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Why central banks cut rates quickly · The SME Stream

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  Speaker 1: The information provided in this program is of a general
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  Speaker 1: nature and is not intended to be personalized financial advice.
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  Speaker 1: We encourage you to seek appropriate advice from a qualified
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  Speaker 1: professional to suit your individual circumstances. Interest rates are continuing
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  Speaker 1: to be cut. How quickly could it provide economic release?
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  Speaker 2: What's clear to me though, is that the New Zealand
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  Speaker 2: economy needs lower interest rates. GDP is reasonable and not
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  Speaker 2: good on a capital basis. It's terrible, but it's a
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  Speaker 2: soft ish landing, so usually they go down very fast.
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  Speaker 2: I mean, it's interesting. Of all the meetings that the
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  Speaker 2: Arbanza's had since nineteen ninety nine, about two thirds of
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  Speaker 2: them they do nothing, so the rates unchanged. Of the
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  Speaker 2: third where they move rates, about sixty percent of the
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  Speaker 2: time they hike, and about forty percent of the time
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  Speaker 2: they cut, but they hike by smaller amounts. They hike
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  Speaker 2: in twenty fives because they're cautious, and when they cut
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  Speaker 2: they cut a lot because they're worried.
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  Speaker 1: No.
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  Speaker 3: Good to see you as always, Thank you medicine. It's
• 1:07
  Speaker 3: nice to be back.
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  Speaker 1: Thank you so much for doing this. Rates they're obviously
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  Speaker 1: going to continue to be cut. The question is to
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  Speaker 1: what degree I guess the answer, if you can explain
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  Speaker 1: this part to us, is how weak the economy really is.
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  Speaker 3: Yeah.
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  Speaker 2: Well, the ibn Z will meet next week and the
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  Speaker 2: consensus is that they'll cut again by fifty basis point.
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  Speaker 2: They've already cut by seventy five points this year, so
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  Speaker 2: that will give us one hundred and twenty five points
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  Speaker 2: of easy So that's meaningful. That will put New Zealand's
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  Speaker 2: cash road below Australia's for the first time in about
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  Speaker 2: three or four years, where it was very briefly below,
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  Speaker 2: but actually it's more like an eleven year low, so
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  Speaker 2: this is an unusual part of the cycle. The consensus
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  Speaker 2: for next week is fifty, but the market thinks as
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  Speaker 2: a chance of seventy five, just a small amount of
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  Speaker 2: pricing for that, and I think there's a reasonable case
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  Speaker 2: for seventy five, which we can talk about if you're interested.
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  Speaker 1: Well, we heard from the Treasury Chief Economic Advisor that
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  Speaker 1: the recession we're in now is actually worse per capita
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  Speaker 1: than the GFC, So the economy's looking pretty terrible. What
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  Speaker 1: do you think the reserve band will be weighing up
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  Speaker 1: in terms of stats and activity at the moment.
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  Speaker 2: Yeah, I mean that's yesterday's speech by Dominic was interesting
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  Speaker 2: and that it was considerably more downbeat than the fortnightly
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  Speaker 2: Treasury updates that we've been getting, which have actually been
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  Speaker 2: talking about a bottom being put in place and signs
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  Speaker 2: of a pickup.
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  Speaker 3: So that was a little bit of a surprise.
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  Speaker 2: But what Dominic is correctly identified is that the tax
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  Speaker 2: take is lightly down, particularly the GST number, the psize,
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  Speaker 2: the performance of service indexes and the pmis and manufacturing
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  Speaker 2: they're really weak. I mean, the PMI I think has
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  Speaker 2: been negative for twenty months and the PSI for something
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  Speaker 2: like eight months back to back, so we're clearly weak.
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  Speaker 2: The rbn said, know this, and that's why they're cutting
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  Speaker 2: interest rates. Now how far they go with this is
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  Speaker 2: the question. The market is toying with the idea of
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  Speaker 2: a seventy five basis point cut. There are good reasons
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  Speaker 2: that the RBNZ could consider that, but I think what
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  Speaker 2: the RBNZ will do is fifty because they're very keen
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  Speaker 2: to portray an image of a central bank that is slowly, carefully,
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  Speaker 2: very very pointedly adjusting a cash rate in response to
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  Speaker 2: the economic signals that they're getting, and so the picture
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  Speaker 2: they're Painting is one of the central bank that's gone
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  Speaker 2: inflation under control without wrecking the economy. Unemployment is still
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  Speaker 2: below five percent, the exchange rate is calm. GDP is
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  Speaker 2: reasonable but not good on a capital basis. It's terrible,
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  Speaker 2: but it's a soft ish landing, so they'll continue with that.
