Inside Economics: Why is the RBNZ so negative, is the divide in rate-cut forecasts credible? And how much cash would it take for you to quit your job?

Economists and the Reserve Bank are divided over when the official cash rate may come down. Photo / 123rf

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 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.

OPINION

Why the great divide between rate cut forecasts?

Q: Hi Liam,

I read in the preview for today’s interest rate decision that markets are expecting the first cut by November but the Reserve Bank still forecasts it for September next year. I understand that there is a bit of strategy and managing of expectations at play, but how can it be credible for there to be such a huge gap in the forecasts?

– W.G.

A: Fair question. The huge gulf is certainly weird and confusing. But I don’t think it necessarily represents as wide a divergence of opinion or outlook as it seems at first glance.

What’s important – and often gets lost in the shorthand commentary of daily coverage – is the three different ways the Official Cash Rate (OCR) track is being forecast. Financial markets, bank economists and the Reserve Bank (RBNZ) are not really doing the same thing.

For the record, the financial markets are most optimistic in their outlook for interest rate cuts, currently pricing in at least one rate cut by November and giving decent odds to one in October – and even outside odds of an August cut.

Market predictions are just the sum of daily bets that sophisticated investors make on future pricing. They aren’t really formal forecasts at all, although we treat them that way. They are very dynamic and the odds can change by the minute.

Economists are trying to consciously make educated guesses about the future, but they are well aware of how hard it is to do accurately. They’ll also change their opinions rapidly as the facts change.

Naturally enough, we get a range of views from across the industry and it’s a good idea to look at all of them to see where the consensus lies.

Right now, the views aren’t actually that divided. Most local economists see the first cut coming in February but a couple are picking November. The data in the last few weeks has been budging their expectations closer to November and we saw ASB break ranks and change its outlook recently.

Then there’s the Reserve Bank, which pushed its outlook from a May 2025 cut to August or September in its last Monetary Policy Statement (MPS). It’s a depressing outlook for the many mortgage holders and businesses desperate to see rate cuts deliver some economic improvement... or it would be if anybody believed it.

So why is the RBNZ so pessimistic?

In a report last week, Abhijit Surya from Capital Economics noted the disconnect between his view (first cut in November) and the RBNZ’s extremely cautious outlook.

Surya noted that the bank currently has the OCR projected to peak at 5.65% in the fourth quarter, while rate cuts don’t come into play until the second half of next year.

“Taking the MPS at face value, the RBNZ seemed to be signalling a high chance of another rate hike,” he said.

“However, chief economist Paul Conway later clarified that the forward track was a ‘mechanistic’ model output rather than an absolute projection. And while he acknowledged that inflation had proven to be stickier than the bank had expected in February, he argued that risks to the inflation outlook had not increased substantially.”

Reserve Bank Governor Adrian Orr (left) and chief economist Paul Conway. Photo / Mark Mitchell

That suggests the Reserve Bank doesn’t want people to take the track too literally. That’s fine and no one can predict the future. We shouldn’t take any forecasts as gospel.

But it is still the outlook produced from a model built by the Reserve Bank and fed with judgments from the Monetary Policy Committee. It has to count for something, otherwise why publish it?

Perhaps it is all just part of the big strategic game? The RBNZ doesn’t like to give the impression that it is “jawboning” (to use the central bank jargon) or bluffing. It wants to be seen to play a very straight hand (I think we’re using a poker metaphor now).

But if it would be foolish for the bank not to lean into the messaging that best suits its ultimate goal – getting inflation back in the target range.

Overly optimistic messaging would not help. Markets move quickly and ahead of the real economy. They also play a sizeable role in setting retail lending rates. So if they start pushing down the price of debt ahead of the RBNZ then the economy will get a lift, despite the higher OCR. Inflation may bounce back and the bank might have to delay cuts – or even hike again.

So to put it simply, it’s really in our interest for the Reserve Bank to take a tough stance. I imagine they will maintain that stance today and but will start to soften it in their August Monetary Policy Statement.

Be sure to check the NZ Herald website at 2pm for the RBNZ’s latest words of wisdom.

Why mortgagee sales are still near record-low levels

You might have read that mortgagee sales are on the rise. While that is strictly true of the trend, I feel like we need a bit of perspective around this.

There’s a risk that some of the headlines around debt and credit data make things look worse than they really are.

Mortgagee sales – which mean the mortgage holder just can’t keep paying the bank and has been forced to sell – are still at historically low levels. Compared to the dark days of the GFC, the numbers are positively rosy.

According to CoreLogic, mortgagee sales in the third and fourth quarter of 2009 peaked at 766 and 757 respectively.

In the first quarter of 2024, there were 24. Yes, they’ve quadrupled since the first quarter of 2022 – from a record low of just six.

Herald sister publication One Roof also took a good, long look at this recently but I asked CoreLogic chief economist Kelvin Davidson for a bit of context.

He warned that the number will likely keep rising for a while yet.

“Mortgagee sales will lag, so you’d anticipate some upside risks, given that mortgage rates don’t seem set to fall too much in the short term, and job security has faded,” Davidson said.

Clearly, the fact that unemployment remains relatively low must help.

But there was also probably more proactivity now too, he said.

“Borrowers are more aware that they can chat to their broker and try to get ahead of the curve, with banks also looking at more options too – extending loan term, go interest only. In the end, nobody wins from the mortgagee sale, apart from perhaps the buyer who gets a ‘bargain’,” Davidson said.

“I’ve also heard a growing number of anecdotes that people are actively selling early and perhaps downsizing or moving somewhere cheaper, to avoid that pain down the track.

“It’s a form of financial stress, but hard to demonstrate with data because it just shows up on our records as ‘another sale’.”

Kiwi businesses running on empty

I’m not trying to pretend the economy isn’t tough, especially for small and medium businesses. That was made very clear in the latest record of business sector outgoings, from the National Accounts for the first quarter.

New Zealand’s non-financial business sector showed a negative saving of $2.5 billion in the March 2024 quarter, according to the figures released by Stats NZ last week.

“Negative saving” is a cute term. It’s how Stats NZ describes the deficit in business earnings in the March quarter.

“Negative saving represents greater outgoings than income and is funded by prior saving or new borrowing,” Stats NZ said.

I‘ve also sometimes heard it described as “dissaving”. But whatever the technical term, it’s just spending more than you earn – or what we’d colloquially call living beyond your means.

So it’s not good news that local businesses’ rates of negative savings are high.

“The non-financial business sector has experienced negative savings in four of the last five quarters. This contrasts with positive savings in most quarters of the preceding six years,” Stats NZ national accounts institutional sectors senior manager Paul Pascoe said.

The sector’s gross operating surplus decreased to $16.0b in the March 2024 quarter. This is the fifth consecutive decrease since the final quarter of 2022, when the gross operating surplus was $18.9b.

“Decreases in operating surplus reflect lower profitability for the business sector,” Pascoe said.

“Over the last year, the production of goods and services slowed while the cost of labour continued to rise.”

Interest paid increased by a further 2.2% to $7.2b in the March 2024 quarter. Interest expenses make up 28% of income payable in the latest quarter, and 14% in the September 2021 quarter – when interest paid was at its lowest level in the series ($3.0b).

Businesses have taken on more debt and reduced their inventories to fund the difference between income and outgoings.

The last year has seen three of the four highest quarters in the series for new borrowing, with $18.4b of new borrowing in the year ended March 2024. Over the same period, net inventories declined $5.2b, reflecting businesses using or selling inventories without fully replacing stocks.

Kiwis are getting wealthier, but it’s complicated...

Last Sunday I wrote that those same national accounts showed the household wealth of New Zealanders was on the rise again.

I wrote it with some scepticism, as it is another example of statistics that paint a picture at odds with our current experience.

But it is true that our aggregate household net wealth rose 0.3% for the March quarter 1.4% in the past year. That was largely a symptom of the US tech boom pushing markets to record highs and carrying our pension funds with them.

I also noted that housing wasn’t helping much due to market doldrums and that “Kiwis store most of their household wealth in the family home”.

Turns out the last part of that statement isn’t correct (at least in the aggregate, which is how these stats are presented).

Michael Littlewood, former co-director of the Retirement Policy and Research Centre, has analysed these wealth numbers in some detail.

It turns out that the gross value of owner-occupied housing (as of December 31, 2023) was 43.5% of gross household wealth; the net value (net to net) was 39.8%.

“Even adding the value of rental housing only just pushes all housing into the ‘most’ category – total net to net of 54.4% – but that’s an overstatement,” Littlewood says.

“For some reason best known to StatsNZ, the value of rental housing owned by the state, councils and employers is included in this number, overstating both that number and the total assets held by all households.”

Littlewood also notes that KiwiSaver assets at $104b (December 2023) were just 4.5% of all households’ net assets.

It’s a reminder that a big chunk of New Zealand’s non-housing assets still sit in bank savings accounts and non-KiwiSaver equity investments.

Littlewood agrees that data is only marginally useful, given “it doesn’t tell us who owns what, the distribution of assets or anything else that might give us a meaningful look at what New Zealand owns and owes”.

“But it is all we have,” he says.

“The limited Stats NZ quarterly numbers illustrate, again, why New Zealand needs a proper, longitudinal survey of New Zealand’s household finances. We can’t make proper policy decisions based on those Stats NZ stats.”

How much cash would it take for you to quit your job?

That intriguing question was posed in a recent Financial Times economics column. Columnist Soumaya Keynes pulled together some of the latest research on the topic and found that for some the figure is surprisingly low.

In one US study based on lottery winners, the authors found that for every US$100,000 ($163,000) of extra wealth, the chances that the winner is employed falls by just under 4 percentage points.

Poorer people were more likely to quit their jobs, while richer people were more likely to stay but reduce their hours.

Another study of individuals in Spain found that many winners quit to set up their own businesses.

How much would you need to quit your job? Photo / Getty Images

The study, by the Centre for Economic Policy Research and Stanford University, asked Europeans what they would do if they received sums ranging from €5,000 to €100,000 ($8800 to $177,000).

“Below around €25,000, people say they would plough on with work. But for sums between that threshold and €100,000, their likelihood of working falls by 3 percentage points on average,” Keynes writes.

“Again, it was women, as well as people who are older, who have less debt or who are close to retirement [who] are more likely to drop out.”

I suppose the gender imbalance may be due to the fact that in many families with younger children, women are often still primary caregivers and the extra cash enables them to spend more time managing the family. Or is that a bit old-fashioned?

Clearly, a $100,000 windfall isn’t going to be enough for most Kiwis to pay off their mortgage and retire early. Maybe a million? But even then, there’s that difficult question of what you’d actually do with all your time.

I’ve met a lot of rich-listers and high-paid executives over the years. I’m yet to meet one who was planning to retire and do nothing. Have a listen to what Rod Duke had to say on the link below...

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 his 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.