Monetary policy easing still some ways off

Tony Alexander

Wednesday 8 May ‘24

In this article, the economic conditions in New Zealand are discussed, noting that consumer confidence is at a low, with many planning to reduce spending, reflecting the weakest sentiment since the 2008-09 Global Financial Crisis. Business confidence has also declined, although it remains at a long-term average. The housing market is affected by high living costs, leading to decreased home sales and stable house prices. Interest rates are central to the housing market's future, with expectations of no rate cuts until mortgage rates decrease by around 1%. This adjustment is unlikely to occur until late this year or beyond due to persistent inflation and strong labour market conditions both domestically and internationally. The Reserve Bank of New Zealand is expected to maintain interest rates until mid-2025, based on current inflation trends, but rate reductions are anticipated eventually when the economic over-restriction is recognised.

We are one month away from the start of Winter and unfortunately many of the indicators we economists monitor for insight into where our economy is going are heading in the wrong direction.  

With household spending making up about 65% of economic activity in New Zealand the degree to which average consumers have confidence in the economy and their personal finance matters a lot.

Unfortunately my monthly Spending Plans Survey recently showed a net 30% of people plan cutting their level of spending if possible over the next 3-6 months.  


This is well below the four year average reading of a net 13% planning cuts and the weakest result since September last year. This result is in line with that from the longer running ANZ Roy Morgan survey which also deteriorated recently to its worst level of consumer sentiment since the 2008-09 Global Financial Crisis. 

Business confidence has also deteriorated to a net 23% expecting to be busier in the next 12 months from a net 30% in February, but at least this gauge from ANZ is at its long term average level and well ahead of -9% a year ago.

This reading encapsulates a key reason why most of us don’t expect the economy to stay in recession this year. Businesses are reacting positively to the new government elected last year with many still more constrained by a lack of staff rather than a lack of customers.

This unfortunately is less and less the case however in the house building sector. With householders hit by soaring expenses for council rates, insurance, petrol, and groceries, a new level of attention has gone onto budgeting and delaying some big purchases.

Market Insight Blog Images - May 2024 TA

When this happens it is particularly bad for manufacturers and retailers of things like furniture, appliances, cars, carpets, and so on. But it also tends to involve people placing home purchase decisions on the backburner for a while to see what is going to happen. This stepping back for the moment probably explains the recent easing in dwelling sales and flattening of house prices on average around the country.

Interest rates are central to the housing market's future, with expectations of no rate cuts until mortgage rates decrease by around 1%

The question of course is when will things change and the housing market once again shift back in favour of the vendors? The answer is not until mortgage rates have fallen by perhaps 1%. So – when might that happen? That is a question to which the answer has been shifting both here and offshore since the start of this year.  


In Australia and the United States optimism about rate cuts in 2024 has been shattered by stronger than expected data partly on inflation but substantially on the labour market. Layoffs have been fewer than expected and unemployment rates are lower than anticipated. 


The implied extra wages pressure means extra inflation and the result in the United States has been a shift away from the markets predicting six interest rate cuts this year to just one. This shift explains the recent rises in wholesale fixed borrowing costs in New Zealand and the removal of scope for banks to keep nibbling away at their mortgage rates as had been happening a couple of months ago.  


Locally we await up to date data on the strength of the labour market. But whatever the numbers show regarding the long climb in the unemployment rate from 3.2% during the pandemic (4% latest), the Reserve Bank’s attention will remain firmly fixed on the quarterly inflation numbers. Headline inflation has improved to just 4%, but underlying rates are running above 5.5% in many cases and that means we won’t be seeing a shift in the Reserve Bank’s predicted timing of interest rate cuts from mid-2025 for quite a few months yet. 


However, my expectation remains that eventually they will acknowledge that they have over-restricted the economy and some quick rate reductions will come. But acknowledging the rate expectation changes offshore, that probably won’t happen until very late this year. Until then the residential real estate markets around New Zealand will in most locations continue to favour buyers with a good range of properties to choose from and vendors eager to make a sale.

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