The Reserve Bank's case of 'sprained ankles' following a 'massive misstep'

Economy / news

Kiwibank economists believe the Reserve Bank is set to do a big about-face with its Official Cash Rate forecasts

29th Jul 24, 2:06pm by David Hargreaves

Source: 123rf.com

The Reserve Bank is set for a "complete about-face" on its interest rates forecasts, "leaving many within the RBNZ with sprained ankles", according to Kiwibank economists.

The Kiwibank economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say in their latest First View publication that in its Official Cash Rate Review on August 14 the RBNZ will "lower all their forecasts and signal rate cuts by year end, rather than late 2025".

In its last set of forecasts released in May the RBNZ gave a surprisingly 'hawkish' view, actually giving an increased chance of an OCR HIKE and not forecasting any cuts till the second half of 2025 - which was later than it had earlier forecast.

The Kiwibank economists now describe that May stance by the RBNZ as a "massive misstep".

"...We see the need for rates relief now, not later. If we were setting policy, we would have cut already. But for August, we’d cut 25bps [basis points], and signal 25bps at every meeting thereafter. And we’d highlight the potential use of 50bp moves, data dependent."

However...

"At this stage, we don’t see the RBNZ buckling fast enough to do what’s needed (yet). Even though we think they should cut, we think it’s a step too far for the RBNZ."

The economists say that if the RBNZ favours seeing official confirmation that inflation is back within it’s 1-3% target band, then November is the earliest kick-off date for rate cuts.

"Because we see this box being ticked by the next [inflation] print released in mid-October.

"Our current call remains a 25bp cut in November. Risks however are strongly skewed to an earlier move."

The Kiwibank economists say the weakness in the recent economic data "has definitely been playing on our minds".

"And no doubt the RBNZ’s too. We do think there is a case where weaker than expected data – whether that be the upcoming employment, GDP, or QSBO [NZIER Quarterly Survey of Business] reports – could tip the scale towards a cut in October. Because such outturns should be confirmation in itself that inflation will fall below 3% in the September (current) quarter.

"August would be too early for the RBNZ, and quite the 180° move – to go from signalling a rate hike in May to cutting well ahead of expectations. The debate on timing will continue as more data comes to light. And more volatility is to come as the RBNZ likely under-delivers on (currently) over -priced market expectations."

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.

66 Comments

by sgtshortcut | 29th Jul 24, 2:20pm 1722219651

So the great Tane Mahuta, aka Governor Orr, has painted himself into a corner…will he admit he got it wrong & cut or will his ego continue to take the wheel & it’ll be steady as she goes on the current course 🤷🏻‍♂️😂

by Mike.Gayner | 29th Jul 24, 2:52pm 1722221563

Adrian Orr is not famous for his humility.

by FCM | 29th Jul 24, 3:38pm 1722224290

Well he already got it wrong once when he cut too low and people gobbled up the cheap $, he never admitted it then, he won't admit it now.

by Jonny.Foe | 29th Jul 24, 2:27pm 1722220070

RBNZ can push their OCR lever this way or that, the damage is done, the recession has momentum, and it will take big fiscal to pull us out of the nosedive. History fans might enjoy this graph. We've been here before.

by IT GUY | 29th Jul 24, 2:55pm 1722221714

He was always going to deny deny deny CUT

I think to kill the Ponzi he had to go pretty hard to convince people, trouble is he has killed the Ponzi and massively dented the remaining non Ponzi businesses confidence.

I think he goes in August, NZD is screaming it thinks so.

by Jonny.Foe | 29th Jul 24, 2:59pm 1722221998

Deny, deny, deny, cut. Is a good description of the obvious strategy. But, the 'cut' bit won't look clever, it will look like pure panic - an admission they have stuffed it up.

by IT GUY | 29th Jul 24, 3:02pm 1722222176

stuff up is a 50 or 75 bps,

50 here and 50 in oct would move the dial

by Jonny.Foe | 29th Jul 24, 3:08pm 1722222512

Move the dial on what, and when? House prices in late-2025?

by IT GUY | 29th Jul 24, 3:14pm 1722222891

No they have to smash lending costs down for business IMHO. Farmers etc.

