Inflation fallout: Are interest rate cuts now off the table until 2025?

1. Inflation hasn’t disappeared just yet

The major piece of economic news last week was the headline CPI inflation rate dropping to 4% in Q1 2024, down from 4.7% in Q4 2023, and roughly in line with what was expected by both the Reserve Bank and private sector economists. So far, so good.

However, that’s still above the 1-3% target range, and the breakdown was a bit concerning. In particular, tradable/imported inflation (e.g. petrol prices) is doing the work at present, coming in at 1.6% for Q1. By contrast, the non-tradable/domestic figure was stuck at 5.8%, reflecting pricing pressure from things like rents, council rates and house-building costs.

Overall, then, the central scenario remains the same; Official Cash Rate rises are off the table, but cuts won’t be seen imminently either, and if anything, the timing for that first drop might just have pushed back slightly into 2025. The OCR isn’t the only determinant of mortgage rates, but meaningful drops in the latter are probably still a story for next year not this.

2. We’re all betting on falling mortgage rates

But even though there’s still a lot of uncertainty about when mortgage rates might actually start to drop more significantly, borrowers are nevertheless voting with their feet and opting for short-term fixed rate loans, of up to one year. Reserve Bank data shows that, by value, 56% of new loans were ‘fixed short’ in February, up sharply from just 36% in December. This signals that borrowers are anticipating rate cuts (at some stage), and hence aren’t wanting to lock in for too long. Of course, that comes at a cost now, with one-year fixed rates about 0.6% higher than, say, three-year rates. Unfortunately, nobody has a crystal ball, and we only know the best strategy in hindsight.

3. Net migration remains strong

It’s pretty clear that migration flows into NZ in net terms have passed their peak, with the 12-month total for March coming in at roughly 131,000, down from 142,000 in November. Of course, that drop is not exactly a collapse (and could be revised in the coming months anyway), and with the long-term average (of a wildly up and down series) sitting at about 35,000, it’s clear our overall population growth is still very strong. That’s boosting property demand, with the clearest effects showing up for rental dwellings in the main centres.

CoreLogic chief economist Kelvin Davidson: "Nobody has a crystal ball, and we only know the best strategy in hindsight." Photo / Peter Meecham

4. A glimmer of hope for the economy

The NZ Activity Index, which has a fair track record in terms of pre-empting the actual GDP results, has been a little stronger in the first three months of 2024, although it did slow from an annual growth rate of 2.3% in February to 0.9% in March. At this stage, the NZAC suggests we might have pulled out of recession in Q1 2024, with GDP possibly rising by about 0.5%. But that’s only a guide for now, and even if we do see some growth, the bigger picture is that our economy is still battling. The next important indicator to watch on this front is ANZ consumer confidence this Friday.

5. Still tough to get low deposit finance, but about to get easier?

Also this week we’ll get March’s aggregated mortgage lending data from the Reserve Bank. The slow recovery is likely to have continued in the latest results, but I’d also anticipate that low-deposit (or high loan to value ratio/LVR) finance remained fairly subdued, for both investors and owner-occupiers. Those with smaller deposits will no doubt be awaiting the possible loosening of the LVR rules at some stage in the next three months or so.

- Kelvin Davidson is chief economist at property insights firm CoreLogic