ANALYSIS: As had been near universally expected, the Reserve Bank this afternoon cut the Official Cash Rate from 3.25% to 3%. This means the rate has now dropped by 2.5 percentage points since the easing cycle started exactly a year ago.
To date, it is hard to see much positive impact on the economy from rate cuts. House prices have fallen in each of the past five months, consumer spending is decreasing, jobs growth is not occurring, consumer sentiment remains well below average, and Kiwis are leaving the country in high numbers.
However, monetary policy is not based on what the economy has just done, even though the Reserve Bank now thinks the economy shrank 0.3% in the June quarter, not the 0.3% growth it predicted. Policy is based on a combination of where growth looks like it is heading and the extent to which spare capacity exists in the economy to handle that growth.
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The Reserve Bank assessed that there was more spare capacity in the economy than it thought there would be three months ago, and that lack of momentum does count for something.
In May, the bank expected the cash rate to bottom out at 2.9% next year; now it believes the low will be 2.5%. In fact, the committee voting on what change to make had two members opt for a cut of 0.5 percentage points, but they were outvoted by the four who opted for a cut of just 0.25 points.
The discussion and support for a bigger cut, plus the lowering of the rate forecast, were not expected in the financial markets, and that means wholesale interest rates have rallied. This is good news for borrowers and means that there may be a tad more downside in the 1-3 year fixed mortgage rates than was previously the case.
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Will these extra rate cuts cause much change in the economy this year? Probably not. It takes a while for rate cuts to feed through to changes in household cash flows and then changes in spending. But a stimulus to the economy is coming.
Next year is far more likely to be a year of reasonable economic growth than 2025 ever had capacity to be. But it pays to remember that there is no boom coming our way; not with high uncertainty about the world economy, weak migration flows, and still well below average household sentiment levels.
For the housing market the scope for extra interest rate cuts (another 0.25 percentage point cut seems highly likely, but one after that less so) won’t have much impact until households regain their optimism about the labour market.
Independent economist Tony Alexander: “Next year is far more likely to be a year of reasonable economic growth than 2025 ever had capacity to be.” Photo / Fiona Goodall
My most recent survey of real estate agents with NZHL showed that 54% can see buyers are worried about their job. This level stood at only 14% at the start of 2024 and peaked at 56% in the middle of last year. So, it can change quickly but for now worries about job security remain high and that will act to suppress home demand in the remainder of 2025.
Many factors are now in train for a better economy next year – election year. But for businesses, a focus on cash flow control and efficiency gains still remains. Margins are still very tight, and the risk that the return of customers will see businesses attempt to rebuild profitability by raising prices is something that encouraged one monetary policy committee member to advocate for no rate change this meeting.
– Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz