ANALYSIS: The Reserve Bank has just undertaken its last review of the Official Cash Rate for 2024 and, as had been universally expected, it cut it 0.5% to 4.25%. In some quarters there were hopes that the cut would be 0.75% and even a few predictions of such at the time of the last review on October 9.
But the economic figures released since early October have not been shockingly weak. In fact, there have been some decent rises in consumer sentiment, quite strong lifts in business confidence along with intentions to invest and hire people next year, and some improvement in consumer spending measured using debit and credit card monthly data.
There is also an upturn in the real estate sector, which suggests that the decline in house-building is likely to end well within the next 12 months.
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This is not to say that the economy is doing fine. It is not. We are either in or barely out of recession, and the global trade environment, which is so important to us, is taking a turn for the worse. The US President-elect has said come January 20 tariffs of 25% will be applied to goods entering the US from Canada and Mexico and an extra 10% will be added to tariffs on Chinese goods.
There is a strong risk that we see retaliatory measures from affected countries, plus others deciding that maybe they too can try and assist their domestic manufacturing sectors by making consumers pay more for the goods they want.
Such policies fail and there is no evidence that the slight recovery in US manufacturing sector employment already underway before Mr Trump’s first term was boosted by the tariffs enacted back then.
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There is a risk that a shift in world trade towards greater use of tariffs keeps inflation higher than would otherwise be the case and this is important because of what has been happening recently offshore. In the US, UK, and Australia underlying inflationary pressures have been proving greater than expected. The financial markets have over the past two to three months been reining in their expectations for how rapidly interest rates fall in these countries and the levels to which rates will go.
This has caused some increases in bank domestic borrowing costs here in New Zealand, which have forestalled any extra decent reductions in fixed mortgage rates for now.
Will the latest 0.5% rate cut from the Reserve Bank have much impact on mortgage rates?
They will go down marginally (don’t get too optimistic) with very short-term fixed and floating rates falling the most. But from here the scope for declines in fixed mortgage rates for terms of three years and longer is not all that great. This is because of the reduced scope for lower inflation and interest rates offshore, and perhaps also because of the reduced expectations for growth in NZ productivity recently noted by Treasury.
Independent economist Tony Alexander: "In the US, UK, and Australia underlying inflationary pressures have been proving greater than expected." Photo / Fiona Goodall
It is worth noting that the Reserve Bank has noticeably reduced its predictions for economic growth over the years to March 2026 and 2027 from 2.7% and 3.2% predictions in August to now just 2.0% and 2.4%. But its outlook for inflation has barely budged and it has raised its predicted end-point for the Official Cash Rate from 3% to 3.1%.
That is not much but it is enough to send a signal to the markets which have reacted to the Reserve Bank’s latest outlook by raising wholesale interest rates slightly.
The economy is on an improving track, the housing market is getting better, employment is likely to start rising again in the second half of next year and inflation looks like staying near 2%. But scope for deep interest rate cuts this cycle is simply not there. Borrowers should keep that in mind as they contemplate how long to keep rolling at six months or one-year fixed rates.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
