ’s policy stance isn’t delivering the results they’re after. We continue to pencil in a 50bp cut in February," he said.
ASB senior economist Mark Smith said the pricing and capacity metrics from the NZIER survey remain consistent with annual CPI inflation falling below 2% over the next few quarters.
"Of note, spare labour market capacity continues to point to the likelihood of core inflation falling below the inflation target midpoint. This will concern the RBNZ and still suggests that a swift pace of OCR cuts is still needed," Smith said
"The OCR at 4.25% is well above neutral setting (likely to be in a 3-3.5% range), so monetary policy is still acting to slow the economy and further dampen inflation. OCR cuts still look to be needed, and we expect a 50bp February OCR cut (3.75%) followed by 25bp cuts in April and May (3.25% OCR).
"The issue is whether the RBNZ will need to push the OCR lower than this to prevent the prolonged economic slump continuing, delivering collateral damage to the labour market and wider economy.
"Our base case is that the OCR will not need to move below 3.25%, but whether they will have to put the foot on the policy accelerator (rather than brake) to support the economy remains to be seen," Smith said.
109 Comments
Business confidence pointing to a strong economy implies there’s room for rates to rise, not fall. However, our current confidence relies heavily on easy credit and mounting debt, which isn’t sustainable. The RBNZ will ultimately face a tough choice, protect the NZD or the housing market.
Looking forward to seeing those inflation figures on Jan 22.
"The lift in business confidence is underpinned by the expectation of more rate cuts. The RBNZ must deliver,"
They are relying on easier credit though. Confidence drops if the economy doesn't get the rate cut? It's not sustainable.
Cutting rates further just says The Market isn't adapting. Unfortunately it's the wrong end of the market getting hammered.
Our economy is struggling, but it's propped up by easy credit. A healthy economy can withstand higher rates. What we need is a "winter" to weed out bad investments. Instead, we've been living in an endless "summer" for decades. We haven't seen a true recession since 1990.
You haven’t realised yet that the RBNZ doesn’t control the cost of money. The RBNZ’s OCR follows the 2-year. As long as inflation persists, the bond market will demand higher returns. If inflation returns, you might find yourself having a religious experience. You better get on your knees and pray inflation drops back to 2% globally, or central banks will end QT and go back to QE.
The United States has experienced a boom over the past 2 years. New Zealand is a small economy, and whether we're in a recession is barely a concern for the rest of the world. The RBNZ currently lacks the tools to improve our economy in this inflationary environment and is at the mercy of a strong USD and higher US Treasury yields. It’s the Fed and the bond market that control the cost of money, and they prioritise their own interests first.
"We haven't seen a true recession since 1990."
That is close enough, but that 90s recession didnt result in us addressing the economic output, rather it drove us to propping up the economy with that easy credit....why will this time be any different?
We are not prepared to accept the changes required nor the timeframe involved.
Maybe this time will be different due to lack of choice, but I wouldnt be confident they wont try.
The introduction of the Employment Contracts Act exaggerated the early 1990s recession, when we were already experiencing rising unemployment.
Tens of thousands of people had their pay and conditions unilaterally reduced and pretty much had to take it or leave it.
Was there a recession in1990? I must have blinked.
And somebody said there was a recession called the GFC.....I never knew......perhaps I was having a nap.
But I do know that during the Korean war, circa 1952, our inflation reached 11% and during the 1970s there was not one but two "oil shocks" during which our inflation was 12%.
It seems to me from simple observation that most inflation shocks are more likely to be caused by geopolitical events including our current one; it's proximate cause can be solely attributable to either poor Chinese public health regulations or the careless leak of the Covid virus from a biological laboratory.
Germany's uncontrollable sky-high inflation in the 1920s was the result of losing WW1 and subsequently led to WW2.
If Joe blogs makes a bad investment, they do so knowing the risk. The risk bein they lose their money, possibly having outstanding debt liabilities afterwards to pay down. If there is large scale investment in say, housing as one example, and the council buy out people's sections who had no insurance in an act of god, then the likes of insurance companies will take more risks knowing they can socialise the losses to the public, and the wheel keeps turning. People seem to be immune to the thought that they could lose a LOT if they fail in a larger investment, a.k.a the Too-Big-To-Fail mentality brought into the mainstream after the GFC bailouts.
It's interesting that bank economists are taking positions on the OCR review that don't take into account international developments. I've stopped trusting bank economists, because they have few incentives to paint an unbiased picture. The NZD is more important than the housing market.