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  Speaker 2: The idea of a seventy five a thing is harder
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  Speaker 2: because it suggests perhaps that there's a little bit of panic,
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  Speaker 2: and I think they're very keen to avoid that.
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  Speaker 1: If they're being timid, then what does that suggest to
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  Speaker 1: you about where this ends, about where the cycle finds
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  Speaker 1: a flaw. What is that rate to look like? I mean,
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  Speaker 1: I've heard from Christian Hawksby that it's around three percent.
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  Speaker 1: Would you say the stats kind of suedesce that that's
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  Speaker 1: about right.
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  Speaker 3: Yeah.
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  Speaker 2: It's the RBNS that has talked about the long term
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  Speaker 2: neutral and the short term neutral interest rates, So I
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  Speaker 2: think Christian was talking about short term neutral there. The
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  Speaker 2: long term neutral is around two point seventy five, So
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  Speaker 2: somewhere between two point seventy five and three and a
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  Speaker 2: half is kind of neutral in the short term. Now,
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  Speaker 2: whether we need to be below neutral at the moment
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  Speaker 2: or at neutral is the discussion, you'll see some economic
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  Speaker 2: competators suggesting already that the pickup is starting to come
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  Speaker 2: through for next year. We've got a great dairy price,
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  Speaker 2: We've got really good kiwi fruit earnings. The meat industry
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  Speaker 2: is doing very well. At the same time, the property
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  Speaker 2: sector is really soft and business is soft because government
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  Speaker 2: is contracting. So you've got some divergent forces. And this
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  Speaker 2: again is what will be feeding into the RBNS. It's thinking.
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  Speaker 2: So when they look at this, they won't be looking
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  Speaker 2: at one side or the other. They've got to take
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  Speaker 2: the ad and the aggregate says interest rates lower, probably
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  Speaker 2: towards three and a half.
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  Speaker 1: On the point of producers, though, if you ask them,
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  Speaker 1: if you ask farmers and anyone in that sect, they
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  Speaker 1: would say, yeah, but ten bucks isn't the old ten bucks.
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  Speaker 1: Their costs are still enormal. Absolutely, So it's even though
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  Speaker 1: those figures look like that, it's not exactly the same
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  Speaker 1: as previous cycles, is it.
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  Speaker 3: I think that's exactly right, Madison. It's not the same.
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  Speaker 2: So whatever ten bucks today is, it's probably more like
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  Speaker 2: six bucks, you know, ten years ago because of cost adjustment.
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  Speaker 2: But the reality is it's not seven bucks, which is
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  Speaker 2: where we were worried it would be because of the
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  Speaker 2: slowdown in the Chinese economy, and there's optimism that we
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  Speaker 2: could hang around these levels. If China continues to stimulate,
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  Speaker 2: that will be helpful, because it's unlikely China will stimulate
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  Speaker 2: the way they've stimulated in the past. They're not going
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  Speaker 2: to be building more airports, more bridges, more roads that
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  Speaker 2: consume iron ore film or coal cocon coal. They'll be
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  Speaker 2: putting stimulus, we hope, into the services side of the economy,
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  Speaker 2: and that will mean consumption and that's good for New
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  Speaker 2: Zealand well.
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  Speaker 1: On stimulus here domestically, if we continue to get cuts,
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  Speaker 1: whether it's fifty seventy five anywhere around that, when does
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  Speaker 1: that actually flow through to the economy. When does that
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  Speaker 1: actually transmit and provide economic relief.
