Picking the exact timing of interest cuts is turning into a long-odds gamble. Photo / 123rf
Picking the exact timing of interest cuts is turning into a long-odds gamble. Photo / 123rf
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
I was telling lucky Newstalk ZB listeners something along those lines on Kerre Woodham Mornings last week and I could feel a palpable sense of exasperation in the room.
“It feels like you’ve been saying that for months,” Woodham said.
She was right! Although it is moving from months to years. The Reserve Bank was the first central bank in the world to begin lifting interest rates in response to elevated inflation - beginning in October 2021.
That’s nearly three years we have been telling this story.
The fact it’s taken this long to start causing a serious economic downturn - that employment wage and wage growth have been strong through most of the period - doesn’t seem to mitigate things.
We suffered through the pandemic stress, copped a cost-of-living crisis and now face a year of recession. It’s a lot.
People are understandably tired of hearing the same message - even though we are finally heading into the home stretch.
Inflation is falling. The annual rate is just 4 per cent. The last two quarters saw prices rise 0.5 and 0.6 per cent respectively.
Prices have mostly stabilised, with a few annoying non-tradable exceptions. Rents, rates, insurance, holiday accommodation and wages are the obvious exceptions.
Insurance, rents and rates are serious and a complex issue, for which (perhaps) government policy might help.
But quite why hotel prices in the South of France should make it into our Consumer Price Index, I’m never quite sure.
As for wages, well, personally, I’m happy for them to be the last piece of the inflation puzzle. Workers paid a high price at the start of the inflation cycle and it would be unfair to see them short-changed at this end.
But the rate of wage growth is falling and if there’s anything sure in the economic equation, it’s that rising unemployment will keep them falling.
So we’re nearly there.
Exactly when we get there is a different issue. What’s clear is that the nearer we get to the end, the more intense the speculation about the final timing becomes.
If anything, the fatigue around waiting for rates to fall is amplifying that speculation
It might sound like a weird thing for someone in my position to say. But I think we need to slow down the pace of commentary about rate cuts.
Right now you can find a spread of bets about the first rate cut that runs from August through to May next year.
I wouldn’t bet my house on any of them.
By that, I mean I’d avoid any big fixed mortgage rate calls that put me in a vulnerable position if those forecasts don’t fall as expected.
Market expectations have been wrong all year. And it’s worth remembering that markets don’t care about your mortgage rate. They set forward prices for traders in the moment. They change all the time. There’s no regret or embarrassment about those changes
US market pricing had six Federal Reserve interest rate cuts priced in at the start of the year and everything looked rosy. Then, ironically, the US economy remained rosy and the rate cut expectations were pared back to the point that last week another hike was being priced in.
This week, the Treasury was forecasting like it was Ferris Bueller planning a day off school. Photo / CBS
On Thursday, the US Federal Reserve kept its equivalent of the Official Cash Rate on hold and delivered a stern warning that inflation was still running hot and rates may stay higher for longer.
But markets rose and bond yields fell. While Fed Chair Jerome Powell’s speech was bad news compared to his last one, it was better than expected. And that’s all that mattered. Markets had worked themselves into such a funk about the prospect of a rate hike, that this more moderately bad news was greeted with relief.
A lot of our economic commentary is market-led. But we shouldn’t take market positions too literally.
We risk getting caught in spirals of unhelpful speculation. Constant anticipation and disappointment can make for an overly gloomy mindset.
It’s worth remembering that the Reserve Bank has, for more than eight months, been forecasting the first rate cut will come in 2025.
Over that period, according to the markets, they’ve been wrong, then really badly wrong, and then only a bit wrong again. Based on current trends, they may soon end up back in line with market forecasts.
But there’s plenty of time for the trend to change again. Once those sticky non-tradables start to fall they may fall faster than expected.
The Reserve Bank may yet be wrong and have to cut sooner. I hope it will be. But I’m biased. I fix my mortgage in October.
Meanwhile we “watch, wait and worry” to borrow a line from Reserve Bank Governor Adrian Orr.
I don’t know if our governor is a Ferris Bueller fan, but I hope he’d agree that we should also stop and look around once in a while. Life moves pretty fast.
Liam Dann is business editor-at-large for the Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
