We've been given permission to spend.
Will we spend? And, what will we spend on?
The Reserve Bank (RBNZ) seems clearly of the view that we have money available to spend and we could be spending it. But we are not. And that's a problem. Seemingly it's a confidence issue. Therefore the central bank now wants us to get cracking and do something to get our ailing economy moving. And spending will help. A lot.
What about the lack of confidence and therefore unwillingness to spend?
After the fast and furious rise in interest rates witnessed between particularly late 2021 to 2023 there's no doubt some people have done it tough. Those who bought during the pandemic frenzy of 2020-22 and geared themselves up with mortgage rates that had a '2' in front of them watched on as the '2's were replaced (not all in one go, but quickly enough) by '7's.
I'm amazed at how most people seem to have come through all this. New Zealand stoicism at it's finest. Latest monthly RBNZ figures on non-performing housing loans suggest that the worst is now over. Separate figures show that as of August, banks' yields on the total mortgage book were down to 5.45% from a peak of 6.39% in October of last year. It's taken a while but the yields are moving down meaningfully now and will continue to do so.
Things are improving and the New Zealand public is in a position to get back out there and start stimulating the economy.
A defensive frame of mind
However, it does appear that a save, save, save very defensive frame of mind has descended on the country. No doubt as the information given above demonstrates, in some cases this has been essential and will likely to continue being so for a while.
But let's consider a few other things.
The RBNZ has previously estimated that only about a third of us have a mortgage. So, for a start that means two thirds of us are not directly affected when Bank A starts hiking its interest payments. The unemployment rate, at 5.2%, is certainly considerably worse than the 3.2% during the pandemic - but it's been a lot worse in the past.
It seems to me there's been a contagious mood that's affected even those who could well afford to spend a bit. The upshot would appear to be that a lot of people who could be out spending are not.
This certainly appears to be how the RBNZ is now viewing matters anyway.
And I think they are probably right. The concern I would have is that once the tap does get turned back on, things could really start to flow. And it might not be easy to turn the tap off. As previously reported, in the media conference after August's Official Cash Rate (OCR) review, RBNZ Assistant Governor Karen Silk said only about half of the 250 basis points worth of cuts made to the OCR at that stage had been transmitted through the economy, meaning 125bps had not.
Well, let's say for argument's sake that another 25bps worth of cuts have been absorbed since then, that would leave 100bps..But of course we've now added another 50bps worth. By some rough and ready reckoning therefore, there's probably about 150bs worth of cuts still to make their way through the economy. This will make a big difference. It will mean a lot more money swirling around. What happens to it?
The changing savings landscape
Let's look at savings, and what's been going on with them. There's been a big change since interest rates began to rise in 2021.
RBNZ figures tell us that in August 2021 households had about $80.9 billion in term deposits. In August 2025 the figure stood at $144.6 billion. That's over $60 billion more 'locked up' in term deposits than there was four years ago. Which is a lot.
I use the term 'locked up'. But we don't really lock our money up for long. Separate repricing information tells us that of $289.2 billion of total household deposits as of August, $243.3 billion (84.1%) was 'locked up' for six months or less. And if we add in the $31 billion on deposit for a year, this means just under 95% of deposits are available within a year or less.
What this means is that vast amounts of money will be available soon.
To go back to the term deposit figures, I was surprised to see that they were still rising in August, but surely the impact of the late August OCR 25-point cut, and now the 50-point cut, and another 25 point almost certain to follow in November, will prompt some sort of serious outflow to start. Just look at what's happening to the deposit interest rates. Not so long ago these has '6's in front of them. Now the '4's are all but gone and the '3's could likely come under threat next.
What will people do? Clearly some people might decide to 'treat' themselves by spending some if they think that their deposit's at greater risk of growing mould than interest. This would be a positive for the economy.
But what about those who want to keep their money invested but are seeking a better return?
Well, you know where this is going don't you...
So, what about the housing market?
Will it be different this time?
I suspect the housing market is still suffering something of a lingering hangover from the incredible 40%+ pandemic price surge.
I do wonder how many people, caught up in the mood of that moment, have ended up, not necessarily financially disadvantaged, but perhaps in a situation where their position is 'untidy'. Maybe they ended up with an apartment that in the current low population growth environment is not offering good yields. And so maybe a degree of tidying up is being attempted before people decided to re-plunge into another property.
But this will sort itself out.
The missing ingredient at the moment is rising prices. Once that happens then surely as night follows day more money will be attracted into the housing market.
I think with an OCR, very probably, of 2.25% by Christmas, then we will see house prices rising again pretty soon into next year. It depends how much of this 'tidying up' that I talked about above is still required and how long that will take in terms of reducing the oversupply currently on the market.
So, what happens then?
A number of things are different now. The RBNZ now has both loan-to-value ratio limits and debt-to-income ratio limits available. Neither of these were in place in 2020. Rents are flat and not likely to start going up imminently.
And maybe too there is an attitude, maybe, that people don't want to see us going through another boom cycle like the last one. I do sense a bit of a "not that again" feeling.
But given our history, it's still a risk.
This is a gamble by the RBNZ
And I think the RBNZ has taken a risk by deciding to push interest rates into a stimulatory level and at a time when inflation is seen as likely to break through the top of the 1% to 3% target range.
The RBNZ is gambling on inflation being controllable and on us being, if you like, 'sensible' with the extra money many of us are going to have available at these lower interest rate levels.
