Is the easing of monetary policy still a distant dream?

Is the easing of monetary policy still a distant dream?

Girl hugging a cloud while sleeping

On October 4 the Reserve Bank will announce the outcome of their next review of the 5.5% official cash rate. There is very little chance that they will change it and little chance also that they will signal that their thinking about the need for continuing restraint has changed.

Their most recent comments came on August 16 when they left the cash rate untouched and wrote that the rate needs to stay at 5.5% for the foreseeable future in order to be certain inflation will comfortably head back to the 1% - 3% target range.

Have we received any new information since August 16 to alter that?

On the good side for lower inflation is news that international dairy prices have fallen further and an El Nino weather pattern bringing drought is becoming set in place for summer. These unwelcome developments mean that farmers have already slammed their wallets shut and the resulting weakness in regional economies will keep nationwide growth at low levels through 2024.

But offsetting this is the news that Saudi Arabia and Russia have cut oil output and international oil prices have risen above US$90 a barrel. This has pushed NZ petrol prices almost to record levels and that adds directly to inflation. But it also saps growth from the economy and while the immediate impact will be greater Reserve Bank concern about high inflation continuing, in the context of falling household spending and a slowly rising unemployment rate it means weaker inflationary pressures from mid-2024.

For now there are too many uncertain factors and risks for the Reserve Bank to start signalling that the inflation outlook is good and that monetary policy might be eased sooner than the timeframe they currently have pencilled in of late-2024.

What does this mean for borrowers?

I can tell from my monthly survey of mortgage advisers with that the recent increases in fixed mortgage interest rates have encouraged an increasing number of people to look more favourably at fixing 18 or 24 months rather than 12 months.

That shift is understandable. But personally I’d be happy in the 12-18 month range because of the concerns I have about the downturn in the rural sector, and the impact which farming retrenchment will eventually have on the economy’s pace of growth and inflation.

On another matter worth mentioning here, the survey referred to above has just shown a net 22% of mortgage advisers reporting that they are seeing more investors coming in looking for advice. This is the strongest proportion since January 2021.

This may be the reflection of three factors:

First, average NZ house prices have now risen on average 0.7% a month seasonally adjusted for three months. The house price cycle has shifted to the upward leg and for assets price rises tend to beget more price rises as more investors are attracted into the market.

Second, there is now high awareness of the surge in NZ population growth resulting from a record net migration inflow of 96,000 people over the past year. More people combined with falling new house construction has obvious implications for house prices down the track.

Third, political opinion polls are suggesting a change in government after October 14. That would mean slow restoration of full interest expense deductibility by mid-2026 and therefore the opposite of investor desertion as buyers when the policy changed in March 2021.

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How does this impact me?