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  Speaker 2: I think it's already coming into the economy, but it's
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  Speaker 2: hitting different parts of the economy at a different at
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  Speaker 2: different pace. So in one of the rbnsa's most recent releases,
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  Speaker 2: they talked about the mortgage rate. The average mortgage rate,
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  Speaker 2: so this is the rate that the average mortgageholder in
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  Speaker 2: New Zealand feels is at four point six percent. It's
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  Speaker 2: just peaking now. Even though they've been cutting for some
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  Speaker 2: months and they cut by seventy five points, the actual
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  Speaker 2: rate that the housing sector is feeling has been going up,
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  Speaker 2: and that's because of mortgage rollovers, so it takes time
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  Speaker 2: for this to come through. Now, the rbn's EDS assessment
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  Speaker 2: is at about I think half of all mortgages will
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  Speaker 2: refix in the next six months and about seventy five
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  Speaker 2: percent in the next nine months. So as they refix,
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  Speaker 2: they should refix at lower rates, so that will start
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  Speaker 2: over some of that stimulus.
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  Speaker 1: But the lower rates they'll fix out won't be as
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  Speaker 1: low as.
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  Speaker 2: The official cash brod may go and aggregate because the
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  Speaker 2: pool of mortgages will still grow and we've still got
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  Speaker 2: new people buying houses. The numbers should come down, so
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  Speaker 2: you will get some stimulus through that. But of course,
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  Speaker 2: if the rbns that are aggressive, which I think is
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  Speaker 2: a case from them being, they'll bring that number down
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  Speaker 2: much more quickly.
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  Speaker 1: If we sum that up, then that'sugges that whatever a
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  Speaker 1: cut we get pre Christmas won't be felt and full
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  Speaker 1: until what next Christmas.
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  Speaker 3: Shot for the housing sector, it'll take a while.
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  Speaker 1: What about other sectors, what about consumption and that sort
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  Speaker 1: of thing. Is that more.
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  Speaker 3: Immediate, Yeah, I think there are.
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  Speaker 2: I mean, certainly for the currency, you would expect there'd
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  Speaker 2: be some adjustment. I mean I mentioned that if we
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  Speaker 2: do cut interest rates by fifty points, next week will
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  Speaker 2: be below Australia. That's the first time in a long
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  Speaker 2: while that's happened. You would expect us to weaken against
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  Speaker 2: the US dollar as well, and especially if the FED
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  Speaker 2: start to slow their easings and perhaps hold under Donald Trump.
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  Speaker 2: In that environment, our export earning should increase. We obviously
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  Speaker 2: don't know what's going to happen with the tariffs, but
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  Speaker 2: there is some hope that we get some more currency advantage,
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  Speaker 2: so different parts of the economy will will react in
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  Speaker 2: a different way.
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  Speaker 1: I wanted to talk to you about what Donald trump
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  Speaker 1: result means for the US economy because this is the
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  Speaker 1: first time I've seen you since since that happened. What
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  Speaker 1: does it mean specifically for our economy if there are tariffs,
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  Speaker 1: and what does it just mean for trade because we
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  Speaker 1: play in that space. We're so reliant on exports and
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  Speaker 1: imports in this country. Is the concern that this could
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  Speaker 1: result in more fragmentation or is it ultimately positive to
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  Speaker 1: have a strong US economy for the world.
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  Speaker 2: I think there's no doubt that a strong US economy
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  Speaker 2: is a positive. It's absolutely a positive because of the
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  Speaker 2: level of consumption. But the reality is the US economy
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  Speaker 2: is actually quite a closed economy. You know, it buys
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  Speaker 2: themselves from itself. It's not as open as we are Australia,
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  Speaker 2: or even as China in many ways because of China's
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  Speaker 2: a large external trade balance. But it is a positive
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  Speaker 2: for US. I mean, the challenge are all the same.
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  Speaker 2: So I talk to a number of different central banks
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  Speaker 2: and the challenge they all have is that they just
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  Speaker 2: don't know. So trying to forecast anything beyond January twentieth,
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  Speaker 2: next year, when Trump is inaugurated is really difficult because
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  Speaker 2: you know, I think the issue with Trump is trying
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  Speaker 2: to decipher what he's going to do versus what he says.
