Two weeks ago, I wrote about some hefty declines in bank wholesale borrowing costs which have happened since the middle of June. Over the past fortnight we have seen some further declines and the likes of the two year bank borrowing cost (the swap rate) now sits near 3.8% from 4% back then and 4.5% in the middle of June.
For the moment the inflation numbers around the world remain extremely high on the back of central banks over-cooking their economies last year through excessively loose monetary policies, and the effects of Russia’s invasion of Ukraine.
But forward-looking measures are heading in the right direction for much lower inflation to be in place a year from now.
Oil prices have fallen quite sharply as prospects for world growth and therefore demand for energy have worsened. International shipping costs are trending back down after soaring last year. Food prices offshore are easing with assistance from grain ships starting to get out of Ukraine.
Locally the pace of growth in NZ house rents is slowing down and a couple of measures of inflation expectations have eased slightly.
These are early days yet and when the Reserve Bank next review their official cash rate on August 17 an increase of 0.5% to 3.0% remains highly likely. But what happens after that is increasingly up for debate.
Some forecasters have lifted their picks for how high the cash rate will go in coming months, opting for 4.0% over 3.5%. But for now, I am happy to stick with 3.5% not just because of early signs that inflationary pressures are easing.
There is also an indication from my monthly Spending Plans survey that wages pressure may not be quite as great as many worry about – from the point of view of a potential wage-price spiral developing. Plus, some articles are appearing noting that many young staff members are not chasing the dollar but favouring more leisure hours and offsite work locations along with ecological causes.
The blowback from this one day will be a realisation that failure to boost incomes when market conditions allowed will mean reduced ability to purchase a house and service a property. But for now, the development suggests the chances of a wage-price spiral in New Zealand are not high.
There is also one other consideration to keep in mind.
What has the Reserve Bank learnt most recently?
That they too aggressively changed monetary policy over 2020-21 and were too slow to recognise that economic and inflationary conditions on the ground were quite different from those they thought were in place.
How is this learning relevant?
It suggests that perhaps this year into next the Reserve Bank is newly aware of its economic analysis deficiencies and will be less determined to doggedly stick with an established path for monetary policy even when the data do not justify that path.
The upshot is that while for the moment the common view amongst analysts is that the Reserve Bank will continue to raise rates sharply and use strong words, the risk is that they surprise everyone before the end of the year. They are likely at some stage to say that caution suggests pausing their tightening cycle for a while to see what the economy is up to.
For borrowers the outlook cannot yet be for sizeable declines in mortgage rates – not with inflation still much too high and the economy beset by shortages of employees. But it is looking more and more like we will not see mortgage rates go back to where they were two months ago and that as bank competition for the still shrinking number of mortgage applications grows, discounting of fixed rates will soon reappear.
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