At the start of this year, optimism about falling inflation in the United States led to the financial markets pricing in six rate cuts by the Federal Reserve before the end of the year. Now, they are only pricing in one rate cut.
In Australia, there had been expectations of two or three cuts this year. Now forecasters say there is a good chance that the Reserve Bank of Australia will need to push interest rates higher.
Because of these altered expectations, wholesale interest rates in New Zealand have increased in recent months, even though there has been only a small change in rate cut expectations here. The popular view of our central bank cutting the 5.5% official cash rate in the second half of the year by perhaps two times has shifted to hopes that the first cut will be able to be made before the middle of 2025, which is when the Reserve Bank have signalled a cut is likely.
In Australia and the United States, the change in optimism regarding monetary policy largely reflects better-than-expected labour market data and stronger-than-expected numbers on things like household spending.
Is that the case here as well?
No. We have just received data on our labour market’s performance during the March quarter of this year. The popular pick and the prediction of the Reserve Bank had been that the unemployment rate would rise from 4.0% to 4.2%. Instead it rose to 4.3%.
Jobs growth was much weaker than expected in the quarter, with employment falling by 0.2%.
There has essentially been no jobs growth in New Zealand since the middle of last year.
Will this rapid weakening in the labour market continue?
Probably, yes. The latest ANZ Business Outlook Survey shows a net 1% of businesses plan cutting staff numbers in the next 12 months. This reading was a net 7% planning to hire more people at the end of 2023. Employment prospects have deteriorated here, while they have improved offshore.
This means that prospects for interest rate cuts here remain good, but as noted previously, the Reserve Bank still needs to see some greater progress in a couple of areas. First, the core measures of inflation need to track considerably lower than the near 5.5% some are still sitting at.
Second, businesses need to pull back a lot more on their pricing plans. The ANZ’s survey has just shown a rise in the net proportion of businesses planning to raise their prices over the coming year to 47% from 45%. The long-term average reading for this measure is 25%, and the fact that businesses are still planning widespread price rises means the Reserve Bank will not be sending an easing signal anytime soon.
For borrowers, the incentive remains firm to stick with one of the shorter terms out to perhaps 18 months. At some stage, fixing three years and longer will become optimal. But that point in time won’t come along until the easing cycle for monetary policy is well underway, and it hasn’t even started yet.
To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz.
