There was much excitement about a week ago when the Reserve Bank reviewed the economy and monetary policy and decided things are not quite as worrying as they were thinking in November. That is not to say that they wrote the outlook for inflation is good, just that they no longer specifically warned that they might need to raise interest rates further.
They still plan on keeping the official cash rate at the 5.5% level they took it to in May last year until mid-2025, but that is not likely to happen.
The chances are good that the first cut to the cash rate will come sometime close to October this year
And there is a chance that rates will fall quite quickly through 2025.
The reason for this optimism on my part is that we can see some strong signs that the economy is being sorely crunched by the tight monetary policy in place over the past couple of years. It is not just that the volume of spending on retail goods and services has been falling for the past eight quarters. It is also the fact that in my monthly survey of real estate agents the respondents have just reported that buyers have the greatest level of concerns about their employment and income since September 2020.
This is important because one of the key routes by which inflation goes up is strong wages growth, so a key route by which it goes down is slowing wages growth. As people grow more concerned about their jobs their wage demands will decline, and employers will feel more inclined to hold out against requests for large rises – even if they are "needed" to compensate for 4.7% inflation.
Another new development is that prospects for house building are looking worse
The number of properties listed for sale with realestate.co.nz has just risen to its highest level in eight years with very large rises in fresh listings received by agents in both January and February.
Buyers decreasingly feel that what they want to buy is not available and that they will need to contract for a new house to be built or purchase a unit off the plan. The home building sector has a large multiplier impact on the economy, and the feedback I am getting from the widely-defined sector is that layoffs are occurring, and a lot of work is drying up.
Eventually this decline in the rate of growth of new housing at a time of strong population growth will produce a spike upward in average house prices. That is probably a story however for next year, and it won’t happen until monetary policy is a lot easier.
At this stage I envisage scope for the official cash rate to be cut by 1.5% in the 18-month period from October this year. But borrowers need to strongly be aware that most interest rate predictions here and offshore have been wrong since 2007, and huge uncertainty remains regarding the speed with which inflation is going to come down.
If I were borrowing at the moment, I would probably take a mixture of six and 12 month fixed rates
But I would expect to still be fixing for short time periods in six and 12 months time. It is difficult to see that the three year and longer fixed rates will get close to their new cyclical lows until maybe 2026. But this far out that can only be a guess!
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