Drums beat louder for RBNZ to start cutting interest rates
Wednesday, 7 August 2024
OPINION: Markets are getting jittery, upping calls for the Reserve Bank of New Zealand to begin cutting interest rates, preferably starting with next week’s monetary policy statement.
The Reserve Bank will be considering two questions: if it is comfortable that inflation is back in band or will come back into band shortly; and if it is, whether economic conditions require a rate cut.
It comes against a backdrop of roiling global markets reacting to a drop in US Labour market figures last week as well as some other factors. The Bank of Japan hiking rates has also put pressure on the yen carry trade, in which traders borrow currency where interest rates are low to invest it in currency where interest rates are higher.
That helped push the Nikkei stock exchange to the biggest two day fall ever on Friday and Monday.
It also partly appears to be due to some of the hype coming off an overinflated tech sector. Especially around stocks in companies focusing on AI such as Nvidia, which has seen its share price rise from US$47 at the start of year to highs of US$135 before falling back to a current price around US$100 at the time of writing.
In other words, there doesn’t appear to be any great underlying economic problem driving the animal spirits of global markets over the past few days, but some market specific factors.
Nevertheless, investors are now betting on an earlier and more aggressive rate cutting track from the US Federal Reserve.
This just ads to a grim and uncertain backdrop to New Zealand’s own monetary policy journey.
BNZ Research compiled a quick list of dismal economic indicators on Tuesday.
They include the performance of manufacturing index’s key components falling to GFC levels, and the performance of service index dropping to its lowest non-Covid score since the series began in 2007.
Retail card transactions are now 4.4% down on a year earlier — in nominal terms.
Jobs ads have slumped 32% on an annual basis and trade figures are showing “a sharp annual decline in the import of plant and machinery equipment and consumption goods reflecting a weakening domestic economy”.
In addition, residential building consents had an annual 36% drop in June. And Hotel Data NZ figures showed revenue per available room dropping by 36.2% in Wellington and 20.9% in Auckland in July.
All this, BNZ argues, points to rate relief being overdue.
“With the economy imploding, inflation must surely continue to fall,” BNZ head of Research Stephen Toplis wrote in a note.
KiwiBank goes further, with chief economist Jarrod Kerr arguing that the bank should start cutting next week and not stop until the official cash rate hits 2.5%. It is currently 5.5%. That would be welcome relief for homeowners and business loan holders.
“We know the labour market is crumbling. The unemployment rate has lifted to 4.3%, off the low of 3.2% last year,” Kerr wrote in a note.
“High-frequency indicators suggest that the labour market is cooling faster than the RBNZ has forecast. The labour market lags economic activity by about 9 months. So, there is still a lot of pain to come. We forecast the unemployment rate lifting through 5% this year, to a peak of 5.2% or higher.”
The indicators now all point that the economy is slowing faster than the lags in the usual official statistics — inflation, unemployment, GDP growth and so on — currently suggests.
Whether the RBNZ will heed any of this remains to be seen. Part of being a successful bank economist is picking the bank’s rate track based on data.
But in addition to data, bank economists also get out around the country and talk to many sorts of businesses. They also obviously have an understanding of what their own financial institution is seeing, and how real economic activity — or the slowing of it — flows through to the banks. And what they are seeing is startling them.
As always, it is worth pointing out that higher interest rates create winners as well as losers, especially those on fixed incomes such as retirees.
It is out of the Government’s hands but politically, rate cuts would be helpful. However, regardless of the increased clamour around the need for rate cuts, if the bank’s monetary policy committee doesn’t think inflation is back under control, it won’t cut.
Rightly so, that is its job,
Nevertheless, for the Government, there’s only one thing that could make many homeowners with massive mortgages grumpier than the currently high interest rates — expecting interest rates cuts to materialise soon, that then don’t.
The drums are now beating, the question is whether they are loud enough to drown out inflation and prompt the Reserve Bank to move.