Here's hoping the RBNZ's big 'cheer up' message has now hit home and that people will start spending and making investment decisions again, IE allowing the economy to grow. That would be a good news story and would vindicate the RBNZ's decision.
But here's also hoping we don't go from one extreme to another; that over caution doesn't give way to recklessness. That could just end up being the same old story.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
15 Comments
Two other things to add to the mix:
1. Low net immigration.
2. A government obsessed with austerity.
The first one is a head wind against rising house prices. And the second means no "crowding out" or inflationary pressures coming from public spending (or lack thereof) anytime soon.
It's been left to Main St to dig the country out of a hole. Expect interest rates to continue lower.
Spending more, borrowing faster than robbo and employing 15k more public servants than the last national government now counts as austerity?
Term deposits have only gone up over the last year because banks are adding interest to accounts. We have actually had a net outflow (more withdrawals then deposits). Average weighted interest rate has dropped from 5.8% to 4.2% during that period.
If this outflow speeds up, we might see some extra activity in the real economy. However, I doubt it. It is more likely that we will see a bidding up of other assets (shares, gold, property etc) and the seller at the end of the chain will use the proceeds to settle loans or buy govt bond (destroying money).
In my view, this flow from term deposits through assets and into loan repayments / bond purchases is well established, helped in large part by Govt selling many billions more bonds than it needs to offset Govt deficit spending (Treasury are supporting RBNZ QT).
It does strike me as odd that the commentariat were going crazy about the wild stimulus of QE, but we hear nothing about QT being pursued while the economy is in recession.
The 'every thing' bubble.
If this outflow speeds up, we might see some extra activity in the real economy. However, I doubt it. It is more likely that we will see a bidding up of other assets (shares, gold, property etc)
Credit issued for gold will be a pittance. Even if you were high among the 1%ers, I doubt a commercial bank is going to lend you money to buy gold. The Ponzi, yes. Gold, no.
Frank Giustra, gold mining financier, said this week that the gold markets have NOT been driven by investors, who only recently started dipping their toes. It’s global central bank demand predominantly. Mind you, Giustra thinks we're heading towards a monetary reset, with gold playing a central role. That puts in the conspiracy theory camp at the boffin meetings, universities, and water coolers.
"Frank Giustra, gold mining financier, said this week that the gold markets have NOT been driven by investors, who only recently started dipping their toes. It’s global central bank demand predominantly"
And that is a very bad sign....when even CBs are hedging against currency collapse.
However the fact is that the seeking of safe assets rather than investing and circulating money is the problem for the (financial) economy.
And governments are unwilling to act as a circuit breaker by investing and redistributing and have been for decades.
Bubbles always burst and if its an everything bubble then there is no safe haven.
Respectfully, you're misunderstanding. Money flows through chains of trades: Person A withdraws their term deposit, buys shares from Person B, who pays off some debt, and buys some gold from Person C, who buys a Govt Bond on the secondary market etc etc.
You could equally start this chain with Person A borrowing money to buy a house from Person B and on we go.
Understand that...my point is the credit creation (both previous and new) is overwhelmingly going into (largely) existing assets (of all classes) and that credit is available to fewer and fewer as the bubbles grow....an unsustainable path that the CBs are apparently joining.
I am not disputing the origin or transmission rather observing the outcome.
Also understand your point about the (unnecessary) sale of 5 billion pa of bonds (QT) that are extracting liquidity from the economy...that is an accelerant to a bad situation.
Sorry, I was replying to the other post. But, while I'm here, it is important to always be clear that money does not 'go into' assets, it goes through the asset sale - from the buyer to the seller. Credit creation, like Govt spending, is the start of a new dollar's journey through multiple transactions until it dies as tax revenue, loan repayment, or payment for bonds. Those transactions during the life of the dollar catalyse the use of labour, materials, energy, etc... aka economic activity. When money is not flowing, materials don't get extracted, labour goes idle, and energy stays unburnt.
"When money is not flowing, materials don't get extracted, labour goes idle, and energy stays unburnt."
Not strictly true, but as far as our system operates true enough.
The problem as I noted in my other post is exactly that....the credit creation is pooling in assets and not circulating within the productive economy where those who produce the needed output are being starved of the needed currency
Meanwhile the powers that be seem focused on providing (non productive) investment opportunities for those who are desperate for somewhere safe to place their gains from the past 4 decades.
Until the state determines that they will themselves create that needed redistribution and/or force the existing asset holders to do so then the portion of society with insufficient currency will continue to grow....and that certainly isnt going to improve productivity nor protect asset values.
True enough is a higher standard than basically all modern economics.
I still struggle the 'credit pooling in assets' thing though. When a bank prints a million dollars for someone to buy a house, that money gets given to the seller, right? The seller might pop it in a term deposit, buy a Govt bond, or repay a debt. Or, they might use it to buy some shares, gold, or a brand new ferrari - meaning the seller of those assets then decides what happens next with the money.
Obviously, when the economy is going strong and asset prices are rising, the credit created by banks making loans is more likely to be spent into the real economy as people extend their houses, start a business, buy extra services.
Ben B always said the last thing you do is to devalue your debt to gold, ie revalue gold UP
Yep, bring it on. About time really.
Not sure why we like to be so conservative in NZ, always scared of the bogey man while other countries are ploughing ahead.
What? I thought the reason interest rates went up with a recession engineered was because people weren't conservative enough and had a big spend up due to cheap credit. Now you want that to happen again in a short space of time?
Bought a coffee this morning.
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