Latest / The SME Stream / OCR cuts a bright spot but economic outlook mixed for the rest of the year

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OCR cuts a bright spot but economic outlook mixed for the rest of the year · The SME Stream

• 0:05
  Speaker 1: Kiota. I'm Chelsea Daniels and this is the Front Page,
• 0:09
  Speaker 1: a daily podcast presented by the New Zealand Herald. The
• 0:17
  Speaker 1: official cash rate has been cut to four point seventy
• 0:21
  Speaker 1: five percent, which is being touted as welcome news for
• 0:25
  Speaker 1: households all over New Zealand. It's the lowest the OSA
• 0:29
  Speaker 1: has been in eighteen months. The Monetary Policy Committee said
• 0:34
  Speaker 1: that annual consumer price inflation was within its one to
• 0:38
  Speaker 1: three percent inflation target range and converging on the two
• 0:42
  Speaker 1: percent midpoint. While plenty of people are popping the champagne
• 0:48
  Speaker 1: over this announcement is the latest cut masking some of
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  Speaker 1: the other issues in the economy.
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  Speaker 2: Today.
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  Speaker 1: On the front Page, Herald Business Editor at Large Liam
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  Speaker 1: Dan joins.
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  Speaker 2: Us to discuss the stats.
• 1:01
  Speaker 1: You need to know, Liam, what's the significance of this
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  Speaker 1: latest ocr cup What does this actually mean for the economy?
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  Speaker 3: Well, really, the cut just means cost of borrowing goes down,
• 1:17
  Speaker 3: which means people who are paying who have debt will
• 1:19
  Speaker 3: be paying less money out to service that debt, so
• 1:22
  Speaker 3: they'll have more money to spend. So it's a way
• 1:24
  Speaker 3: of putting cash back into the economy which had been
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  Speaker 3: removed by the Central Bank by the Reserve Bank in
• 1:31
  Speaker 3: order to get on top of inflation, because they put
• 1:34
  Speaker 3: lots of money into the economy to cope with.
• 1:36
  Speaker 1: COVID, and in terms of inflation, that number is looking
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  Speaker 1: a lot friendlier. Now.
• 1:40
  Speaker 3: Hey, yeah, Well, the official rate is three point three percent,
• 1:44
  Speaker 3: which is still outside the mandated target ban, but that's old.
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  Speaker 3: That's for the second quarter of the year. We don't
• 1:50
  Speaker 3: get the official number for the third quarter until next week,
• 1:53
  Speaker 3: which is a bit inconvenient. But the Reserve Bank is
• 1:56
  Speaker 3: very confident that it is under control, and it has
• 1:59
  Speaker 3: said that the statement this week that basically they see
• 2:02
  Speaker 3: it below three already. They've looked at I guess, second
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  Speaker 3: tier stuff like what businesses are saying about their own
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  Speaker 3: pricing and all that sort of stuff. And also, you know,
• 2:11
  Speaker 3: when you look at the way the data flows through
• 2:14
  Speaker 3: the way the statistics work, the third quarter last year
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  Speaker 3: had very high inflation numbers. We're in the near the
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  Speaker 3: peak of that inflation. They'll drop out, so we know
• 2:23
  Speaker 3: that they'll come out of the average. So for the
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  Speaker 3: average annual rate over the last year, it is looking
• 2:28
  Speaker 3: likely that it'll be below three percent. So that I
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  Speaker 3: guess means we can say in terms of high inflation,
• 2:34
  Speaker 3: it's over. We've won the war against inflation. Doesn't mean
• 2:37
  Speaker 3: prices won't go up necessarily, but we shouldn't be seeing
• 2:40
  Speaker 3: those big spikes. And some things might go down, some
• 2:43
  Speaker 3: might go up, but the average rate's going to be
• 2:45
  Speaker 3: between one and three, which is where economists and central
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  Speaker 3: banks like.
• 2:49
  Speaker 1: To keep it. And do we look at that rate
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  Speaker 1: when we kind of determine whether we're in a recession
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  Speaker 1: or a recessionary period.
