The Reserve Bank (RBNZ) has moved "too little too late" with its Official Cash Rate (OCR) cuts this year "and the delay has cost us", Kiwibank economists say.
In their weekly First View publication, chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say they had "long advocated" for an OCR move to 2.5% (which is where it is now) but that move came too late.
"The recovery we anticipated for this year stalled, activity lost momentum and Kiwi households and businesses have suffered further. All of which has put the Reserve Bank in a position of needing to do even more. They didn’t do enough, the economy stalled again, and now they’re having to do more to mop up the mess."
The Kiwibank economists are expecting (along with the markets) that in its OCR review this week the RBNZ will make a further 25 basis-point cut to bring the OCR down to 2.25%.
"A cut to 2.25% this week is perfectly priced by markets and requires little justification. The Kiwi economy still needs more support. Yes, the RBNZ has delivered a significant amount of easing. 300bps to be exact. But for the majority of this year, the cash rate remained at restrictive levels. It is only after the cut to 2.5% in October that policy moved beyond neutral ground and into more stimulatory territory," the economists said.
They also raise the possibility of a 50 basis-point cut.
"Why not? Indeed," they said.
"It’s certainly within the realms of possibility, and should be on the table for discussion by the RBNZ’s MPC [Monetary Policy Committee].
"Another “surprise” 50bp move gets the cash rate to 2%, without the long wait until February’s decision. A 50bp move to 2% would clear the decks, and clean the slate for incoming Governor, Dr Anna Breman," the economists said.
"The RBNZ’s mistakes over the past two years have been centred around the inability to recognise the recession, and an inability to respond to the recession after it became painfully clear."
The economists say even if they are not actually calling for a 2.00% OCR and "hope with fingers crossed" that a 2.25% cash rate will do enough…" we certainly like the idea to getting another outsized move to crank things up a bit. And if it works, you just start hiking again, a little earlier than expected."
Beyond the cut itself, attention will fall to the RBNZ’s set of refreshed forecasts and OCR track in the new Monetary Policy Statement.
The economists say that given the RBNZ has already delivered more than the previous track implied, and in October the RBNZ signalled further ‘reductions’, "we’d expect a lower terminal rate with the RBNZ keeping the door open to more easing. And it's the move in the track which will drive and set markets up for the remainder of the year".
The economic recovery remains fragile, they say.
"Greenshoots are emerging but are few and far between. We hope a 2.25% cash rate will be enough for activity to spread. But we may need more."
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"The recovery we anticipated for this year stalled, activity lost momentum and Kiwi households and businesses have suffered further. All of which has put the Reserve Bank in a position of needing to do even more. They didn’t do enough, the economy stalled again, and now they’re having to do more to mop up the mess."
At least we have someone to blame, but the banker's comment suggests we're a command economy that is over-reliant on a council of priests to look in to the chicken bones and select the appropriate potion or spell.
Of course the cynics will say that their tinkering is still based on ensuring the price of debt is lower than the rate of inflation. The Aotearoa economy is toast without cheap debt.
The Aotearoa economy is toast without cheap debt.
Yes. Unfortunately that is the situation we're in. Trying to grow the economy off the back of repeated property booms has locked us into the downward spiral of needing ever-cheaper debt to jump-start the economy again.
I don’t think we need cheaper debt than what we had 5 years ago, but interest rates are double what they were then, and were triple a year ago. That’s a significant adjustment.
The RBNZ were trying to create a recession and boy did they succeed.
I don’t think we need cheaper debt than what we had 5 years ago, but interest rates are double what they were then, and were triple a year ago.
That misses the point entirely.
I don’t think we need cheap debt to have growth, but ramping it up by a factor of 3 in a couple of years is a different kettle of fish.
In an ideal world I would have liked mortgage rates to slowly creep up towards about 6% as I’m not a fan of cheap debt either. But the RBNZ went higher than that almost overnight.
Trying to grow the economy off the back of repeated property booms has locked us into the downward spiral of needing ever-cheaper debt to jump-start the economy again.
It's become one big confidence trick. Their premise is based on a number of factors:
1. Cheap debt means people more likely to spend like drunken sailors over saving or spending less on non-discretionary goods and services. Good for economic vitality in an economy weighted towards consumption over production.
2. The Ponzi relies on cheap debt. Confidence in the Ponzi flows through to non-discretionary spend. Therefore, cheap debt is an important condition for economic vitality.
Agreed. When you replace the words cheap debt with 'confidence' it is clear, If everyone loses faith in the system, it cannot maintain itself.
There's plenty of charts showing the ridiculous impact that RBNZ's loosening had on the housing market, but their macho tightening was just as villainous, and just as unnecessary. My favourite chart to illustrate this is a comparison of the OCR vs the effective mortgage rate (the weighted average interest rate that mortgagors are actually paying at any given time).
RBNZ stopped their aggressive rate hikes in May 2023 - with the OCR hitting 5.5%. Important to note that May 2023 was already past the turning point for lots of the macro data - trends in job ads and company liquidations turned negative around December 2022. Job growth was boosted by the borders opening, but quickly reverted to a downward trend, and housing and business real credit growth turned negative in Jaunary 2023.
What this tells us is that RBNZ had turned the OCR up enough to cause a recession well before they stopped hiking. Some of us made this point at the time (just saying).
It got worse. When the OCR hit 5.5% in May 2023, the weighted average interest rates actually paid on mortgages and business loans was 4.8% and 7.3% respectively. Mortgage debt servicing costs just kept on rising as the banks caught up with the hikes - hitting 6.4% in October 2024. Business debt costs moved a bit more quickly - hitting a peak of 7.9% in April 2024. The numbers here are huge - a 1.6% hike in interest costs on $350bn of mortgages is $5.6bn.
So, to be clear, RBNZ had done enough by late-2022 to cause a recession. But, they hiked on until May 2023. Peak pain hit the economy over a year later.
Unforgiveable incompetence.
Yep the hikes went too far, and worse the reductions were too slow. And another mistake was waiting too long after Covid to make their first increase.
One area we may disagree on though; if the RBNZ had got it right I reckon things would have been pretty good. You’d rather do away with them altogether and have a fixed interest rate?
Fair play. I think getting it right would have looked like fixed interest rates through the whole period.
Thank you for your comment/s. Always an interesting read.
For interest only. Did you create this graph?
Edit: Sorry J F. I've had a closer [expanded] look. I see the source as RBNZ itself.
It's a great graph. It's often forgotten that if enough people question that things are actually a Ponzi, then it cannot be restarted, we are now in that position.... There are still way to many people who are aware that they are holding bags, and that type of overhang cannot be overcome by FHBs at the bottom. Also very few FH owners are in a position to move up a rung on the ladder, as the rungs are so far apart they are not affordable moves with current prices of housing.
Its a decade of no house price growth and we are already a couple of years into it. Death by inflation to the doubles in 7 years BS.
Doesn't matter what the rate is set to. Lowering interest rates can only accelerate growth when there is potential growth.
Post-Vax we are a high cost, low wage economy with no capital gains potential, NZ has maxed out capital gains. Our capital assets are now unaffordable across the board.
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