Housing is dust until xmas 25/26 at the earliest.

by Arbroath | 29th Jul 24, 5:32pm 1722231123

25 in August & October followed by 50 in November to be 4.50% for the long summer break. If things still feel as weak as they do now then 50 in February followed by 25 in April & late May 2025 and we will be back around neutral at 3.50%. You heard it here first.

by Jonny.Foe | 29th Jul 24, 6:24pm 1722234256

3.5% isn't neutral any more. Private sector debt is too high.

by IT GUY | 29th Jul 24, 7:44pm 1722239088

yep

but all the kings horses and all the kings men, cannot put humpty together again

by Landgirl | 30th Jul 24, 11:44am 1722296646

Bingo. We’re trapping ourselves into a boom bust cycle. Low rates = go nuts, high rates = go bust.

by Rumpole | 29th Jul 24, 8:36pm 1722242201

Arbroath - Probably right but Orr wouldn't understand so wont happen until the economic damage to NZ is severe.

by linklater01 | 30th Jul 24, 9:15am 1722287700

Arbroath,

Love the smokies, but that's too fast. My guess is 2 25bps this year.

by Rumpole | 29th Jul 24, 8:34pm 1722242064

Internastional interest rates are what governes NZ mortgage rates and Westpac has already read the room with its two rate cuts recently.

by J.C. | 29th Jul 24, 3:05pm 1722222320

I think to kill the Ponzi he had to go pretty hard to convince people, trouble is he has killed the Ponzi and massively dented the remaining non Ponzi businesses confidence.

He can't kill the Ponzi. He should know that. The boffins in his flock will be reluctant to point this out, despite their fancy pants educations and models.

What they need to do is for money growth to expand north of 10-15% pa. How that can happen, I don't know as money growth is primarily delivered through credit creation for the Ponzi.

by IT GUY | 29th Jul 24, 3:13pm 1722222808

I am not sure that there has ever been a country where 65% of all bank lending has been into the primary Ponzi. I do not think NAct even realise how much fiscal support is going to be needed, I don't think they have any idea how either.

by Jonny.Foe | 29th Jul 24, 3:15pm 1722222923

In the last ten years, 87% of net credit money creation (by banks) was housing loans! it was about 50/50 housing / non-housing before the GFC.

by IT GUY | 29th Jul 24, 3:18pm 1722223095

This cannot be replaced overnight, we are doomed.

by DDSQL9822 | 30th Jul 24, 10:57am 1722293839

Agreed, bank's visibility is blocked by short-term term profits. With shrinking population, these banks will be stuck with ballooned assets without any takers. In 10 to 15 years people will find out that it wasn't the worth to borrow so much for something that is highly inflated.

by Rumpole | 29th Jul 24, 8:39pm 1722242340

It would help if Nat recognised increasing productivity and then doing something to encourage NZ producers but I fear Luxflakes will continue to whitewash and slide whichever way the WEF tell him to.

by bw | 29th Jul 24, 3:16pm 1722222975

"money growth is primarily delivered through credit creation for the Ponzi"

And that's it in a nutshell.

Change what we use Debt for; anything but The Ponzi, and cut the OCR to whatever anyone likes. And if we are really courageous, we CAN do it.

by J.C. | 29th Jul 24, 4:41pm 1722228112

Change what we use Debt for; anything but The Ponzi, and cut the OCR to whatever anyone likes. And if we are really courageous, we CAN do it.

No. The nation's wealth is tied up in the property sector. It's politically unpalatable and economically disastrous to wreck this private capital base. Essentially it's now too big to fail.

by malamah | 29th Jul 24, 4:48pm 1722228519

The flip side is the destruction of wealth of the current non-owners and potential FHBs. Whatever losses we're protecting in the housing market currently come at an opportunity cost to future generations, with interest.

by IT GUY | 29th Jul 24, 5:11pm 1722229886

Just like in China its going to collapse here as well, its to big to stop it failing

by OldSkoolEconomics | 29th Jul 24, 5:48pm 1722232084

It will be interesting to watch what unfolds over the next few years.

Not just here but globally. For us it will be mainly about housing and that will spill over to everything else.

It looks like in the US the AI bubble might just pop to kick things off.

by Blackbeard | 30th Jul 24, 10:18am 1722291539

This is what is going to happen - a Bipolar world

China (Russia) lead brics

US (UN) lead G7

NZ needs to be clever and have a foot in each door - neutrality stance

by Landgirl | 30th Jul 24, 11:50am 1722297039

The flip would require a psychological shift in the national consciousness- which you’ll possibly only get if the housing market crashes badly enough to destroy faith in its everlasting tax free gains. Orr will haul on the interest rates to prevent this happening (because it will wreck our economy which is tied to household mortgages) - which in turn reinforces the infallibility of the ‘Ponzi’

by malamah | 29th Jul 24, 4:45pm 1722228327

Interesting timeline of events;

In July 2008 OCR was reduced 8.25% -> 8.0%, but by December 2008, OCR was 5%. The real carnage came after.

