Mortgage rates are on the way down.
Liam Dann is the New Zealand Herald’s business editor-at-large. He is a senior writer and columnist, and presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Q: It’s great that banks have moved quickly to pass on the OCR cut this time. What are the market expectations for interest rates from here? – M. Johns
A: After all the excitement of the first rate cut last week, it’s the obvious next question: now what? A good starting place might be the forecasts published by the Reserve Bank (RBNZ) itself last week. But if you’ve followed the controversy about the forecasts it published in May, you’ll know to take those with several grains of salt.
The RBNZ’s May forecasts had priced in the first OCR (Official Cash Rate) cut in August 2025 and of course, they ended up cutting last week earlier. Flip-flop, backtrack, u-turn or simply a change of position as conditions changed... take your pick. There’s been plenty of commentary in the past week. Business Herald Wellington editor Jenée Tibshraeny noted that amidst the rate-cut celebrations, “the cynics were reaching for the backs of their necks to soothe the whiplash”.
Regardless, the RBNZ has now revised down its OCR track. It’s currently signalling a further 50 basis points (bps) of OCR cuts by the end of the year.
As ASB chief economist Nick Tuffley notes, the new track includes another 100bps of cuts over 2025 (taking the OCR to 3.75% OCR by year-end) and an OCR endpoint of just below 3% in the third quarter of 2027.
Unsurprisingly, markets expect to see more downside than that.
“There is a lot now priced in,” Tuffley says. “About 35bps of cuts in October, 80bps of cuts by year-end and close to 125bps by February, with the OCR down to around 3% by the end of 2025.”
Obviously, the RBNZ only cuts in increments of 25 basis points (or quarter percentages) but market pricing aggregates a large number of positions that investors have taken. So when we see something like 35 basis points priced in, that’s telling us that a single (25bps) cut is fully priced and there are some expectations of a double (50bps) cut in October.
“This represents a huge shift, but we would not completely rule this out – including a 50bps cut before year-end – if the data remains soft and the RBNZ deem a faster pace of policy normalisation is needed,” says Tuffley.
Normally I’d also be warning that markets tend to get carried away with pricing in cuts, but they were bang on about the August cut. (As was Tuffley and his ASB team, which also called it.)
Meanwhile, we’ve already seen bank rates coming down. There were some small cuts in advance of the announcement. KiwiBank and ASB cut within hours of the decision last week.
Then yesterday, ANZ cut again, taking its special one-year rate down to 6.45%.
In a wrap of expectations for home loan rates (by RNZ’s Susan Edmunds), Infometrics chief forecaster Gareth Kiernan plugged the RBNZ’s OCR track into his retail rate model. That suggested that by early next year, “a one-year home loan rate might be about 5.4%, a two-year fix might be 5.5%, a three-year 6% and a four-year 6.1%. Five-year fixes would be 6.3% and the floating rate would be 6.67%”.
As the Reserve Bank research told us about the pain of rate hikes, it takes something like 18 months for rate movements to fully transmit through the economy. It’s the nature of Kiwis’ preference for fixed-rate mortgages that it will likely take a similar period for the cuts to fully transmit. Although hopefully, more homeowners have moved to shorter terms as the prospect of cuts became more imminent (unless of course, they took RBNZ forecasts as gospel).
All of this is fair winds for the New Zealand economy which, as I pointed out in my Sunday column, stands a chance of settling into some kind of “normal” setting for the first time in years. My suggestion is that the Government (and all of us really) needs to embrace the opportunity to reset our sails before the next crisis inevitably comes our way.
With rate calls behind us for a while, all eyes this week will be on the picturesque US mountain town of Jackson Hole, Wyoming, where central bankers from around the world will gather for their annual shindig.
It’s sometimes described as “Coachella for central banks”. There’s probably less drug-taking and body painting, although former Reserve Bank Governor Alan Bollard used to get his watercolours out and use the downtime to capture the epic scenery on canvas.
Governor Adrian Orr isn’t going this year (he attended in 2022) but Karen Silk, assistant governor and general manager of economics, financial markets and banking, is.
Silk is one of the seven members of the Monetary Policy Committee that made the rate cut call (by consensus with no vote required).
As mentioned in last week’s look at the make-up of the committee, Silk has extensive experience in the commercial banking sector – most recently as an executive for Westpac. She started with the RBNZ in May 2022.
It was probably a stretch to say “all eyes” are on Jackson Hole this year as the event coincides with the big Democratic Party convention in Chicago.
But there will, as always, be plenty of interest in the speech from US Federal Reserve chair Jerome Powell (due on Saturday morning NZT).
The next Fed interest rate decision is due on September 18 and it is widely expected to cut the official rate by 25 basis points. Markets will look to Powell for more clues.
However, perhaps the greatest value for Silk will be in discussions about the global outlook and what neutral rates are going to look like in the post-pandemic world.
Speaking of US politics, Donald Trump has raised fresh concerns that he would move to undermine the independence of the Federal Reserve if he gets back into power.
