Inside Economics: Could Trump tariffs mean lower OCR, plus why house prices are just ‘plodding’

Donald Trump will reveal more of just how far his tariff policy will go tomorrow.

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

In the shadow of liberation day

Liberation Day is almost upon us. US President Donald Trump will unveil the full scope of his tariff policy tomorrow morning (Thursday, April 3 NZT).

There’s not much businesses, economists, investors, or anyone else can do but wait with bated breath for the details, which will have a huge impact on global economic growth this year.

Kiwibank economists took a look at the risks earlier this week, setting the scene with a fairly upbeat take on the progress of the domestic economy.

The recovery is under way and should gather momentum (to the point things might actually start feeling better) in the second half of this year, they say.

“There’s little in the way of domestic catalysts that could derail the Kiwi economy from this trajectory,” the Kiwibank team says.

“But when thinking of the balance of risks, we still see risks as skewed to the downside for the economy. Risks, which are predominately coming from offshore.”

“While we’ve managed to stay off the Trump tariff country hit list (for now), the ramifications of an escalated trade war could hurt us significantly.”

As Kiwibank notes, tomorrow we’ll hear Trump’s plan for reciprocal tariffs, with an update on the on-again, off-again 25% tariffs on Mexico and Canada.

“Additionally, we’ll also see whether the newly announced 25% tariffs on autos, as well as the 25% tariffs on goods from any country that imports Venezuelan oil and gas, will come into effect as promised last week.”

Whatever the numbers, it would be a relief just to have some certainty around it all.

At that point, markets can start pricing in the impacts, and we can start to move on.

Could a bad tariff reaction drive the Official Cash Rate lower?

Kiwibank economists also say that fears of a global growth slowdown are building, given the level and scope of the tariffs proposed.

In that environment, the demand for Kiwi exports will come under pressure.

“It certainly doesn’t help that our two key trading partners are at the forefront of the trade war.”

If that escalates, then we could see the domestic economic recovery stall.

Current expectations are that the Official Cash Rate (OCR) will drop from 3.75% to 3.25% – with cuts at the next two reviews. After that, the odds about even on whether we’ll see a third cut – taking it to 3%.

But a trade war and slower global growth could require the Reserve Bank (RBNZ) to push the cash rate below 3%, they say.

“It is a scenario that’s certainly not outside the realms of possibility, yet one the market has not priced.”

Rate cut next week

The first of those widely expected 25 basis point cuts is due next week.

This one seems to have come around fast.

Next Wednesday (April 9), the Reserve Bank will release its April Monetary Policy Review (MPR).

It’s not a full Monetary Policy Statement (MPS) and won’t involve a press conference with Acting Governor Christian Hawkesby.

But it will be the first monetary policy decision since the abrupt departure of the previous governor, Adrian Orr, last month.

Reserve Bank of NZ Deputy Governor Christian Hawkesby during the November Financial Stability Report press conference. Photo / Mark Mitchell

Nobody is expecting any significant change in direction. The rest of the Monetary Policy Committee remains the same, and the path for the next few months has been well signalled.

The RBNZ put out an update this week, but only to confirm that Hawkesby will be chairman of the committee and remain in the acting role while the process for selecting the next governor is formalised.

“The Monetary Policy Committee now has three internal RBNZ staff and three external members,” the release said.

“The MPC will continue to operate with six members until a Governor on a five-year term is appointed. The MPC chair holds a casting vote.”

Of course, this cut and another 25 basis points in May have been so well signalled that they are already largely priced in by the commercial banks.

There’s been no shortage of commentators and economists warning that mortgage rates probably don’t have much further to fall.

Unless, as per the Kiwibank analysis above, the global economy turns down a lot sharper – which would not be a good thing.

In his MPR preview, BNZ head of research Stephen Toplis points out that markets are increasingly reluctant to fully price in a 3% low in the cash rate.

“The current market bottom sits a smidgen above 3% but has regularly risen above 3.1%,” he says.

“While the RBNZ will not be unhappy with this, we doubt it would want the ‘last’ rate cut priced out at this point in time.

“Was this to be the case, then mortgage interest rates could well be repriced higher. We are not at all convinced the RBNZ wants that to happen now.”

Perhaps some global tariff turmoil will shift market pricing.

But Toplis argues that the “ultimate driver” of the low mark in the cash rate could be determined by whether or not the RBNZ succumbs to pressure and eases back on its published intent to have bank capital ratios rise aggressively.

Capital back-track?

The Reserve Bank has wasted no time in announcing a review of its capital requirement rules for banks following the departure of Adrian Orr.

I’m sure the two things aren’t meant to be officially related, but Orr was a fierce supporter of the move to raise bank capital requirements.

There has been speculation that a stand-off between Orr and the Government over this issue was one of the reasons for his abrupt departure.

It coincided with news that Finance Minister Nicola Willis had sought advice on how she might compel the RBNZ to relax the requirements.

She argues that relaxing the requirements “could make a difference to the productivity and growth of the New Zealand economy, and therefore to New Zealanders’ incomes”.

Wellington business editor Jenée Tibshraeny covered the announcement of the RBNZ review on Monday week, noting the board’s decision also follows “the banks lobbying hard for the rules to be eased, saying that once fully implemented in 2028, the costs associated with holding more capital will push the interest rates they charge up by about 50 basis points“.

The Reserve Bank has argued that 20 basis points is a more realistic estimate.

In his OCR preview, BNZ’s Toplis argues that if the RBNZ does not follow through with its initial proposals, then this would represent “an effective easing in policy”.

“All other things being equal, [that] would mean the cash rate would not need to be as low as previously forecast to achieve the same inflationary outcome.”

House price growth has been slow.

Why house prices are just ‘plodding along’

Lower rates ought to be giving the housing market a boost. But there hasn’t been much sign of price growth yet.

ANZ Property Focus report, out this week, takes a look at why house prices have remained sluggish despite lower interest rates.

On a positive note, the “housing market continued to warm in February with house prices posting another monthly gain while seasonally adjusted sales volumes returned to growth”.

But in the report – titled “plodding along” – they say they continue to expect price momentum “to remain sluggish” over the coming months as a soft labour market weighs on household confidence.

They also note that the number of new listings continues to surge, highlighting the sales-to-listings ratio.

They say, “The sales-to-listings ratio is a useful indicator of heat in the housing market and tends to give a three to six- month lead on house price momentum.

“The return to growth in sales volumes in February wasn’t enough to offset the lift in listings, and the sales-to-listings ratio remains consistent with lacklustre growth in house prices in the near term.”

A lot is hanging on the stabilisation of the labour market, ANZ concludes.

Until we see unemployment peak and employment pick up, the housing market recovery is “likely to remain stuck in first gear”.

However, the ANZ economists remain confident that will happen in the next few months with signs of life in recent data.

They note that monthly filled jobs (recorded by Stats NZ) have returned to growth, just.

“While growth remains very modest, and below the rate of population growth, it is nonetheless a positive early signal.”

They also note that firms’ employment intentions have returned to positive territory over recent months in ANZ’s Business Outlook survey.

Overall business confidence is holding steady at elevated levels, the survey (released on Monday) showed.

ANZ concludes: “All in all, underlying indicators of the housing market are more consistent with a stabilisation than a vigorous rebound. We remain of the view that momentum will begin to accelerate in the second half of the year.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.