"The NZD is more important than the housing market."
The OCR setting is neither about the NZD nor about the housing market. It's about the fact that the current OCR is at a restrictive level which the NZ economy struggles to cope with. The NZD and housing market may be affected by lowering the OCR, but they are not the RBNZ's main concern.
Understand this folks, and your predictions of where the OCR is going will improve significantly.
I respectfully disagree. The neutral OCR rate is defined as a rate which does neither stimulate, nor slow down the NZ ECONOMY. Inflation, exchange rate, unemployment, housing etc… may be affected by where the neutral OCR rate is at, but they are not the setting elements for the neutral rate.
When people understand this, it becomes easier to predict where the OCR is going.
Yeah I agree and have had this discussion with Chris of no fame. I personally think the neutral rate is a bs fallacy.
Why do we never seem to be at the neutral rate but always trying to get to it? Then when we get to it, we find that it is no longer the neutral level at that level no longer balances the economy? Imagine the amount of money we probably spend on PhDs at RBNZ to try and work out what the neutral rate is, then spend years trying to drop or raise rates to try to get to that level, only to get there then some external event occurs and find that all of that work was a complete waste as the economy has changed and a whole new round of research is required to work out what the new neutral rate should be as we raise or drop rates in an emergency to balance the economy in the new conditions and paradigm of economy players/market sentiment. RBNZ economists trying to work out neutral rate = cat chasing own tail.
You could probably fire 50 people from the RBNZ getting paid 6 figure salaries and just do a guesstimate on where it needs to be and be just as accurate as 50 PhDs working in the same problem.
Save the tax payer millions and end up with the same economic outcomes.
Of course it's another BS fallacy. It's a new jargon only being spoken in very recent times. Once upon a time the OCR was closely tracked to the direction of the 90 day rate. But it's always been about stabilising inflation at a "neutral" concocted rate.
Once the economy depended on credit creation, and houses became the next established investment class affecting financial stability, it's become more about sustaining the FIRE industry. But they won't tell you that.
Bank economists only want to sell more "money" and will say anything to get the people salivating over lower rates.
Why do we never seem to be at the neutral rate but always trying to get to it? Then when we get to it, we find that it is no longer the neutral level at that level no longer balances the economy?
Because as we know, our economy is highly dependent on exports, credit creation for housing, as well as the inflow of foreign capital which links to our currency valuation relative to the USD. We are tinkering with our own numbers to try and balance the external forces (e.g price of oil) driving our behaviour and overall sentiment. The OCR is an outdated tool needing review as it's effectiveness in todays world has already been seen to be flawed. Sadly what i see is that the views of the post WWII generation still are beholden to society and need to be updated. The OCR was effective wen a larger percentage of the population held mortgages such as in the mid 1990's, this is not the same as today.
Let's go straight to the horse's mouth
For working purposes, we define the NRR as the interest rate that would prevail if there were no inflationary or deflationary pressures requiring the central bank to lean in either direction.
https://www.rbnz.govt.nz/-/media/f8acef7c3ad7428e89e43294cdbfd063.ashx
Not disagreeing with you Yvil nor attacking your position. But in the US (which generally determines interest rate movements as the reserve currency) their current financial conditions are not at all restrictive - they actually need to be tightened.
See this chart:
https://x.com/rbadvisors/status/1877723249091514554?s=46&t=MUwQeKa7MkEJ…
So conditions may not actually be as tight as what people perceive - they may actually have been too loose still with further tightening ahead.
Our views align very closely kraken. People should be asking themselves do you think rates will be higher in 3-5 or even 10-15 years time than they are now - I personally think it’s more likely they will be higher than they are now.
Going to get a big mortgage? Then I wouldn’t plan on the costs of the mortgage to fall but to be flat or higher in the future (they may fall in the short term ie 12-18 months but think they could be higher after that - see what the longer term interest rates are telling us - ie they are rising not falling)
Most are paying for a mortgage for 20+ years so I don’t understand the fixation on such short term movements (ie what is going to happen in the next few months) - people end up missing the big for the small - ie you won’t see can’t see the forest for the trees.
The big mindset shift for people now, in my opinion, is that mortgage rates are more likely to be flat or rising over the period of the mortgage rather than continuously falling - which is a completely different mindset to the past 30+ years. A new paradigm is needed but 90% of the population appear to be stuck thinking that the future is going to be a repeat of the past - ie confirmation and recency bias is the controlling force in their analysis. Everyone is still thinking lower rates that fall forever are just around the corner once more - I disagree (but of course could be wrong…unless we go Japanese 1990s style deflation).