Trump appointed Powell in 2017, an appointment which he publicly regretted (in a rare example of a self-confessed misstep). Ironically, Powell has turned out to be pretty well-received by the US establishment. He was reappointed by Joe Biden.
That’s prompted him to talk up his plans for exerting more control over the Fed – a worrying possibility.
The independence of the central banks is something that unites most economists, whether they lean left or right politically.
“I feel that the President should have at least say in there, yeah, I feel that strongly,” Time magazine reports Trump saying last week at a news conference in Mar-a-Lago. “I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
He doesn’t (in case you were wondering) – but that is beside the point. The relative instincts that a politician might or might not have for central banking are beside the point.
The point of central banks’ independence is that they will be free from political interference and will do the right thing for the economy – as dictated by their mandate and remit.
Politicians typically struggle to act apolitically. The clue is in the name.
Locally the independence of the RBNZ around rate-setting remains fiercely upheld, even if there are occasional terse relations between the bank and the political leadership.
In Opposition, Finance Minister Nicola Willis was highly critical of the RBNZ governor and Deputy Finance Minister David Seymour openly called for his resignation.
In Government, the tension between Willis and the RBNZ seems to have cooled and some commentators have interpreted Willis’ reappointment of the RBNZ board chair Professor Neil Quigley as indicating a degree of comfort with the current central bank regime.
It might be cynical to point out that last week’s rate cut and the likely direction of rate cuts from here look set to provide fair political winds for the Government but, as Matthew Hooton pointed out in his column last week, it probably is.
But Willis has indicated she is willing to be more direct with instruction to the RBNZ with regard to its other function as a regulator of the banking sector.
Speaking to the Herald’s Jenée Tibshraeny, Willis proactively raised the prospect ahead of the Commerce Commission concluding its study on competition in the banking sector (which dropped yesterday).
Willis indicated she was prepared to override the regulator if a strong enough case could be made that reducing the amount of capital banks need to hold would improve competition and efficiency in the sector without undermining the financial system’s stability.
Put to her that the RBNZ would strongly oppose being made to soften its rules, she said: “Yes, well, we’re accountable to the people who elect us. The RBNZ is unelected. Ultimately, this is about a democratic mandate.”
The interview raised the ire of ex-RBNZ staffer and blogger Michael Reddell, who took issue with the way such a big change was being floated publicly.
Reddell’s concern was not with the possible rolling-back of the tough capital requirements per se. He didn’t support them in the first place. Reddell also noted that he was in favour of prudential regulatory policy settings being decided by the Finance Minister on advice from the RBNZ.
What bothered him was that the Finance Minister would drop these hints so casually in a media interview, writing that “if you want to be taken seriously as a Minister of Finance, you don’t just drop such a view into an interview – with, it appears, nothing in support – you outline carefully your case or commission some reviewers to look into the matter carefully”.
Still, from my media perspective, it was a good scoop.
Willis followed through this week with a comment in her press release following the Commerce Commission report.
“The report concludes that the Reserve Bank can and should place greater emphasis on competition,” she wrote.
“I agree and I intend to issue a new Financial Policy Remit this year to make clear the Government’s expectation that the Reserve Bank, in its policies and actions, supports a more competitive banking sector.”
One imagines a more detailed proposal and discussion documents will follow
Following on from the Massey University Business School team who launched a real-time inflation tracker last month, another university is offering up real-time modelling of economic data.
This time it is AUT’s economic department, looking at unemployment using a predictive computer model.
AUT said its Unemployment Rate – Nowcast (UR–Now) model estimated the rate may have jumped to 4.8% in July.
A lot has been made of the delays in getting key data for the economy and we don’t get a full set of labour market data for this quarter until November 6.
Massey University initially launched its GDP tracker back in 2018. GDP data is probably the most backwards-looking of the data sets Stats NZ collects: we don’t get an update on the June quarter until September 19.
I monitor both its inflation and GDP tracker and will be interested to see how the AUT unemployment tracker performs against hard data when it eventually lands. There have been calls from some for the Reserve Bank to adopt these tools, but while they are certainly worth looking at in the mix of indicators, I’m not convinced they are accurate enough to base key policy decisions off yet.
AI (artificial intelligence) is evolving fast though, so as the models learn and evolve, it will be exciting to watch their progress.
40 years ago this week...
Congratulations and happy birthday to economic consultancy Infometrics, which celebrates its 40th anniversary this week. Founded in the turmoil of the last days of Sir Robert Muldoon’s National Government by Gareth Morgan and Andrew Gawith, Infometrics has provided a source of strong and non-partisan economic commentary over the years. These days, its most recognisable faces are chief forecaster Gareth Kiernan and chief executive Brad Olsen, both of whom are unafraid to stick their neck out on big issues and always make themselves available to talk to the media. Well done guys.
Reserve Bank says leaving banks to their own devices hasn't worked.