Interest rate cuts may slow after surprising news out of the US

Monday, 13 January 2025

Lloyd Burr explains why there's always a difference between the Official Cash Rate (OCR) and the mortgage rates banks charge us.

The US has recorded the fastest jobs growth since the beginning of last year.

Inflation had risen slightly, which was concerning decision-makers in the US.

The improving job market in the US could mean reduced interest rate cuts in New Zealand.

The US job market is growing - good news you’d think - but it impacts New Zealand too, particularly with our ongoing interest rate cuts.

According to the latest employment data from the US, the country recorded more than a quarter of a million more jobs in December, which was the fastest jobs growth since the beginning of last year. The unemployment rate also lowered to 4.1%.

Infometrics chief executive Brad Olsen said that wasn’t all good news, with the strength in the economy raising questions about further interest rate cuts in the US this year.

“If the US economy is doing this well with higher interest rates, lower interest rates still would likely see stronger activity, which could add to inflationary pressures,” he said.

Inflation in the US was creeping back up.

Inflation had jumped slightly to 2.7% per annum in November, which was up from 2.4% in September.

According to the University of Michigan’s inflation expectations survey, there would likely be an increase in short- and long-run inflation. The long-run expectation rose to 3.3%, which Olsen said was the highest level since June 2008.

“Views that inflation might continue to be higher than normal will worry decision-makers, because higher inflation expectations can influence higher actual inflation,” he said.

These factors were raising questions about whether interest rate cuts were still likely in 2025.

“Forecaster expectations for US interest rates have shifted again, with most picks shifting out to June for the next cut to the US Fed Funds Rate. Bank of America has now said that they think there will be no more US Fed Funds Rate cuts, and that the next shift will be a hike,” he said.

The NZD had fallen 7.4% on averaged between September and December.

So how will this affect little old New Zealand?

“All of this has implications for New Zealand. Fewer interest rate cuts in the US will keep international/US interest rates higher – we’ve already seen bond rates push up after the US jobs data,” Olsen said.

“That means that the international funding that New Zealand banks borrow will cost more, which could reduce the scope for further interest rate relief here at home than first expected.”

The strength of the US economy and markets had seen strong demand for the USD, which had pushed higher, and the NZD had fallen fairly heavily in recent months against the greenback.

The NZD had fallen 7.4% on average between September and December, and could well fall further, Olsen said. A lower NZD supported exporters, but made import costs higher.

“We’ve been cautioning for a bit that the low point for interest rates might be closer than many people think or expect, and these recent developments add some weight behind this,” Olsen said.

“The Reserve Bank will still cut interest rates in 2025 – and there’s a fair bit of domestic data to digest before they next make their decision in mid-February – but globally, there might not be as much further interest rate relief to come, and some of that impact is likely to spill over to New Zealand.”

New Zealand’s Official Cash Rate dropped 50 basis points to 4.25% at the end of November, with the next review on February 19.