Is the end of interest rates pain nearer?

Thursday, 18 July 2024

Inflation is down, but will interest rates follow? Pressure is building on the Reserve Bank to drop interest rates harder and faster after new figures show inflation has reached its lowest level in three years, while the economy remains in a deep slump.

Stats NZ Figures showed inflation dropping to 3.3% in the three months to June, down from 4 per cent the previous quarter. The Reserve Bank’s inflation target is 0-3 percent, but it will need to know lower inflation is sustainable before it starts dropping the official cash rate - which influences interest rates.

The latest inflation figures now have all the major banks forecasting a drop in interest rates in November, bought forward from early to mid-2025.

But Independent economist Shamubeel Eaqub said the Reserve Bank should cut its base lending rate now. Cutting too slow and too late would cause an unnecessary number of job and business losses, he said.

'Consumers don't have much buying power and businesses don't have much pricing power.

'The RBNZ now has overwhelming evidence of an economy in deep recession and inflation on the wane, which all the evidence suggests will ease further.'

New Zealand has been in the grip of a double-dip recession, with job losses mounting and businesses hurting in the midst of a cost of living crisis.

Deputy Prime Minister David Seymour also voiced concern about interest pain lingering longer than it needed to.

Asked whether the Reserve Bank should cut interest rates when it next meets to reset monetary policy in August, Seymour said he couldn’t tell the Reserve Bank governor what to do.

“But you don't need an economics degree to see people are hurting, inflation is going down fast and relief is required,” he said.

Seymour said he was reflecting “how a lot of people feel”.

Kelvin Davidson, chief property economist for CoreLogic, said the lowest inflation rate for three years is good news for home owners and buyers.

'For people thinking about buying a house, there's a decent chance over the next two or three months that interest rates will start to come down.'

Existing mortgage holders would see banks start to drop interest rates by November at the latest, or August at the earliest in line with the Reserve Bank, he said.

'I wouldn't be surprised if banks' rates start to drift down. The market is quiet so banks will want to compete.

Unfortunately, rents, council rates, and insurance premiums remain 'stubbornly high' he said.

For Luke Swann, a prospective first home buyer in Christchurch, the drop in inflation means he can take his house hunting more seriously.

“It gives me the confidence that there is light at the end of the tunnel,” he said.

“If there was no relief in sight, I would have to reconsider becoming a homeowner.”

Westpac chief economist Kelly Eckhold said the figures probably made an earlier interest-rate cut from the Reserve Bank marginally more likely, though not unequivocally so.

Kiwibank, which has been forecasting a rate-cut in November, said prospects for “an even earlier cut” were rising while ASB senior economist Mark Smith said underlying price pressures were cooling rapidly.

Stats NZ reported increases in the prices of rent, insurance, and cigarettes and tobacco were the main drivers of domestic inflation.

Rents increased 4.8% in the 12 months to the June 2024 quarter, while rates rose 9.6%. The price of insurance premiums rose a whopping 14%.

But there are notes of caution.

Moody’s Analytics economist Shannon Nicoll said the figures were“bitter-sweet”.

“While the good news still outweighs the bad, sticky services inflation represents a real challenge for the central bank. If these pressures can't be addressed in the near term, the sustainability of inflation remaining in target will be challenged,” she said.

Infometrics chief forecaster Gareth Kiernan remained convinced the Reserve Bank won’t move till February.

The inflation data was good, but the Reserve Bank was likely to have lingering concerns about services-based and non-tradeable inflation remaining high, he said.

Simon Arcus, Wellington Chamber of Commerce Chief Executive, said the drop in inflation was welcomed because of the impact it would have on the future cost of debts being more manageable for businesses.

But at the same time some of the “stubborn costs” were insurance and rents which were “hard on the back pocket”, Arcus said. “How we deal with those is still to be worked through.”

The figures would provide a boost in confidence - however, “there’s still a lot of pain out there”, Arcus said.

In retail they had seen a 40% drop in income. “So it’s probably welcome, it’s the right direction, but it’s still tough out there.”

“If the cost of living is easing, that’s fantastic, but two of those things, rents and insurance are hard on the back pockets so people find that challenging still.”

Business Canterbury chief executive Leeann Watson said she hopes the inflation drop will help boost business and consumer confidence.

'We've seen a significant drop in demand.

'Some of the higher costs businesses have incurred, such as wages and insurance, are baked in and are here to stay,' Watson said.

'But as the cost of living, cost of doing business and interest rates come down, this should give consumers more confidence. We'd like to see people out supporting their local businesses.'

Workers spoken to on the street by our reporters hoped that it meant relief was on the horizon.

One government worker, who did not want to be named, said the prices of everything from parking to food going up was “crazy”. She wanted to see GST removed from food rather than paying triple taxes.

“If you get paid, the next day, it’s all gone.”

A woman working for a private IT company said while salaries didn’t change, even rubbish bin collection prices had gone up and was four times what it was two years ago.

People no longer had disposable income and there was no purchasing power.

One man spoken to had worked as a Government consultant but his contract ended in May due to Government spending cuts.

He was currently renting in Wellington and wouldn’t consider getting a mortgage even with a cut in rates, more concerned about job stability.

With the cost of living, “you go without”, he said, and with a tough job market, he was weighing up moving cities to move back in with his parents.