Inflation remains a thorn in the economy's side

Inflation remains a thorn in the economy's side

Girl touching thorny cactus

It would be wonderful to be able to write here that the passage of time has brought some pleasingly good evidence of falling inflationary pressures in New Zealand and because of that the interest rates outlook is a lot brighter. But I can’t – not that things have necessarily gone the other way.

We do have some data suggesting things are improving – but the speed of improvement is quite slow. This comes mainly in the form of the ANZ’s monthly Business Outlook Survey. The net proportion of businesses planning to raise their selling prices over the coming year has just fallen to 44% from 52% three months ago, 59% six months ago, and 70% last year.

The fall is glacial and the long-term average is 25%. Therefore the Reserve Bank is unlikely to be feeling that the 5.5% level they took their official cash rate to in May is generating excessive downward pressure on inflation in the country. They will not be entertaining thoughts of easing anytime soon.

Could they be thinking about tightening as some still predict?

I don’t think so given the trend in pricing plans just noted and the fact tens of billions of dollars worth of mortgages have yet to roll from rates below 5% to rates close to 7%. Extra restraint has yet to hit the economy.

But what about the upward pressure on rents resulting from the boom in net immigration?

Will this cause concern for the Reserve Bank? Yes, but those concerns are likely to be offset by the clear easing in tightness of the labour market which is underway. Businesses increasingly report that finding staff is improving – though in most sectors it remains the case that few employers can pick and choose amongst good candidates as was the practice some years in the distant past.

The housing market is not going to get a new boost from falling interest rates in the near future. But the migration boom is going to place increasing upward pressure, and I can see from my surveys that investors are starting to become more interested in making a purchase.

The political opinion polls suggest a win for the National Party on October 14.

If this proves to be the case then investors can anticipate regaining the ability to deduct interest expenses when calculating taxable income. However, they won’t get 100% deductibility back until 2026, so a surge in investor buying from the second half of October is unlikely.

Buying because of a potential change in the foreign buyer rules to allow taxed purchases for houses of over $2mn is likely to be very, very small if detectable at all for properties priced at less than $1.5mn.

At this stage, my survey of real estate agents shows that since the start of the year the net proportion of agents seeing investors backing away from the market has gone from 55% to zero. That is a big improvement – but the result is still zero which means just as many agents see investors backing away as see them stepping forward. The result is well away from the net 66% of agents seeing more first home buyers in the market.

For now, with the inflation rate still much too high at 6%, we shouldn’t expect to see any signal of comfort from the Reserve Bank until the first half of next year. For most borrowers, fixing for one of the shorter terms out towards 18 months is probably going to be optimal.

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