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  Speaker 2: And one of the wisest things I think I've read
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  Speaker 2: about Trump is to take him seriously, but don't take
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  Speaker 2: him literally. And what he's serious about is tariff's. You know,
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  Speaker 2: whether he's serious about sixty percent tariffs on China and
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  Speaker 2: ten to twenty on the rest of the world, well,
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  Speaker 2: we're not sure. Pretty serious about tariff so there's an
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  Speaker 2: assumption that there will be tariffs imposed on China. Now
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  Speaker 2: how that plays out depends on what China does. If
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  Speaker 2: China responds in a way that allows the tariffs to
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  Speaker 2: be relatively low, they agree to buy more US goods,
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  Speaker 2: they import more things from the United States, and they
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  Speaker 2: take more goods and the trade surplus diminishes. That's okay,
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  Speaker 2: everything will go very calm. If the Chinese respond with
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  Speaker 2: their own tariffs on the United States and there's a
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  Speaker 2: standard off, then we've got an issue because both sides
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  Speaker 2: have then got to replace that market. So what do
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  Speaker 2: the Chinese do with all the surplus goods that they've
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  Speaker 2: been selling to the US. If they start to dump
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  Speaker 2: those everywhere else in the world, that will be deflationary.
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  Speaker 2: And then you're going to get countries outside of the
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  Speaker 2: US who will complain because it's hurting their domestic industries,
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  Speaker 2: and then they will put in tariffs. So you could
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  Speaker 2: see that spiraling quite quickly. So that's one risk that
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  Speaker 2: they've got. So that's deflationary risk.
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  Speaker 3: On the upside.
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  Speaker 2: The inflationary risk is tariffs cost more, and if you
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  Speaker 2: close economies, you remove comparative advantage, you remove competition, you
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  Speaker 2: drive up prices, which is effectively what we saw during COVID.
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  Speaker 2: The economy became closed and so the cost of everything
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  Speaker 2: went up, especially labor.
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  Speaker 1: What did Ray Dalio call them a corporate rid entering
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  Speaker 1: into a hostile take of it? So I take him seriously?
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  Speaker 3: Bottom line?
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  Speaker 2: Yeah, I think we should take him seriously. And I
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  Speaker 2: don't think everything I've read says that he didn't expect
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  Speaker 2: to win last time, or he expects and what he
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  Speaker 2: expect deed to win this time.
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  Speaker 3: So he's going to be much better prepared.
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  Speaker 1: You mentioned that central banks have no idea what to
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  Speaker 1: make of all of this, because either way inflation, real,
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  Speaker 1: deflationary the very very different impacts on the economy. How
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  Speaker 1: do you think that that could impact their short term
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  Speaker 1: decisions like the one from the Reserve Bank we're about
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  Speaker 1: to get perhaps also with the RBA, you mentioned that
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  Speaker 1: you think that the Reserve Bank of New Zealand is
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  Speaker 1: going to be more cautious. Is that also playing on
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  Speaker 1: their mind? Is that a reason why they're going to
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  Speaker 1: be slower in their.
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  Speaker 2: Approach to cut No, I think I mean the decision
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  Speaker 2: next week and the immediate decisions for all central banks
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  Speaker 2: will not include anything to do with the potential Trump
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  Speaker 2: tarriffs or Trump two point zero or Trump forty seven,
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  Speaker 2: whatever you want to call him, because they just don't know.
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  Speaker 2: The Central Bank always will say when we see the
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  Speaker 2: policy and we can analyze the policy, we can model
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  Speaker 2: the policy, then we will incorporate it. Right now, it's
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  Speaker 2: not something they can model, so they'll simply ignore it.
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  Speaker 3: Now.
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  Speaker 2: That doesn't mean they won't be talking about it around
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  Speaker 2: the table. I'm sure Donald Trump's name is one of
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  Speaker 2: the most frequently used in the discussion that they're having,
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  Speaker 2: but it's not something they can put into the forecast yet.
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  Speaker 1: So if you could forecast twenty twenty five at all
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  Speaker 1: for US sean, obviously a lot of unknowns, but what
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  Speaker 1: a rate's going to look like? What are the sort
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  Speaker 1: of biggest watch outs for our economy and also for
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  Speaker 1: the world right now?
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  Speaker 2: Yeah, I mean, I don't know that I can forecast
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  Speaker 2: much past about the middle of the year because we
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  Speaker 2: just don't know what the United States is going to
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  Speaker 2: do with tariff and how China is going to respond. So,
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  Speaker 2: you know, I read lots of forecasts where people have
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  Speaker 2: this dominant view about interest rates are going up, are
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  Speaker 2: going down, and I say, what, maybe I'm just not sure.
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  Speaker 1: You know.