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  Speaker 3: It has an impact, but the recession is usually judged
• 2:59
  Speaker 3: on GDP and the output of the economy. If the
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  Speaker 3: output's falling massively and we're in a deep recession, then
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  Speaker 3: often pricing will fall as well. And that well, that
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  Speaker 3: has happened. That's why they talk about the reserve bank
• 3:12
  Speaker 3: engineering a recession. I mean, they don't really want a
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  Speaker 3: recession necessarily, but they have to reduce the amount of
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  Speaker 3: activity in the economy just to get that inflationary effect out.
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  Speaker 1: And how are we looking at the moment in terms
• 3:24
  Speaker 1: of the recession.
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  Speaker 3: Well, we're either still in recession or just popping out
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  Speaker 3: of a recession as we've sort of moved into the
• 3:31
  Speaker 3: fourth quarter. But we don't get the GDP data till
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  Speaker 3: much later, but we know that the Reserve Bank in
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  Speaker 3: August forecast at the third quarter would be negative as well.
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  Speaker 3: We went backwards, so that would be recession. People talk
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  Speaker 3: a lot about per capita recession with the immigration numbers
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  Speaker 3: over the past couple of years. We've been in per
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  Speaker 3: capita recession for two years, so you know, depending on
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  Speaker 3: how much weight you put on that per person in
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  Speaker 3: this country, the size of the economy has been shrinking
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  Speaker 3: for some time.
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  Speaker 1: Most common are predicting further cuts to the OCR in
• 4:03
  Speaker 1: the coming months.
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  Speaker 4: In August it dropped to the lowest it's been in
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  Speaker 4: four years, and there could be more drops up left,
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  Speaker 4: with some people saying that it could drop to his
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  Speaker 4: lowest three point five percent by the end of twenty
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  Speaker 4: twenty five.
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  Speaker 2: Now another drop is predicted at the end of November
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  Speaker 2: when we'll see them meet again, and all predictions are
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  Speaker 2: now that by the end of next year the reserve
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  Speaker 2: banks of the OCR will be back within what they
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  Speaker 2: call the neutral range of two and a half to
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  Speaker 2: three percent.
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  Speaker 1: Why doesn't the Reserve Bank just do them all in one.
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  Speaker 3: Big go, That's a good question. It would be very
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  Speaker 3: dramatic to do like some people have said, look, maybe
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  Speaker 3: a seventy five basis point cut after something like christ
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  Speaker 3: Church earthquake or when the global financial crisis hit. Sometimes
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  Speaker 3: I think we might have gone to a full one
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  Speaker 3: percent cut, trying to remember straight after COVID, at the
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  Speaker 3: worst of that COVID as well. That's very dramatic though,
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  Speaker 3: And you know, we talk about monetary policy being a
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  Speaker 3: blunt and if you do that, it affects the balance
• 5:03
  Speaker 3: of the cost of borrowing a lot, and it's hard
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  Speaker 3: to undo fast, you know. So if it was bumping
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  Speaker 3: around by a four percent from quarter to quarter or
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  Speaker 3: between rate calls, that would be very hard to plan
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  Speaker 3: forward plan as a business or even as a consumer
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  Speaker 3: or you know, when you're looking at buying a house.
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  Speaker 3: So really what you want with monetary policy and central
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  Speaker 3: bank action is slow, stable change. You want it to
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  Speaker 3: be sitting somewhere really predictable for quite a long time.
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  Speaker 3: So even the cuts we're seeing now are probably you know,
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  Speaker 3: it's good to see it come down, but it's a
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  Speaker 3: shame that we're having to cut so hard because it's
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  Speaker 3: so dramatic, and you know, ideally it would be a
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  Speaker 3: smoother path, so you'd have a series of twenty five
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  Speaker 3: basis point cuts. Central banks don't like to cut in
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  Speaker 3: big numbers unless there's really dramatic reason to do it,
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  Speaker 3: and that's why I've been saying that, you know, if
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  Speaker 3: we do have another fifty basis point cut and then
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  Speaker 3: some economists are even picking another one in February, that's
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  Speaker 3: three fifty basis point cuts. That is quite radical, and
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  Speaker 3: it's not the sort of thing a central bank would
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  Speaker 3: do unless the economy was really in a lot of trouble.
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  Speaker 3: So I'm hoping that even though I've got a mortgage
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  Speaker 3: and I want rates to come down to sort of
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  Speaker 3: three percent or something, if we had to get there
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  Speaker 3: in the early next year, that would really be an
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  Speaker 3: indication that something was not right with the economy.
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  Speaker 1: And we've already seen some activity from our major banks. Haleium,
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  Speaker 1: what's the latest on those, Yeah.
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  Speaker 3: A lot of marketing stuff. I would say Initially we
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  Speaker 3: saw some banks move ahead of the ocr and there's
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  Speaker 3: a lot of competition and positioning. But more or less
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  Speaker 3: the fifty basis points has been passed through. I don't
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  Speaker 3: know if we'll see much more from here. Sometimes the
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  Speaker 3: bank rates are also affected by what's happening overseas and things,
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  Speaker 3: but it's been passed through pretty well, and now it's
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  Speaker 3: just a matter of when people refix. Businesses are more
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  Speaker 3: likely to be floating or on very short term rates,
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  Speaker 3: and they pay higher rates and they'll feel some benefits
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  Speaker 3: straight away, and then businesses will get some indirect benefit
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  Speaker 3: as consumers have more money in their pockets. And it's
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  Speaker 3: not insubstantial. You know, it's bigger, probably for most mortgage
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  Speaker 3: holders than what the government's tax cut was. I think
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  Speaker 3: if you're talking about fifty basis points or half a percent,
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  Speaker 3: or say a five hundred thousand dollars mortgage, that's twenty
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  Speaker 3: five hundred dollars a year, fifty bucks a week, almost
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  Speaker 3: fifty dollars a week, and a lot of people have
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  Speaker 3: bigger mortgages than that. And if you're not refixing next week,
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  Speaker 3: maybe it's a month or so, but you're still seeing, oh,
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  Speaker 3: that's going to be money that's coming back into my pocket.
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  Speaker 3: Or you know, if you're lucky enough to be in
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  Speaker 3: a position to not adjust your payments, just leave it
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  Speaker 3: there and let the lower interest rates mean that you're
• 7:40
  Speaker 3: paying off your mortgage faster. Then you'll be better off
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  Speaker 3: in the long run.
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  Speaker 1: Retail and Z is hoping the recent cut will bring
• 7:56
  Speaker 1: some extra Christmas chair. What's the likelihood of better spending
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  Speaker 1: this silly season.
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  Speaker 3: Well, I think there will be, particularly if we get
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  Speaker 3: another one or another fifty basis points in November, that
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  Speaker 3: will feel quite a substantial boost. It's not quite clear
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  Speaker 3: how much confidence is going to be boosted by this.
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  Speaker 3: It seems very upbeat at the moment, but then we
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  Speaker 3: have to remember the Reserve Bank was warning that it's
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  Speaker 3: doing this. It's comfortable doing this because inflation is falling
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  Speaker 3: and they know that the economy is in a slow patch.
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  Speaker 3: They can see business stress rising, they can see unemployment rising,
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  Speaker 3: and they see that continuing well into next year. So
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  Speaker 3: if you're worried about losing your job, you're probably less
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  Speaker 3: likely to spend. And it's not necessarily a super quick
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  Speaker 3: turnaround for some of these businesses that have been under
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  Speaker 3: awful stress for a long time.
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  Speaker 1: Does the ocr cauts and all this talk about interest rates,
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  Speaker 1: does this mean anything for those of us who don't
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  Speaker 1: actually have a home or a mortgage, Well, I guess.
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  Speaker 3: For younger people, probably the bigger issue right now is
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  Speaker 3: unemployment and rising unemployment and the risk of losing your job.
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  Speaker 3: So as businesses feel like they're more confident, consume confidence grows,
• 9:01
  Speaker 3: then hopefully we'll start to see the employment situation turn around.
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  Speaker 3: I mean that to me is the biggest issue. I think.
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  Speaker 3: You know, in a way, during the COVID stimulus, there
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  Speaker 3: was a labor shortage. There was actually a lot of
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  Speaker 3: opportunity for younger people in the job market, and that's
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  Speaker 3: obviously dried up, and that's making it a bit tougher
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  Speaker 3: to get a pay rise or to move around jobs
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  Speaker 3: and get pay rises in that we know, you know,
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  Speaker 3: wage inflation is part of the inflation that's falling away,
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  Speaker 3: which is not so good. Well, that's part of the
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  Speaker 3: process by which inflation comes down. It's the overall weakning
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  Speaker 3: of demand and that comes through in terms of weaker
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  Speaker 3: inflation and unfortunately in terms of job losses and business closures.
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  Speaker 3: Maybe if you're saving a way and looking to buy
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  Speaker 3: our first home, then lower mortgage rates are going to
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  Speaker 3: make it a bit easier. Hopefully it doesn't just spark
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  Speaker 3: another housing boom. And most commentators seem to think that
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  Speaker 3: even with lower mortgage rates, there isn't really enough pent
• 9:59
  Speaker 3: up demand and to suddenly see house prices start spiking
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  Speaker 3: like they did a couple of years ago.
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  Speaker 2: Well. L. J.
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  Speaker 1: Hooker has actually noted the reduction in interest rates is
• 10:08
  Speaker 1: already impacting the property market. They say, we're seeing a
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  Speaker 1: significant uplift in buyer activity and confidence. More people are
• 10:15
  Speaker 1: attending open homes, more people have been attending auctions around
• 10:19
  Speaker 1: the country, So I guess people are getting a little
• 10:22
  Speaker 1: bit more optimistic about their chances of entering the housing market. Yeah.
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  Speaker 3: I mean that's from a real estate agent, right, yeah, Okay, Well,
• 10:31
  Speaker 3: I mean, and it came out the day of but look, yeah,
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  Speaker 3: there's going to be more confidence and optimism seeping in,
• 10:40
  Speaker 3: and there will be people on the sidelines who are
• 10:42
  Speaker 3: actually cashed up properly, investors who were thinking, oh, the
• 10:45
  Speaker 3: numbers don't add up, don't add up, and then suddenly
• 10:47
  Speaker 3: the numbers do add up now, or they can see
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  Speaker 3: that they're going to add up in terms of mortgages
• 10:52
  Speaker 3: and the rent you can charge and all that sort
• 10:53
  Speaker 3: of stuff. So I would say some investors will be
• 10:55
  Speaker 3: coming back. And it does tend to pick up and
• 10:57
  Speaker 3: spring as well, So I don't know if that's a
• 10:59
  Speaker 3: seasonally as to press release. But there's a few factors
• 11:03
  Speaker 3: that are just you'd call headwinds to that. I mean,
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  Speaker 3: we're not seeing immigration rise now. The immigration rate is falling,
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  Speaker 3: so you know, we're not seeing masses of new people
• 11:13
  Speaker 3: arriving into the country, and we are seeing a lot
• 11:16
  Speaker 3: of new Zealanders leave, So just the sheer population effect
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  Speaker 3: there won't be that kind of pressure. There could be
• 11:21
  Speaker 3: further changes the government regulations. You know, if they were
• 11:24
  Speaker 3: to open up to foreign investment in the residential market
• 11:28
  Speaker 3: something like that could be a further boost. But yeah,
• 11:31
  Speaker 3: I think we will see it start to improve. But
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  Speaker 3: I just don't think it's going to suddenly turn into
• 11:36
  Speaker 3: one of these housing bubble price spikes.
• 11:39
  Speaker 2: Double whammy, double happy.
• 11:41
  Speaker 1: It's a sign that we've got inflation coming under control,
• 11:45
  Speaker 1: which is what we need to get a lit on
• 11:48
  Speaker 1: the cost of loving crisis. Nikola Willis said we're seeing
• 11:53
  Speaker 1: green shoots after this announcement. What does she mean by.
• 11:56
  Speaker 3: That, Well, green shoots is a kind of colloquial economy
• 12:00
  Speaker 3: term for the return of growth after a period of recession.
• 12:04
  Speaker 3: Remember it being very popular after the GFC and often
• 12:08
  Speaker 3: gets used too early. I think it's how hard you
• 12:10
  Speaker 3: look for the green shoots. She's right that the conditions
• 12:14
  Speaker 3: are coming right for growth, you know, for people to
• 12:17
  Speaker 3: start investing in She's obviously she's got an interest in
• 12:19
  Speaker 3: encouraging that. And I don't want to sound too gloomy,
• 12:22
  Speaker 3: but you sort of have to ask where does the
• 12:24
  Speaker 3: growth come from other than just a bit more cash
• 12:26
  Speaker 3: in the economy, a bit more consumer spending, and a
• 12:29
  Speaker 3: bit more maybe life in their housing market. Those are
• 12:31
  Speaker 3: the sort of the frothy, lighter ends of the economy.
