Tony Alexander: Chances of an early rate cut are rising, but at a huge cost

ANALYSIS: I have just completed the five monthly surveys of the various groups in my 30,000-strong database. For consumers, the results show that pessimism has spread and people are more reluctant than ever to spend. The implications are not good for retailers and the hospitality sector, which are already under pressure.

While weaknesses in the economy have made it easier for businesses to source good staff, what matters overall for monetary policy and spending is employment. And things are worsening for employees.

The deteriorating cashflow situation for businesses means some “nice to have” things are being pushed sideways. These include mitigating climate change, improving workplace culture, and investing in new equipment and machinery. The latter is bad for productivity, which is bad for wage growth and the ability of businesses and government to keep good people on this side of the Tasman.

The results of my housing market-related surveys point to worsening conditions here too. FOMO has almost entirely disappeared and has been replaced by worries about prices dropping. My monthly survey of property investors, for example, shows that 10% of respondents are now worried about prices falling, compared to less than 4% at the start of the year.

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Finding good tenants has become more difficult and the average rent increase which landlords say they will try to achieve in the coming year has fallen to the lowest level since this particular survey started three years ago. That average is 4.9% compared with 5.6% early this year and 6.3% in July last year. The rental market has deteriorated for landlords (improved for tenants) at the same time as the residential real estate market has weakened.

Whereas in January a net 24% of real estate agents had said that they were seeing more investor buyers in the market, now a net 25% say they are seeing fewer. The investors have returned to the hills they disappeared into after the then Government removed interest rate deductibility in March 2021.

Independent economist Tony Alexander: "For borrowers, the better times of lower interest rates still lie well down the track." Photo / Fiona Goodall

First-home buyers, who have been the key drivers of the real estate market since early 2023, have also stepped back. Time is on their side now that the number of homes listed for sale is up 26% year-on-year. In January a net 55% of real estate agents said they were seeing more young buyers. Now, only a net 5% say that.

If I were running the Reserve Bank, I’d be happy right now. The above results mean the chances of inflation settling back to 2% are rising and the timing of the first cut in the 5.5% Official Cash Rate can probably be brought forward from the middle of 2025.

But we shouldn’t expect our central bank to indicate any such happiness about the inflation outlook until the end of this year. When it looks outside of New Zealand, it will see inflation worries have risen in the United States and Australia (the latter in just the past few weeks). Caution will be its operating mantra.

For borrowers, the better times of lower interest rates still lie well down the track (hopefully November) while for businesses, the tough conditions will likely get worse before they get better.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz