Late last year the Reserve Bank predicted that the annual rate of inflation in New Zealand would fall from the then rate of 5.6% to 5.0% when the December quarter numbers came out. In the event the data released this week showed inflation at 4.7%.
Does this mean interest rates can start falling?
The question for borrowers is whether we can anticipate an easing of monetary policy soon and a signal from the Reserve Bank to banks that they can (should) pass on already sharply lower fixed borrowing costs into much lower fixed mortgage rates. The answer is no.
At 4.7% inflation is still too far way from the 1% - 3% target range for the Reserve Bank to take any risk of being wrong and easing too early.
One reason for their caution is that although the labour market is easing rapidly and businesses say finding staff is the easiest in 14 years, we lack solid evidence of wages growth substantially slowing down.
We all expect that such data will appear as we advance through 2024
But until proof of a feed-through of excess labour to low average wages growth appears, the Reserve Bank will remain cautious.
They’re also going to continue to impose restraint on the economy because underlying measures of inflation are also too high. Like the headline measure they are falling. But one key measure which excludes the recent downward pressure on prices from the exchange rate, international oil prices, and lower shipping costs, still sits at 5.9%.
When might the Reserve Bank receive enough evidence to bring forward their planned timing of a cut in the 5.5% official cash rate from late-2025?
Most of us think by the middle of this year. By then we will have a better feel for the degree of weakness in house building, the extent of the rise in the unemployment rate, whether tourist inflow numbers have stopped growing or not, whether the government is truly reining in spending, and how quickly wages growth is slowing down.
The first sign of their increased willingness to ease might not actually be visible initially to you and I. It could be a behind the doors signal to banks that it would not be a bad thing if banks were to respond to recent sharp falls in their fixed rate wholesale borrowing costs by cutting their fixed mortgage interest rates. We will have to read between the lines of the sporadic cuts in fixed rates as they occur and in particular whether one bank cutting rates slightly leads to other banks undercutting them in short time.
For now, any cuts in bank fixed rates are likely to be minor and for many borrowers while the traditional route of fixing either one or two years may be considered, locking a rate in for just six months could be optimal.
The problem there however is that when one’s six month fixed rate matures, let’s say in July or August, it is highly likely that we will have an indication of easing willingness by the Reserve Bank and interest rate forecasts will be getting pushed downward. Then what do you do? One’s incentive then will be even greater to avoid fixing one – three years than seems to be the case now.
I see a good chance that come August the many people currently fixing just six months will say they might as well have fixed one year or 18 months in order to ride the cycle down and not have to face decisions on what to do every six months.
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