ASB chief economist Nick Tuffley says it now looks more likely that the Reserve Bank (RBNZ) will start cutting the Official Cash Rate (OCR) in the second half of 2024 rather than waiting till 2025.
This follows last week's GDP shock, which showed a 0.3% fall for the September quarter versus the RBNZ's expectation of a 0.3% rise. The RBNZ hasn't been forecasting any fall in the OCR, currently at 5.5%, till 2025.
However, following the release of the GDP figures, the wholesale interest rates are now pricing in the first OCR cut in May of next year, with FOUR cuts being priced in for the whole of 2024.
In the ASB's Economic Weekly publication, Tuffley says the GDP figures "weren’t the Christmas present we were expecting".
"All up, the level of GDP as at Q3 was 1.6 percentage points lower than we had anticipated.
"And GDP is down 0.6% over the year to September, with three out of four quarters registering contraction. That is in effect a mild recession at a headline level – and a marked 3% contraction to date on a per-capita basis."
In terms of what it all means, Tuffley said recent momentum in the economy "has been much slower than anyone had expected: for ourselves and the RBNZ about 0.8-0.9 percentage point less momentum in the most recently published six months".
Tuffley said looking over the past couple of years, the economy’s "non-inflationary speed limit" now looks a little slower.
"Inflation was very high over that past two years, even as growth was lower.
"Another way of putting this is that the level of demand in the economy has been lower than anticipated, but the supply capability of the economy has also probably been lower than previously thought. It’s that gap between excess demand and supply that creates inflation. All other things equal, growth likely needs to slow by slightly more than expected to get inflation under control, to ensure that gap gets closed.
"And that is where the implications of the markedly weaker economy right now come in.
"It really does appear like monetary policy has started to bite hard and is slowing the economy faster than expected.
"If that is the case, the RBNZ’s job will be done much quicker than it thinks. We have a lot of re-forecasting to do to get on top of the implications of the GDP figures. But it now looks more likely that the RBNZ will start cutting the OCR in the second half of 2024, rather than waiting until 2025. We will formally review our OCR outlook, so watch this space."
Westpac economists, who had been forecasting another rise in the OCR in February say in their Weekly Economic Commentary this "is now much less likely", but they still believe the OCR will remain at 5.5% for 2024.
Westpac chief economist Kelly Eckhold said the GDP data "tell us that the economy is in a much weaker position than we (and even more so, the RBNZ) thought even a few weeks ago".
"We think it’s likely, absent any further surprises, that the RBNZ will revert to something like their August 2023 MPS view that the OCR will remain at 5.5% until the latter part of 2024.
"We continue to see them as remaining much more cautious than markets on the prospects for lower rates. While the recent data provides a decent basis for revising down forecasts of inflation this is not the same as being confident those forecasts will be borne out.
"The RBNZ’s new Remit requires a sole focus on inflation, and we are sure that they will need to be confident they can hit 2% CPI inflation in the second half of 2025 and meet the new Remit. All going well, we can see a path to where they get that confidence by the time of the August 2024 MPS [Monetary Policy Statement] – but there is a lot of water to go under the bridge before that happens," Eckhold said.
"We continue to see the strongest case for a gradual reduction in the OCR from the beginning of 2025."
59 Comments
I think the housing market will just scrape on by in 2024. FOMO will turn its attention to jobs and food.
I can't say for sure re immigration, but we don't have enough jobs or infrastructure for those who have recently arrived, and they didn't bring the millions of dollars we thought they would. Our trade is turning down, I don't think India are interested at all.
The govt wish to roll back the spending, and arm wrestle the OCR down. The money injection from the housing market will take a year or two to wash into the economy and show any meaningful turn. This will negatively effect rents, mortgage payments and business in general.
The economy is already going backwards, and private debt relies on the security of future income. Where is the money coming from?
It would have been pretty obvious whether the recent immigrants would have money or not.. from their country of origin, skills and wealth ( answers to the immigration questions)
Labour would have turned a blind eye to who was actually coming and just wanted to stuff people into the country to keep the rental and housing market looking bouyant. when our domestic economy was flailing. They were only focussed on the election, not mid to long term.
So now, and if Nats really do stop the govt overspending and level off immigration - the real state of the economy and housing market will become apparent quite rapidly and it wont be a very pretty picture as we dont have much of an economy left outside of building and selling houses to ech other.
still cheap flights to Oz
But are they going to want to lock themselves into a mortgage, given current uncertainties? That said, I know people are buying again from outside the region ($500k will get you a house on a quarter acre just over an hour from Wellington right now, I'm hearing of at least one person who bought a holiday house as a result) so it might not be an issue if the price is right.
Not one of the better banks.
Hold off and wait for the NACTF to sell off Kiwibank.
It'll be priced low'ish for a good one-off capital gain on listing and should perform acceptably. (If the new owners don't insist in hobbling it with paying dividends it may perform very well.)
It was inevitable. The economy has inertia. The OCR has inertia. It's like trying to catch a falling egg in an ascending escalator without breaking the egg. What ever your thoughts are on the expertise within the RBNZ -that was always a tough ask. The soft landing was announced a little prematurely it would seem. I think we're going to see unemployment rise sharply in the first 3-6 months of 2024 and the RBNZ will be spooked into OCR changes. Let's hope the DTI is implemented before the housing market gets re-ignited.
