In a nutshell:
- Given how popular fixed-rate loans are in New Zealand, monetary policy decisions take one to two years to trickle through to the economy, as people roll off existing loan terms.
- Today's interest rate decisions will largely impact inflation outcomes in 2025 and 2026, not 2024.
- New Zealand’s economy is undoubtedly weak — and it has been for over a year, especially on a per capita (or per person) basis.
- The Reserve Bank’s (RBNZ) interest rate settings, although unchanged for almost a year, are still having a tightening effect on the economy. At current levels, there’s another 1% increase to the average mortgage rate still to come, which would take a further $3.5 billion p.a. out of Kiwi homeowners' wallets.
- Inflation is tracking down fast. There are some BIG numbers to drop out of the CPI calculation by September 2024, including the 1.8% inflation figure from the September 2023 quarter.
- In my view, the Reserve Bank Monetary Policy Committee should start lowering the Official Cash Rate (OCR) at the next announcement, on 10 April 2024, with a 0.25% reduction.
Being blunt, the RBNZ is almost single-handedly responsible for reducing New Zealanders' living standards over the last 18 months
Back in 2022, it set out to inflict a recession on New Zealand in order to tame inflation. And now, in light of the latest GDP stats out just last week, it looks like it’s succeeded in that mission.
In fact, per capita GDP is almost back to where it was in 2019, five years ago (the black line on the graph below).
In an excellent article for Squirrel, economist Rodney Dickens argues that the RBNZ is normally slow to realise there is an inflation problem, and equally as slow to recognise when it’s done enough damage to tame inflation.
“Monetary policy is more like a sledgehammer than a scalpel and the RBNZ’s inept use of it makes economic cycles more extreme. It means there are reasonably protracted periods of solid GDP growth followed by recessions.”
He points out that monetary policy changes take up to 2 ½ years (yes, years) to have any impact on inflation.
By implication, that means the RBNZ’s ability to do anything more to influence inflation outcomes over the next year is — at this stage — practically non-existent.
So, what’s happening right now with monetary policy?
To put it simply, monetary policy is tightening at a frightening pace.
This is because Kiwi prefer fixed interest rates on their home loans. As Rodney points out, it takes a couple of years for the impact of rate hikes (or cuts, for that matter) to fully impact households.
Take a look at the below graph from Core Logic, based on Reserve Bank data:
Source: Core Logic, RBNZ
The top three lines are current fixed home loan interest rates — roughly what you’ll pay on a new home loan, or when you refix after your current term comes to an end. They’re around 7%.
The yellow line is the average interest rate Kiwi are paying on their fixed-rate home loans right now. It’s currently sitting below 6%.
The average mortgage rate got right down as low as 2.7% a couple of years ago, meaning it’s already climbed by over 3%. But it’s still got over 1% to go to get to the level of current rates.
In other words, almost a quarter of the impact of all those OCR hikes we’ve had in this latest round (totalling 5.25%) is still to be felt.
Don’t kick Kiwi when they’re down and out, Mr Orr
New Zealand has been one of the worst-performing economies in the Western world over the last couple of years.
GDP (a.k.a. the country’s collective output) has fallen by about 4% per person since September 2023, and is back near 2019 levels.
And there’s further evidence of all that economic pain everywhere you turn:
- New Zealand’s GDP (output) is down 0.3% over the last year despite roughly 3% population growth.
- GST receipts are well below even recent forecasts.
- Business tax receipts are also below forecast – reflecting lower profits.
- Retail sales volumes were down 4% in 2023, in spite of that approximately 3% population growth.
- Everyday Kiwi and businesses are struggling. According to Centrix:
- Almost half a million consumers are behind on their payments to lenders and suppliers (e.g. banks, telcos, utilities).
- Over 12,000 borrowers have been flagged by lenders as being in financial hardship, an increase of 32% over the last year.
- 22,000 borrowers are behind on their home loans, up 13% over the last year.
- Business credit defaults are up 16% over the last year.
I could go on, but you get the point.
So, the reason we’re all feeling worse off is because, objectively, we *are*.
In my opinion, the RBNZ needs to start cutting the OCR, now
Inflation is a silent destroyer of wealth.
That’s why it was totally appropriate for the RBNZ to take aggressive action post-Covid, hiking the OCR to rein in our booming economy and inflation.
The latest inflation stats, out last month, show that while non-tradeable inflation is proving sticky, headline inflation has dropped off at pace.
While the official numbers still show annual inflation at 4.0%, that result includes some big quarterly figures that are almost a year out of date—arguably not the most accurate picture of the current state of things. This is clearly shown in the graph below.
If you instead calculate the annualised rate, using only more recent data (with the last two quarters coming in much lower than the levels we’ve seen over the previous two and a half years) inflation is actually running at 2.2% annualised.
Well within the RBNZ’s prescribed target range of 1%-3%.
So, in my eyes the job is largely done. And in fact, unless the RBNZ takes decisive action, and soon, to loosen monetary policy, there’s a very real risk of it being overdone.
From here on out, the RBNZ needs to be looking to the future and taking action that will be right in a year or two, when the impact of any changes made now will be felt by Kiwi households.
Talk of holding out any longer on cuts just to be sure inflation is slayed is unnecessary — and the impact of that approach would be devastating for New Zealand and New Zealanders.
Still, that's the widely-held stance among bank economists, many of which are picking rate cuts to start in late 2024, with a couple even looking to 2025.
I suspect this is partly reflective of what they think the Reserve Bank will do, rather than what it should do — and there’s a real opportunity for this group to be more proactive in arguing for different monetary policy settings.
In my view, which is very much at odds with the above, the Reserve Bank’s Monetary Policy Committee meeting in May should at least be signalling that the start of a gradual cycle of interest rate cuts over the next couple of years is imminent.
And given the slew of weaker-than-expected backward (and forward) looking economic indicators published over the last month, I’d be cutting the OCR by 0.25% on the 22nd May.