At the end of my last column on interest rates written two weeks ago I noted that the Reserve Bank will not want to see people getting optimistic about interest rates falling and have this influence their spending behaviour and therefore inflation. Thankfully, there is no sign that you and I are feeling a lot better about where things are heading, but there is still a chance that at the next cash rate review on May 24 the Reserve Bank nudges the rate higher by a final 0.25%.
This week we received news showing that the unemployment rate has remained at the very low – read too low – level of 3.4% and that employment grew by a firm 0.8% in the March quarter to be 2.4% up from a year earlier. Wages growth remains strong, and these numbers tell us that although the labour market weakens after the economy weakens, the Reserve Bank will still be concerned about wages growth staying too high for too long.
But despite a still very strong labour market, we consumers are newly fearing the worst.
My yet-to-be-released May Spending Plans Survey has just revealed that a net 42% of us intend cutting our spending in the next 3-6 months. This is the worst result since December’s -43% and a clear deterioration from -27% just four weeks ago.
Why might we be feeling newly dour despite the strong labour market?
Three clear reasons can be discerned from my survey. We are having to put more money aside to pay for groceries as food prices continue to go higher. We are working to pay down debt, probably because borrowers are rolling off fixed mortgage rates near 3.5% to rates of 6.5% and higher. Plus, we simply feel more concerned about what the future holds.
The results make for bad reading. But they are exactly what the Reserve Bank wants to see as it fights inflation at 6.7% and wages going up between 6% and almost 8.5% depending upon which measure you use.
So, if the outlook for household spending outside of groceries is so bad, why not completely rule out another cash rate rise and instead start talking about rate cuts being needed from late this year? After all, some $170bn worth of mortgage debt comes up for rate renewal in the next 12 months so the bulk of the effect of higher mortgage rates has not even started.
The answer lies in what our central bank is learning from conditions offshore. In other countries central bankers have been noting that despite poor consumer sentiment people are still not cutting spending by enough. Inflation is turning out to be too “sticky” at levels just below the peaks reached a few months ago.
In Australia for instance this week the Reserve Bank raised its cash rate another 0.25% whereas the financial market expectation had been for no move. The RBA said they are concerned that inflation is too high and worried about data showing the Aussie housing market started turning up back in February.
Thankfully, here in New Zealand we talk about the near certainty of an upcoming recession whereas no such shrinkage is expected across the ditch, and our housing market is yet to bottom out. Our cash rate is also 5.25% whereas Australia’s is still only 3.85% which is quite mild by world standards.
For Kiwi borrowers, times are tough and by necessity set to get tougher for those with rates rolling off in the next few months. But there is a lot of growth and inflation restraint already in the pipeline and it remains reasonable to speak in terms of fixed mortgage rates having already this cycle hit their peaks.
The 3-5 year rates have in fact already been cut by 0.7%. The popular one and two year rates might not show those sorts of declines until late this year or early-2024.
To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz