A 50 basis-point cut to the Official Cash Rate, which would see it drop from 3% to 2.5%, is needed, ASB senior economist Jane Turner says, otherwise there's a risk of delivering stimulus too late to households and businesses.
Turner's comments follow the release of the New Zealand Institute of Economic Research (NZIER) Quarterly Survey of Business Opinion (QSBO) on Tuesday which shows business confidence has fallen in the September quarter to meet reality.
This survey has been running since 1961 and is closely watched by the Reserve Bank of New Zealand (RBNZ) who are set to announce the new Official Cash Rate (OCR) on Wednesday.
The RBNZ is charged with keeping inflation in a 1% to 3% range, and it explicitly targets 2% inflation.
In August, the OCR moved to 3.00% from 3.25% - with two members of the RBNZ’s six-member Monetary Policy Committee voting for a 50-point OCR cut. At that stage an OCR low point of 2.5% by the end of the year was seen as a real possibility by the central bank.
While there’s a universal expectation of a cut to the OCR, the big debate is whether the OCR will be cut by 25bp - bringing it to 2.75%, or 50bp which would see the OCR at 2.5%.
With the September quarter seeing a drop in business confidence as the recovery in demand continues to disappoint, it’s possible these survey results may be weak enough to tip the RBNZ into making a 50 basis-point (bp) cut to the OCR.
'Wheels are spinning in the mud'
Following the survey release, Turner said more support is needed and the RBNZ “needs to get there faster and deliver a 50bp cut tomorrow or risk delivering the stimulus too late to matter to households and businesses”.
“The economy may have turned a corner, but we are failing to gain traction to get out of this hole - the wheels are spinning in the mud.” Turner expects a follow-up cut to 2.25% next month.
Westpac senior economist Michael Gordon says: "The NZIER survey suggests that the economy remained sluggish in Q3. It supports our view that the RBNZ will deliver a circuit-breaking 50bp cut in the OCR tomorrow."
Meanwhile ANZ senior economist Miles Workman says the survey results increase the odds that the Reserve Bank delivers a 50 bp cut on Wednesday.
“All up, we still think strategy favours a dovish 25bp cut tomorrow, but today’s data move it towards the coin flip realm.”
Workman says a 50bp cut would not be difficult to justify.
NZIER deputy chief executive Christina Leung says the easing in business confidence this quarter is the lowest since December last year.
Leung says while NZIER's core forecast is for a 25bp cut in the October meeting, if the Reserve Bank decided to go for a 50bp cut, "I don't think anything in here would stop them from doing so".
The survey says: “We recognise the increased speculation that the RBNZ will cut the OCR below 2.5% in this cycle, given the persistent weakness in economic activity."
Continuing to face weak demand
The survey results will not have cheered the RBNZ - only a net 15% of firms expect an improvement in general economic conditions over the coming months – a drop from a net 26% in the June quarter.
Leung says “firms are feeling less confident now given they continue to face weak demand".
As firms continue to report weak demand, the survey found a net 14% of firms faced reduced activity in their own business in the September quarter.
The survey says “this waning optimism is leading to increased caution when it comes to hiring and investment” as a net 23% of firms reduced staff numbers in the September quarter and firms indicated plans to reduce investment in things like buildings, plant and machinery.
While weak demand is the main constraint for firms, the survey says the proportion of firms reporting weak demand as their primary constraint has fallen to 63% in the September quarter. This was a net 68% in the previous quarter.
The survey says “instead, there has been a modest increase in the proportion of firms reporting capital and finance as the primary constraints”.
A net 3% of firms reported finding labour was a primary constraint.
“There’s some movement there but overall weak demand remains the dominant concern for firms,” Leung says.
Inflation
Despite this, the survey says “cost and pricing indicators suggest a pick-up in inflation pressures in the September quarter”.
Along with a slight increase in cost pressures, a net 11% of firms reported they had raised their prices in the September quarter.
“We expect annual CPI inflation to rise just above 3% over the coming quarters. However, continued excess capacity in the New Zealand economy should drive inflation back towards the RBNZ’s inflation target mid-point of 2% over the coming year.”
Manufacturing sector feels the least optimistic
Among the sectors surveyed, the manufacturing sector was the least optimistic as only a net 3% of manufacturers expected economic conditions to improve.
“Although export demand improved, export demand was still in contraction,” the survey says.
“Profitability in the manufacturing sector deteriorated in the September quarter, despite many manufacturers being able to raise prices to pass on higher costs.
“The weaker global growth outlook, arising from heightened global uncertainties, presents a key headwind for the manufacturing sector, given the influence of global investment on manufacturing demand.”
Despite this drop in confidence, retailers were the most optimistic sector this September quarter even though there was continued weakness in new orders and sales, the survey says.
“The optimism is likely to be supported by the widespread expectations of lower interest rates over the coming year.
“With over 40% of mortgages due for repricing over the coming six months, we expect the reduction in interest rates to date will continue to support a recovery in retail and services demand over the coming year.”
45 Comments
What are they possibly trying to achieve by delaying any recovery by stretching it out?
Agree. If they do 0.25 this review, it will almost certainly be followed by another 0.25 next review. Why wait?
We are still seeing the impacts of decisions 1-2years ago, therefore why rush to make a decision now which we wouldn't expect to see the ramifications/consequences for another 1-2years?
The cost of debt isn't the issue and saviour here.
They rushed it up from 0.25 to 5.5 and killed the economy. Need to rush it back down to a level that people can afford before things really get bad.
Is that really what killed the economy?
Yep, it’s what its designed to do and it worked just like it has every other time.
If you want an increase in activity then spending capacity must be increased for those without the propensity to save.
It appears the ponzi has run out of new entrants.
Yup. And the leveraged to the wazoo should use cheaper debt to reduce debt. But the seminar believer wont.
It appears the ponzi has run out of new entrants.
We have options. Just do what the Aussies have done with the 5% FHB grant sponsored by the taxpayer. Frankenstein economics. If the Ponzi is looking vulnerable, throw the kitchen sink at it.
Anyway, at any seminar you attend, the idea of the marginal buyer being critical in the market is a taboo subject. Ashley Church would be scrambling for his crucifix if someone bought it up. It could even see you get banned from the BBQs if people had an inkling of what it actually meant.
I ripped TA a new one at a private presentation back about 2022, he was still preaching its just a pause...
Most people... economists, bankers, politicians, and general public are shocked that the pause has gone so long.
The collective wisdom of interest.co.nz commenters has never doubted the severity of the downturn. This is where to come for the good oil
I think that they have tended to think of the OCR as a switch not a dial. My feeling is that .25 percentage point cut would be right - why race to bring it down two months earlier.
I wonder if some of that push toward faster reduction is from people who aren't watc;hing overall economic demand but are rather focused on the housing market. Further changes of 0.25 points isn't going to change the housing market - that is hit by a supply demand issue and we need to wean ourselves off that as the total barometer of our wellbeing
The push toward faster reduction is due to the NZ economy tanking while other economies are improving. The RBNZ went too high, too fast, then took too long to start cutting, and cut too slowly.
The push toward faster reduction is due to the NZ economy tanking while other economies are improving.
Which of these improving economies are you referring to? Aussie? I think it's a myth to say that the Aussie economy is the gift that keeps on giving. They're relying on extreme migration to juice consumption. Their jobs growth is primarily in the public sector, not the pvte sector.
Where are these other economies that are improving?
I spend far too much time reading the news and Im struggling to find one.
Maybe improving is the wrong word. Their economies had positive GDP growth last year while ours was negative 0.9%.
US 2.8%, UK 0.3%, Canada 1.5%, Australia 1.4%.
The main difference in the GDP figures is theirs includes all the spend from supporting a speculative property market, and ours now doesn't.
The Australian property bust is going to be epic.
The Australian property bust is going to be epic.
That's what Steve Keen said 14 years ago. He's still waiting for it to happen.
But how Steve perceives things is compelling. Just how it all unwinds is unclear. I'm betting on social degradation.
Given the low bar of experiences that I can actually remember,
while hitching in Aussie, from Sydney to Darwin,
social degradation could be bad, real bad.... like its red neck max max already.
The old circuit-breaker analogy: "It supports our view that the RBNZ will deliver a circuit-breaking 50bp cut in the OCR tomorrow".
My prediction stays the same - and the article states it - demand is missing from the economy and the private sector is in a self reinforcing contraction at this stage. Won't matter very much what you do with interest rates.
Increased government spending - gradual because they've destroyed productive capacity in such a short time -is needed to restore demand and private sector growth.
Our household has cut our spending (demand) for two main reasons:
- At current interest rates I’d rather pay down debt than spend
- At current interest rates we have less money left over after we pay the mortgage than we did a few years ago.
So interest rates are by far the biggest factor for us. I don’t think the government has affected us at all, in fact we’ve had a tax cut that has probably favoured us.
shit yeah that is classic crap speak at any level it reeks desperation vs careful planning
.
50 points now + 50 points in November, then pause.
Could be right.
The biggest risk IMO is if the next GDP is negative, the next CPI is less than 3%, and the RBNZ hasn’t made significant cuts. That’s when the entire country (particularly the finance minister) will be out for RBNZ blood and they will end up making big cuts that they shouldn’t.
They have been way too conservative for a while now, the risk with that is that our patience runs out.
Sounds great for your housing portfolio. Not great for everyone else considering there's only 1/3 of people with a mortgage...
Why not great for everyone else? If that can get our economy going then isn't that great for everyone...who is it not great for, and why?
Make speculation and inflation Great Again...
You need to get some red hats made 😂
Is that a serious question?
What do highly inflated house/accomodation prices do for an economy?
Increase wage demand and business costs making everything more expensive than it otherwise needed to be.....especially in relation to those economies you need to compete with....it is a dumb policy but what we have relied upon for at least 20 years, once we gave up on competing via investment in our abilities....and to continue it beyond any reason we have imported demand via migration.
It serves a very small fraction of the population and the country not at all....and both major parties ( but i suspect not for much longer) subscribe to it.
It is a serious question Frank, according to pretty much everyone who posts on these interest forums the “ponzi” is dead and buried and there isn’t enough capacity for another boom round…so why is the concern that lower lending will instantly lead to over inflated house prices?
Lower lending might encourage people to invest in productive businesses and that would surely be great for all of NZ?
Except that we have built a huge asset bubble that is seeing an inaction because we do not know how to unwind it.
Add to this the fact that the globe is suffering a decline in its ability to grow and a small economy that thinks it is better than it is and we find ourselves where we are.
Time to be realistic and accept (and aim for) what we are capable of.
Ok, I was simply asking why cutting the OCR would be “not great” for the two thirds who don’t have mortgages as the commenter above said…this reply doesn’t answer that.
My mistake then....if the reduction in the OCR creates the demand the RBNZ (and banks) desire then we will simply double down on our existing problems and an ever smaller segment of the NZ population will be satisfied, meanwhile the economy as a whole (and the majority) will have less and less reason to support the staus quo.
The end result is the goose that lays the golden eggs for the few will be cooked.
If they use LVRs and DTIs well couldn’t it cap the house price growth then the lower lending could create extra disposable income for those with mortgages to put back into the economy, and it might create confidence for businesses to loan for productive assets? All good stuff for our economy.
Term deposit holders would hurt I agree.
I understand that if the lower rates simply fed into housing and we see another boom then that is a terrible idea, but again, it seems the majority here think we do not have the capacity for that to happen again.
We (the banks) have the capacity..the question is do enough have the appetite for the risk?
But what does it do for he economy? Does it increase our ability to provide for ourselves?...or does it make our exports more desirable/competitive?
And the interest (profit) extracted from the economy goes where?...back into NZ Inc?...no, the bulk heads offshore for the benefit of other economies.
As said, it is a dumb policy
term deposits below inflation rates?
Already happening.
Recall that the RBNZ were indicating negative interest rates a few years ago...we have to reduce costs somehow , unfortunately Treasury always advocate reducing labour costs...and the politicians, despite the denials listen to Treasury.
It is a distribution problem....we can do what we can do, the recompense is secondary.
The ability remains no matter .
once rates go negative no body can default........
I think whether the OCR will be cut by 0.25 or 0.5 will be more telling about our new Swedish lady Governor (is there a feminine to "Governor"?) than the the economy itself.
I might surprise a few, but I think it should be 0.25%, because we're seeing a pick in activity at the coalface. This won't be reported for months of course. This is not a prediction, just an opinion.
Its such a small difference it will not make a difference, the damage is already done
The damage has been done by decades of endless debt speculation fueling ever stupider house prices. The recent rise in interest rates simply awoke the over leveraged from their drunken state to financial reality. It has to be paid back at some point and the banks can call in the loan on their property...yest they actually have more rights than you while a mortgage is registered.
The term Mortgage in the middle ages translated as Death Pledge, and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure.
I'm still not seeing any great improvement at the coal face. That's why I think we're going lower than many predict with interest rates.
circuit breaker does not equal green shoots
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