ANALYSIS: The Reserve Bank has just validated market expectations of an easing of monetary policy with a 0.25 point cut in the cash rate to 5.25% (although I had thought they would hold out to October). The RBNZ predicts the rate will fall below 4.5% in the middle of 2025, then 3% come the end of 2026. On that basis householders can reasonably expect the likes of the one-year fixed mortgage rate will fall to around 5% and perhaps slightly under come the end of 2026.
Only three months ago the RBNZ said it wouldn’t cut the OCR rate until August 2025 and warned that it might in fact need to take the rate higher. ANZ economists even predicted early this year that the rate would rise to 6%. Why such a huge change in a very short time?
First, as I’ve noted here for at least the past year, just as the RBNZ over-loosened monetary policy during and immediately after the pandemic, it has now over-tightened it. It kept the cash rate too high for too long – but only perhaps by 3-6 months.
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While the outlook for growth is now so bad it sees our economy shrinking 0.6% for the four quarters of this year rather than growing 1% as they predicted in May, business pricing plans have remained much too high.
On average a net 25% of businesses since 1992 have said they will raise their prices in the coming year. This was over a time when economic growth averaged 2.7% a year. Now with 0.6% shrinkage a still much too high net 38% still say they plan hiking their charges.
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This tells us something important. The RBNZ decided to take a gamble. It is hoping that the new weakness in the economy, which it failed to acknowledge in May (hint you guys – read my monthly survey results), will crunch pricing plans quite quickly.
That may well happen. But the RBNZ noted many times in its commentary this time around that business pricing plans will be very closely monitored and need to change further. I can already tell from my latest monthly Business Survey run with Mint Design that the proportion of businesses saying they won’t now raise their prices has risen to 26% from 18% last month and a year ago a net 22% saying they would raise their prices.
Independent economist Tony Alexander: "Only three months ago the RBNZ said it wouldn’t cut the OCR rate until August 2025 and warned that it might in fact need to take the rate higher." Photo / Fiona Goodall
Things are headed in the right direction and borrowers can look forward to lower mortgage interest rates. But before we get to sub-5% fixed rates more people will lose their jobs, more businesses will go under, and there will be a lot more restructuring across most sectors in the economy.
How quickly will the housing market respond to this new-found optimism about interest rates? I can already tell from my surveys of real estate agents and mortgage brokers that buyers are coming back – including some tentative investors. Sentiment is likely to improve further.
But listings are ahead over 33% from a year ago, job security is poor and set to remain that way, net migration flows are falling away very quickly, the rental market has recently shown new weakness, plenty of potential home-buying young Kiwis are leaving the country, and businesses are likely to keep their investment levels low until well into 2025.
Before the end of this year house prices are likely to be rising again. But it pays to remember that while interest rate levels are extremely important when it comes to housing market strength, so too are employment and access to credit. These areas will still take some time to improve.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
