New Zealanders are spending like its 2017 as high interest rates sap retail sales volumes

As the Reserve Bank of New Zealand (RBNZ) prepares to make its next monetary policy decision next week, retail sales data suggests previous rate hikes are working.  

Retail sales volumes have been falling for eight consecutive quarters and dropped another 1.9% in the last quarter of 2024. 

Volumes are now 4% lower than a year ago and 8% below their peak two years ago. 

Doug Steel, an economist at BNZ, said the data showed New Zealand’s jets have not only been cooled but are now in reverse.

“Retail sales is not all of private consumption but does equate to a bit more than half of it. And that is a big segment that has been going continuously backwards for two years,” he wrote.

Real sales per capita have dropped 6.7% from one year ago as cash-strapped households have cut discretionary spending to pay their mortgages or, at least theoretically, increase savings.

Over two years sales volumes per person have dropped 11.1% and are now at the lowest level since March 2017. 

“If the RBNZ was looking for signs that demand is weakening, it seldom gets much clearer than this,” Steel wrote in a note on Friday. 

Most economists expect the central bank to hold the Official Cash Rate at 5.50% on Wednesday, but ANZ’s economics team believes it could choose to start hikes again. 

Economic activity data for the third quarter of 2023 was weaker than expected but the Reserve Bank's chief economist downplayed the importance of the data.  

Steel said the weak sales volumes suggested the weaker-than-expected result could be repeated in the fourth quarter data when it comes out in late March. 

It also suggests that monetary policy settings are working. Consumers are cutting spending, which is limiting retailers’ pricing power. 

“It all fits with our view that interest rates do not need to be lifted any further, even though one cannot rule it out given the recent rhetoric from the central bank”.

Or, perhaps not

But the weak sales data wasn’t enough to discourage ANZ from their hawkish forecast of two more OCR hikes in the next two meetings. 

Miles Workman, an economist at the bank, said retail sales volumes had fallen more than expected but there was plenty more data to factor into gross domestic product forecasts.

“It’s hard to foresee the outlook for retailers turning optimistic until the RBNZ has tamed inflation and is able to ease monetary conditions,” he wrote. 

“To get to that point, we think the OCR will need to go a touch higher from here”. 

International central bankers are also striking a cautious tone when discussing the outlook for interest rates. 

While hikes are unlikely in the United States, policymakers are reluctant to start loosening monetary policy until it assembles stronger evidence that it has put inflation to bed. 

Similarly, the European Central Bank has warned cutting rates prematurely could be more damaging than holding them high for a little too long. 

The annual inflation rate in both these jurisdictions was roughly 3% in January, as measured by their monthly consumer price index data.

New Zealand’s headline inflation rate was 4.7% in the December quarter and isn’t expected to drop below 3% for another six months.