• 12:34
  Speaker 3: What the economy needs is I don't think I don't
• 12:36
  Speaker 3: think Nicola Willis or Christopher Luxe would argue with this,
• 12:39
  Speaker 3: because they're out there saying that they're trying to affect
• 12:41
  Speaker 3: this change as well. But what the economy needs is
• 12:45
  Speaker 3: growth coming from the actual engine room, which is the
• 12:47
  Speaker 3: productive end manufacturing and agriculture and investment in those areas
• 12:53
  Speaker 3: to boost our economic output, our export earnings, those kind
• 12:56
  Speaker 3: of things, rather than just money going round again. You know,
• 12:59
  Speaker 3: you can pour money into an economy, as we've just
• 13:01
  Speaker 3: seen through COVID. You can pour money into an economy
• 13:04
  Speaker 3: and GEDDP can look very good for a while, but
• 13:06
  Speaker 3: it starts to cause inflation unless you've got real wealth creation,
• 13:10
  Speaker 3: you know, goods that we're selling and earning money from, etc.
• 13:13
  Speaker 1: So, Liam, is the economy actually really in a good place?
• 13:17
  Speaker 1: Reading a lot of these press releases, like we've said
• 13:19
  Speaker 1: a post announcement, it felt like Santad come early. And
• 13:22
  Speaker 1: I know you like being cautiously optimistic.
• 13:25
  Speaker 3: Yeah, it isn't in a good place right now. But
• 13:28
  Speaker 3: sometimes you'll see business confidence surveys and they'll be very
• 13:31
  Speaker 3: They'll be like a decade high. The confidence is at
• 13:34
  Speaker 3: the highest it's been in a decade. I think that
• 13:36
  Speaker 3: was the A and Z Business Outlook. That's asking people
• 13:39
  Speaker 3: what they think the economic conditions will be like in
• 13:41
  Speaker 3: a year. So things are so bad they can only
• 13:44
  Speaker 3: be better. So most people in that survey are now saying, yep,
• 13:47
  Speaker 3: they'll be better in a year. So you get a
• 13:49
  Speaker 3: really strong result. But really, there are still a lot
• 13:52
  Speaker 3: of businesses doing it really tough, especially in retailing. You know,
• 13:56
  Speaker 3: I've done some work with retail in Z the Association.
• 14:00
  Speaker 3: You know, they talk about a lot of businesses still
• 14:02
  Speaker 3: really really struggling. And of course there's businesses that are
• 14:05
  Speaker 3: dealing with a whole bunch of structural change as well.
• 14:07
  Speaker 3: So you know, retailers are competing with online stuff out
• 14:11
  Speaker 3: of China, Temu and all the rest of it. People,
• 14:14
  Speaker 3: even though they're going to have a bit more money
• 14:15
  Speaker 3: in their pocket, may be a bit shell shocked from
• 14:17
  Speaker 3: the whole experience of the last two years or so,
• 14:21
  Speaker 3: so they may be inclined to save a bit put
• 14:23
  Speaker 3: a bit aside, which is a good thing, but doesn't
• 14:25
  Speaker 3: translate to immediate stimulus. So I guess it's just not
• 14:28
  Speaker 3: quite clear yet how quickly this will turn around. There's
• 14:32
  Speaker 3: a lot of external factors too, so New Zealand is
• 14:35
  Speaker 3: very reliant on the strength of the global economy. American
• 14:38
  Speaker 3: economy is going quite well, Chinese economy not so well,
• 14:42
  Speaker 3: but it's had some stimulus, so we have to wait
• 14:44
  Speaker 3: and see really how strong demand out of China will
• 14:47
  Speaker 3: be and what that does to our export prices that
• 14:49
  Speaker 3: kind of thing.
• 14:50
  Speaker 1: Thanks for joining us, Liam, That said for this episode
• 14:58
  Speaker 1: of The Front Page. You can read more about today's
• 15:01
  Speaker 1: stories and extensive news coverage at Enzidherrald dot co dot nz.
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