Pull up...

by Pragmatist | 29th Jul 24, 5:45pm 1722231933

That graph needs context, like at least a couple years before the downturn. And a title saying what data source.. I mean, is that data even for NZ?

by Jonny.Foe | 29th Jul 24, 6:29pm 1722234544

Yes, it is NZ, it was part of a series with references at bottom. The data source is monthly filled jobs (stats NZ, info share) seasonally adjusted, all industries. The data starts in 1999. It has gone negative year on year three times - 2009, 2020 (briefly), and 2024.

by Rumpole | 29th Jul 24, 8:32pm 1722241951

Spot on Joe RBNZ too little too late & too much too soon, thanks for the chart, Orr should rememember the trend is your friend.

by WestieAJ | 29th Jul 24, 2:37pm 1722220648

Anyone with a connection to the real economy knows that September CPI will be lucky to get to 0.5%. When the September 2023 quarter of 1.8% drops out we are at 2% or lower annual inflation. A 0.25% cut in August is 100% necessary. If only to give businesses some hope that surviving to 25 is possible.

by bw | 29th Jul 24, 3:00pm 1722222039

So you reckon giving a business that has $1,000,000 of Debt a cut of $208 per month; $2,500 for the year the difference between survival and receivership? That's a lack of risk management if it is. But of course, to a property speculator, it might be the crucial factor. After all, Capital Gains isn't Inflation, is it?

by WestieAJ | 29th Jul 24, 3:32pm 1722223942

New Zealand has around 560 billion of total bank lending. Each 0.25% interest rate reduction will inject 14 billion a year of additional spending power back into the economy. 38 million per day. $20 per day per household.

by bw | 29th Jul 24, 4:04pm 1722225876

And where pray tell is all that Debt concentrated? Yep. In the Residential Property Market. That's the problem, fix that, and all else becomes easy.

Do those sums again as if Property Debt was, say, 1/4 what it is today - roughly about what it was 20 years or so ago, and see what a massive noose we've placed around our necks.

by Flying high | 30th Jul 24, 4:53am 1722271994

Trouble being that we dream big over possibilities and standards for housing. Developers of standalone family homes are now loss making and not viable. So where are you getting new standalone housing stock from ... granny flats, weve gone the other way. That meets a need for a sector, not everybody.

by Jonny.Foe | 29th Jul 24, 4:18pm 1722226698

Business will get some relief on debt servicing costs pretty quickly so a 0.25% reduction on interest payable on $200bn of business loans = $500m per year of reduced business costs. Great. However, the average interest rate payable on $360bn of mortgage loans will probably increase for 3 - 6 months after the OCR cuts as fixed rates work through. It will be a year before we see a few billion of extra disposable income hitting the economy.

More importantly, the above only covers the business cost / disposable income side of the equation. The other side is bank money creation stimulus - the amount of money that NEW mortgage loans inject into the economy (net of repayments). When the economy is running in its usual Ponzi style, private sector debt increases by around 4% per year in real terms. It will be year or so before we see any real terms growth at all.

by Let me be Frank | 29th Jul 24, 4:51pm 1722228667

I suspect this time round will be deeper and longer....and the next time (assuming there is one) may be the final play.

by Jonny.Foe | 29th Jul 24, 5:14pm 1722230077

Yes, I was modelling exactly that last night. Private debt is back down from 155% to around 140% of GDP now ($550bn). This means interest payable on private debt is around 10% of GDP ($42bn per year). Whenever interest costs get above about 8% of GDP the economy falls to bits. So, for us to go through another cycle of the housing ponzi, we would need the OCR to be back around 1%. We could then continue to grow private debt at 4% and GDP at 2% for 20+ years without interest payments getting above 7% of GDP. Unless of course we have another bout of OCR hikes, in which case we have another reset until the next phase.

Just because the above is true, doesn't make it a good idea!

by Let me be Frank | 29th Jul 24, 7:22pm 1722237737

" We could then continue to grow private debt at 4% and GDP at 2% for 20+ years without interest payments getting above 7% of GDP. "

What is your formula?...I ask because by longhand I get private debt at 342 billion (usd) and a current servicing cost of.7.2% of GDP more or less, assuming OCR rate is used.

by Jonny.Foe | 29th Jul 24, 7:13pm 1722237181

Basically increase private debt by 4% per year and GDP by 3% per year. Then assume interest payable on that pile of private debt is OCR+200pts. If OCR drops to 2% and stays there, you can limp along for years. Here's that data visualised.

by Let me be Frank | 29th Jul 24, 7:32pm 1722238377

Ah OCR plus margin...got you. Thanks.

by ChrisOfNoFame | 29th Jul 24, 10:48pm 1722250111

Import more people. Build more houses. Job done.

by gnx | 29th Jul 24, 7:36pm 1722238595

Minus the loss of interest earned on td’s

by Jonny.Foe | 29th Jul 24, 10:06pm 1722247560

True

by bdogg | 29th Jul 24, 4:06pm 1722225964

It gives the whole economy hope. Consumers especially who can spend slightly more than the zero they are currently spending. Everything is linked.