What you call inertia, I call momentum. i.e. considerable force must be applied to slow the momentum but less force is required as the velocity slows. And that's where we are now ... moving at a very slow speed, perhaps even stopped, or maybe we're already going backwards?... But the RBNZ is still applying maximum force?
And when the economy needs stimulus, the reverse applies, more force needs to be applied to overcome what I call 'economic friction'.
But then ... Overcoming the friction to restart investment can be very tricky. When central bankers jaw-bone the markets down, what they say lasts for far longer than rates remaining high.
Weather forecasters in Akl are far more reliable.
But tell me, do you think the bank economists are required to be honest? Are there laws that bind them to honesty?
Or is there nothing stopping them from publishing their 'infomercials' as fact while they actually provide very different advice within their respective banks?
ASB chief economist Nick Tuffley says it now looks more likely that the RBNZ will start cutting the OCR in the second half of 2024 rather than waiting till 2025.
Maybe these bank economists should read Interest's comments section and follow the smarter commenter's views, lol.
Very, very unlikely.
A bit of history will explain why. Back before the RBNZ was created interest rates (and bank regulation) were in the hands of politicians. Consequently overseas lenders saw lending to NZ as very risky (and rightly so!). Thus our retail interest rates were way higher than places like the US that had better structured and regulated markets. The RBNZ was formed in 1991 (ims) and it took time for for the RNNZ to gain the trust of overseas lenders. But they did. And retail interest rates fell. We're still a tad higher than we should be.
Again this is mainly down to our financially and macro-economically illiterate politicians (and the swing voting fools that elect them) that lurch from one economic direction to another. Foreign lenders remain understandably nervous.
And with the NACTF slashing and burning critical infrastructure projects without any sensible economic analysis being evident I suspect overseas lender will remain nervous and demand risk premiums. But this will be a one term government. So normal service should resume shortly. But what a shame we all have to suffer higher interest rates while these fools flail around endlessly while demonstrating to the world their incompetence. Just an aside, the increasingly extreme nature and views held by an increasing number of 'swing voters' is making lenders nervous on a global basis and NZ has just become 'watch' case where it hasn't been since the 90s.
If the trust between the banking systems fails like it did during the GFC, then rates could easily be higher. Quite a bit higher. Its reflects the risks in what may be exposed as who is the biggest liar. The lie being the price that assets are marked on their books of the banks. Lets face it, everyone has ignored how the word "fundamentals" should be spelt for quite a while.
The previous free hold owner was renting it out for $750 per week, and paying tax on their $450 per week profit.
They're now selling for a tax free capital gain, meanwhile I'll be tapped out and reliant on interest deductibility to make the numbers work.
End result, the rental property goes from $150 per week in tax to zero tax. And the rent of $750 per week is also picked up by the taxpayer for the unemployed.
The figures might have been a little hyperbolic, but the problem still exists. No different than if average rents in this country were $100 a week less, that $100 could be spent by the tenant at local businesses that collect and pay GST, employ staff with PAYE etc.
But often $600 - $700+ per week per renting household is being spent on non-tax bearing enterprises due to debt soaked landlords.
We recently put a 2 bed unit to market, we had 2500 enquiries a manic open home,quite clearly large numbers were new arrivals but all employed.
The majority in the health sector.we were offered above what we asked but we don't do that, but it is usually only one this time quite a few.
Who would have thunk it that house prices could continue to drop after the OCR is cut....https://imgur.com/a/QtUuacZ
I don't know if the normal inflation fundamentals still apply. Covid made a lot of weathly people and lucky boomers very rich. Will they stop spending?. They will simply make more money put thier rents up buy more ebikes and go on more cruises. I get that the low income will continue to suffer but will the boomers?. Inflation will stay above 4%. Where I live the tourism has increased its just boomerville . I think unemployment will rise a little working middle income people will suffer but you won't be able to get into a cafe due to the line up of hard done by boomers getting interest on their investments.
Healthcare is the main spend as people pass through their sixties and beyond, as practically all boomers are now. Otherwise older people simply eat less, drink less, move into smaller houses and really have no need to spend on anywhere near the range of things that a young and establishing family does.
Some interesting trends I was reading a while ago. Some US demographic areas have the Boomer generation competing for the same small houses as their kids the FHBs. They're moving to be closer to the grandkids but unwittingly pricing them out.
Other areas, they're unwilling to give up the big house. Many people round me are in their late 80s or their 90s and still in their 3br house on a quarter or eighth acre section. So if the Silent Generation don't want to, we can't assume the Boomers will downsize either, or that the wealthy ones will only spend on healthcare. We've got another 10 years to prepare, at least.
Many people are brainwashed to think that low interest rates are the way it should be, which is nonsense look back in history 5% is a low level, when I got my first house I was paying 5% because I was working for a large bank everyone else was 12% to 15%. Dropping rates low has pushed up property prices to the point that if you purchased the average house in Auckland at 1.2 million and rates did go up to 12% for the million dollar mortgage would cost you $2400 per week that’s $500 more than average household income. If inflation is at 5% why would any bank give you a mortgage at the same rate they have to make a profit.
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