Great post IO. There is no doubt that longer rates are significantly up recently. I also agree that, whilst short term rates may drop a little in NZ, it won't be by much. So, yes in the medium term (next 2 years), I agree that rates are likely to be flat or rise. But beyond 2 years, which is difficult to predict, I think rates will sink again. Why ? Because I feel there is too much geo political and economic trouble brewing, and I think the likelihood of a major recession or war is very high.
A new paradigm is needed but 90% of the population appear to be stuck thinking that the future is going to be a repeat of the past
Keen observation, and this is the same for political views as they are often generational given parents raise their kids preaching one set of views often. The bigger challenge is how do we get the greater population to understand, and critically analyse the factors you mention so that we can, as a nation, begin thinking of, and voting for, a better solution without this generational recency bias we cling to so dearly.
Doesn't the RBNZ have $39 billion in foreign currency reserves to intervene when the NZD is in trouble?
New Zealand's official overseas reserves (E1) - Reserve Bank of New Zealand - Te Pūtea Matua
Isn't this one of their "tools" for managing our economic environment too? If the dollar is too low, then you start to import inflation with the goods and services the economy is buying from overseas. With our NZ economy consistently being balance of payments negative, it is just a matter of time before inflation on imported goods and services starts going up and driving the overall inflation up too.
Did the RBNZ's recent big spend up on foreign reserves (total increased by $15 billion from Dec 23 to Dec 24) also in some way create a larger liquidity of NZD in the FX market and drive the NZD value down too? If the RBNZ doesn't intervene on behalf of the NZD value, are they trying to achieve something else by letting it nosedive?
Am I correct in saying this or have I got it all wrong?
Sorry can you quote me somewhere saying that the OCR definitely won't be cut 50bps at the next meeting or are you busy making straw men?
At best I've said there is a chance of a 25bps cut instead.
This is not even evaluating the fact that a 50bps cut may happen and that it ends up being the wrong decision. The RBNZ has certainly had a lot of practice making incorrect decisions in the past.
Even Tony A is calling less
https://www.oneroof.co.nz/news/tony-alexander-us-punctures-kiwi-hopes-o…
Is your assumption that the RBNZ always make the right decisions? Or are we playing the game of guessing what wrong decisions the RBNZ are going to make next….then celebrating/showing off about our success rate at how well we can predict how wrong the RBNZ always is? (which appears to be the game you are paying). This game, if this is the game we are playing on this forum, is actually complete madness.
We should have two opinions:
1. What do we think the RBNZ will do.
2. What do we think should be the right decision and justify the reasoning (or do you think the RBNZ are always right?).
At times it is difficult to tell what we are arguing about - if it’s that the RBNZ will probably over do it with rate rises or drops then you’re probably right - if it’s that they will do the right thing to avoid excessive booms and busts, then you could we be wrong and a good thing to argue about.
Looking at the economic data around the globe, I personally wouldn’t be dropping rates at the next meeting, but that doesn’t mean that I don’t think the RBNZ will do exactly that.
I think you will be right Yvil. But it will probably come with a mention of instability and that future OCR cuts may not be possible etc.
If he doesn't cut by 0.5% after saying he would, interest rates will increase and the economy will go backwards big time. That seems like the bigger risk at this stage.
Well I’m sure your self esteem will remain in tact when the RBNZ cuts by 50bps next month.
If not and you get it wrong the others who told you were going to be wrong will celebrate, your ego will be dented, and you still won’t see how pointless it is to take pride in predicting exact OCR movements at exact points in the future.
"you still won’t see how pointless it is to take pride in predicting exact OCR movements at exact points in the future"
I found it very useful when I was able to predict 14 months ahead of time the first OCR cut to happen in August 2024, and hence fix my mortgage term accordingly. I also found it very beneficial to fix my mortgage for 3 years at 2.89% in 2021, when I again predicted correctly that interest rates were going to rise significantly. I saved $ thousands.
If they are going to drop rates they need reduce the DTI ratio, otherwise its off to the races again with fueling the "Speculative Borrowing Phase" and avoiding reality taking place. The only winner being the Bank shareholders.
But you are exactly right that the OCR will fall by exactly 50bps next month even though that is also a future event like weather systems that can be unpredictable - which you admit you get wrong? But you don’t see the hypocrisy of these positions because you know the OCR will 100% definitely drop by 50bps next month?