by DaveB1978 | 30th Jul 24, 6:03am 1722276221

It isn’t just the $208 in interest. If people have more money, they will spend more so a modest boost in sales and lower coats will be the result.

by DonKerrBab | 29th Jul 24, 3:47pm 1722224844

Back of the envelope calculation would suggest Rates will add about 0.4% to September CPI

by Jonny.Foe | 29th Jul 24, 4:28pm 1722227303

That's a 14.6% weighted average rate rise? A 10% average rate rise would add 0.274 percentage points to the annual CPI.

by Arbroath | 29th Jul 24, 5:36pm 1722231376

Sept quarter might still be closer to 1.0% imho but because it’s made up of effectively tax like hikes (rates & insurance) that are hard to avoid it’s not the kind of inflation the RBNZ should be concerned with. It’s nothing to do with monetary velocity and everything to do with draining much needed cash from household budgets which will lower future inflation.

by DaveB1978 | 29th Jul 24, 8:46pm 1722242794

3.3-1.8+1 = 2.5% so well within the 1-3% and I’d go as far as saying the ocr is probably inflationary for rates as it increases the cost of debt.

by bw | 29th Jul 24, 2:48pm 1722221300

Just one opinion, of course. From 2023...

"Respectfully, Kiwibank's chief economist has been reading from the same song sheet all year when predicting rate cuts from the RBNZ. Time that we had some commentary from an economist who actually knows what he's talking about."

https://tmmonline.nz/article/976522626/ocr-rates-cuts-should-dominate-n…

by HouseMouse | 29th Jul 24, 10:24pm 1722248658

I wonder if people like him actually irritate Orr, and that encourages him even more to be stubborn on cutting the OCR

by Due Diligence | 29th Jul 24, 3:25pm 1722223501

The fact that RBNZ has STILL not cut the OCR is astonishing.

KiwiBank economists have been calling this correctly for quite some time now. They understood the extent to which the NZ economy was suffering to a far better extent than RBNZ.

As an aside, Adrian Orr has been so liberal and frivolous with his jawboneing that he has lost all trust.

by bw | 29th Jul 24, 3:54pm 1722225246

The Aussies have a similar debate going on:

"The prudential regulator will not relieve borrowers of the 3 per cent interest rate buffer they must absorb before qualifying for a home loan because the economy faces too much uncertainty from inflation, geopolitics and leverage."

And the predictable response from a bank with a vested interest - along the lines of Kiwibank's pleading:

"ANZ chief executive Shayne Elliott says regulators are “locking out middle Australia” from being able to access home loans, in the latest warning from a major bank boss that there is a disproportionate focus on shrinking financial system risk."

https://www.afr.com/

by CN - new | 29th Jul 24, 7:07pm 1722236868

Vested financial self interests to regulators:

Your macro prudential measures for financial stability for the entire financial system and the country are interferring negatively with my personal bonus / profits.

The vested financial self interest forgot to thank the central bank for being a cause of their rising profits due to their interest rate cuts since 2008. Instead many claimed the profit rises due to their own innate skills and ability.

by Takere | 29th Jul 24, 4:05pm 1722225919

But. CPI(Basket of Pams Goods) is 3.4% and the Household Survey is 5.6%. (Mortgages, Land Values, and related transactions). We're looking at a total of 9.0% of real inflation.

Higher for Longer baby 👶

by bdogg | 29th Jul 24, 4:12pm 1722226348

This has to be one of the stupidest, uneducated comments that I have ever read. Factoring mortgages into inflation and wanting to keep the OCR high to what...... drop the mortgage payment 'inflation'? lol

Takere with pure NPC commentary.

by kwbrn | 29th Jul 24, 4:51pm 1722228679

My prediction is higher for longer.............because that's best for me.

by ChrisOfNoFame | 29th Jul 24, 10:52pm 1722250337

Thank you for the honesty. Those 'predicting' the same aren't usually so.

by MikeM | 29th Jul 24, 5:30pm 1722231015

My prediction:

If unemployment is bad enough next week, they'll cut in August.

by blobbles | 30th Jul 24, 12:08am 1722254910

Unsurprising to most of us that the economists are starting to agree with what we have been saying for the past 3-6 months. But the RBNZ loves to look in the rear view mirror to see whats in front of them.

by Eschaton | 30th Jul 24, 11:18am 1722295082

Worst RB governor ever?

by lt84 | 30th Jul 24, 1:08pm 1722301723

Of course they will

It’s an exercise in futility having unelected bureaucrats on huge pay packages who don’t know nor experience the real world having them determine our economic destiny

Cancel the RB it’s obsolete