I want to take a look at what the experts think. But first, let’s catch up on where we are right now.
On Wednesday, we find out how effective high interest rates have been at dampening labour demand.
In other words, how many poor suckers have lost their jobs in the past few months so that we can get inflation back under control?
It’s the ugly and unlikeable side-effect of monetary policy and inflation targeting. The more effective it has been, the higher unemployment will rise and more wage growth will fall.
It’s blunt and imperfect but we live with it because it works. It does its job clearly and measurably in a way that few other economic theories can.
It’s working again. We can all see it sucking demand from the economy. Times are tough but the odds look better every day that we have inflation under control.
The European Central Bank, the Bank of Canada and the Bank of England have all declared victory and cut rates. The US Federal Reserve looks set to go in September.
And here in New Zealand? Well, that is the big question.
I have mixed feelings.
I so want this grim post-pandemic cycle of inflation to be over. I’m ready to pop the champagne and toast another victory for monetary policy. Also, I have a mortgage to refix in October.
But I can’t help thinking about how utterly soul-destroying it would be to go too early and see inflation spike back up.
Uggh. Imagine that ... the Reserve Bank being forced to backtrack and put rates up again. Nicola Willis would be so cross.
Financial markets certainly think we have won the inflation battle. Current pricing has the odds of an Official Cash Rate (OCR) cut in August at better than 50/50.
Investors in the speculative end of the interest rate market are so excited about the prospect of cuts that they have created headroom for banks to drop mortgage and deposit drop rates ahead of any move by the Reserve Bank.
Talk about a self-fulfilling prophecy. The flaw in the crisp symmetry of market expectation is the lack of hard evidence that we’ve beaten inflation.
Unemployment and wage data will provide more clues. But we won’t see Consumer Price Index inflation for this current quarter until October.
We’ll see monthly Selected Price Indexes with inflation figures for food, travel and accommodation. But that is mostly tradeable inflation – the part that we know is under control.
The Reserve Bank needs to be sure that domestic price rises (non-tradeable) are abating.
The cost of waiting an extra six weeks or so to be sure pales in comparison with the pain that inflation flaring up again would inflict on this weary and battle-scarred economy.
That’s why we have central banks to be the grown-ups in the room, because we know financial markets won’t be.
I struggle to see how the Reserve Bank could get there for August. Despite the more optimistic language in the last Monetary Policy Review, it still has its official rate track forecasting the first cut won’t come until August next year.
That’s why – even with all the economic gloom and hospitality industry pain this winter – I think the Reserve Bank will need to wait until at least October.
In fact, I think there is a strong case for waiting until November but then moving quickly to ease pressure with 50 basis points of cuts to give the economy some fair winds going into the summer break.
For many mortgage holders, the bigger question right now is not whether it will be August, October or November. It’s how far rates fall from here and how fast.
That’s what we need to know if we’re weighing which rate and what length of term to pick. What will the new normal look like when all the dust finally settles?
Banks are already dangling enticing deals (with rates below 6%) in front of longer fixed terms like three and five years. Are they really good deals?
The maths starts to get complicated and the longer we try and project the more variables there.
The same markets expecting a rate cut in August see 75 basis points of cuts by the end of this year and imply an OCR of 3.66% by this time next year.
The economists are more cautious – rightly – as they can factor in the more realistic pressures and considerations the Reserve Bank will be juggling.
But for the record, Westpac economists expect “an initial 100 basis points of easing by mid-2025 in 25 basis-point increments consistent with ‘tempering’ restrictiveness”.
That’s an OCR of 4.5% by the middle of next year, so presumably (based on current margins) one-year mortgage rates of around 5.85%.
Westpac sees the OCR bottoming out (the terminal rate) at 3.75% by early 2026, which might equate to mortgage rates of about 5.10%.
ANZ is a little more optimistic about the terminal rate (although that means they are more pessimistic about the economy).
“From November, we are forecasting 25bp cuts at each meeting, taking the OCR to a terminal rate of 3.5%,” they say.
That suggests we might see some mortgage rates below 5% in late 2025.
Long-term forecasting is always fraught and vulnerable to disruption by events. But these expectations are something to consider when we look at how low to lock in for.
We should also be a bit careful what we wish for. It’s the curse of monetary policy that the lower rates go, the more likely it is that you or someone you know will lose their job.
Economics ... so much fun!
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist. He also presents and produces videos and podcasts. He joined the Herald in 2003.