“I admit I can get wrong about past events but I am never wrong about future events” quotes by Yvil Jan 2025
You might be right, you might be wrong…who am I to judge…
Seems to be a lot of tension in the air on here. I really cannot call it this time around, a few months ago I thought we would see another cut but now I'm going for a hold. Regardless of the outcome, lets see what the banks actually do, after all that's all that really matters.
Yeah I would personally hold and see what develops globally - it honestly wouldn’t surprise me if the Fed starts hiking again this year and cuts now really wouldn’t help us down track if that is the new direction if the global reserve currency.
(but the RBNZ will probably do whatever is the most extreme option ie cut more or too much. A .25cut might be a good compromise).
Apart from the last couple of years interest rates for the duration of our mortgage have been 5.15% or lower. I put my money where my mouth is and fixed half the mortgage yesterday for 5 years @5.89. The other half comes off fixed term in April. The .5% cut is likely mostly priced in, so interest rates won't get much better in my view.
But it fluctuates frequently. If it went up and stayed up, that would cause long term inflation. If it goes up this month and goes down again in 3 months time (which is what it tends to do), that should not result in an OCR increase.
I remember paying $3.30 a litre just before Labour temporarily reduced the fuel excise, yesterday I paid $2.55. If fuel price is such a big factor, general prices should be much lower now then then, we should have had massive deflation.
China is trying to export its deflation to the world. But can the world still afford it? This being reported today
Logistics company said “ecommerce volumes had fallen off a cliff” since the start of the year, after previously supporting air freight rates out of China.
To be fair the previous labour government were the worst performing one NZ has ever had.
The current coalition is trying to get the country out if the mess that was created and it will not be easy with the amount of debt they accrued.
They should never ever get back into control again.
Fact check:
NZ GDP 2017=322b
NZ GDP 2023=377b
Roughly 17% growth
https://rep.infometrics.co.nz/new-zealand/economy/growth
What was the GDP growth rate after the first year of National in power?
So far the quarter growth rates with National have been:
0.3%,0.3%,-1.1%, -1%
Careful what you wish for.
Debt only matters as a percentage of GDP. And the current lot are actively shrinking GDP, so the percentage of debt to GDP is increasing.
It doesn't really matter how you look at it. The current lot are at least as bad as the last lot, but numbers coming through from their austerity program (which hasn't worked anywhere else in the world) are pretty ugly.
I am politically apathetic between the two, just looking at the financial figures coming out.
Debt only matters as a percentage of GDP
Debt to GDP ratio.
2017 : 21.6%
2023 :39.3%
over the previous governments terms they almost doubled the debt to GDP ratio.
A 50% increase in debt for a 17% increase in GDP seems like a poor job.
2024: 39.15%
current government working on reversing that, 2024 (the current government) showing the only decrease in debt to GDP over the last 5 years.
I wonder what that figure is, if you take out COVID debt? Given National said they would have done exactly the same, not sure it can be attributed to any political party. Government debt at the end of 2023 was 155b NZD. Treasury reports we spent 70b on COVID response and recovery. So close to half. Also we should note Labour was paying down debt pre-COVID (or growing the economy):
https://tradingeconomics.com/new-zealand/government-debt-to-gdp
Is it actually austerity though?
In economic policy, austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both.
In NActs case they are making spending cuts to pay for some of their tax cuts, so there isn't a reduction of money in the economy. In fact the spending cuts don't cover the tax cuts, so NAct have stimulated the economy.
They have slashed a lot of projects that would have stimulated the economy and thrown over 10k government workers out. None of that is stimulatory.
Their tax cuts were basically meaningless amounts that were instantly eaten up by inflation. I doubt anyone feels richer because of them and spending has dropped from a year ago, in spite of them.
I'm with ASB on this one. Current retail rates are not stimulatory and we need them at another 100 points lower (probably more) to give consumers enough wiggle room to confidently spend again.
The RB has underestimated the damage done to household budgets by double digit rates and insurance hikes inflicted in back half of 2024, IMO.
Exactly. But we also need the rates much
lower to stimulate the housing construction sector. That needs retail rates no higher than 5% to stand a chance at genuine recovery.
Collectively, housing construction, retail and hospo make up a big part of our domestic economy, and are very sensitive to interest rates
The lower rates haven't resulted in an immediate reverse to the house price falls, and NZs economy i essentially a housing market these days. No surprise as it takes time, but they are now wanting to drop the OCR even more. That will likely result in a weaker NZ dollar and higher price for imported goods. NZs OCR is already lower than Australias.
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