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  Speaker 2: What's clear to me though, is that the New Zealand
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  Speaker 2: economy needs lower interest rates. So we're definitely going to
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  Speaker 2: have a lower cash rate going forward. The question is
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  Speaker 2: how quickly we get there. Now, for us next week,
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  Speaker 2: it's probably fifty, it's probably a fifty point cut, but
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  Speaker 2: there's real merit in my viewing going seventy five to
• 12:54
  Speaker 2: get ahead of this. You know, you mentioned Dominic stephens
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  Speaker 2: speech yesterday. Dominic outline what we all know, which is
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  Speaker 2: at the economy is very very weak.
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  Speaker 3: That's the first thing.
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  Speaker 2: The second thing is that this is and this is
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  Speaker 2: perhaps the most important factor, is the calendar.
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  Speaker 3: This is the last meeting of the year. There's eighty four.
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  Speaker 2: Days until the next meeting in February. Now, any other
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  Speaker 2: time of the year we'd have a meeting every six weeks,
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  Speaker 2: so this is effectively two meetings. And if it was
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  Speaker 2: any other time of the year, what we'd expect from
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  Speaker 2: the Central Bank is that they would cut fifty at
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  Speaker 2: one meeting and then probably fifty at the next one. Well,
• 13:28
  Speaker 2: they've got a two fo here, so expecting seventy five
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  Speaker 2: is not unreasonable. In my view, but they have to
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  Speaker 2: explain that, I think pretty clearly to people now. They
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  Speaker 2: don't normally go seventy five. They've done it twice, so
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  Speaker 2: you can get that story in history. So since nineteen
• 13:42
  Speaker 2: eighty nine, when the OCI was first introduced, they've only
• 13:45
  Speaker 2: ever moved the cash rat by seventy five basis points
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  Speaker 2: twice was that up or down bone moved it now
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  Speaker 2: and once going into COVID, and then they moved it
• 13:53
  Speaker 2: up once by seventy five coming out of COVID as
• 13:55
  Speaker 2: infleation started to rise quite quickly. They've moved three times
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  Speaker 2: by more than seventy five during the GFC when they
• 14:03
  Speaker 2: cut aggressively, once by one hundred and twice by one
• 14:06
  Speaker 2: hundred and fifty. So usually they go down very fast.
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  Speaker 2: I mean, it's interesting. Of all the meetings that the
• 14:12
  Speaker 2: ibnz it's had since nineteen ninety nine, about two thirds
• 14:15
  Speaker 2: of them they do nothing, so the rate's unchanged. Of
• 14:19
  Speaker 2: the third where they move raids, about sixty percent of
• 14:22
  Speaker 2: the time they hike and about forty percent of the
• 14:25
  Speaker 2: time they cut, but they hike by smaller amounts. They
• 14:30
  Speaker 2: hike in twenty fives because they're cautious and when they cut,
• 14:33
  Speaker 2: they cut a lot because they're worried. So it's always
• 14:36
  Speaker 2: on the downside where you get the bigger moves. And also, interestingly,
• 14:40
  Speaker 2: if you take the whole history of the ocr we
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  Speaker 2: started off at four and a half percent, We're at
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  Speaker 2: four seventy five today. We'll probably be at four and
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  Speaker 2: a quarter next week. The long term average is four percent.
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  Speaker 2: They've hiked thirteen percent cumulatively, and they've cut twelve point.
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  Speaker 3: Seventy five percent. We're back when we started about where
• 14:58
  Speaker 3: we started.
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  Speaker 1: None of us really matters, just back at the starting point.
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  Speaker 2: If you left New Zealand twenty five years ago and
• 15:03
  Speaker 2: came back today, you go, oh, this looks pretty familiar.
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  Speaker 1: And we know that Adrian or is an opposed to
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  Speaker 1: a shock factor pre Christmas. I remember he did a
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  Speaker 1: fifty hike a couple of years ago. Because there is
• 15:14
  Speaker 1: that wait to come, We'll stay tuned absolutely.
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  Speaker 3: I mean it's always interesting.
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  Speaker 1: Well, thank you so much for explaining it incredibly well
• 15:23
  Speaker 1: to us, not only this year, but in previous years
• 15:25
  Speaker 1: as well. You're actually the most frequent contributor to the show.
• 15:29
  Speaker 1: You've been on three times this year, and you are
• 15:32
  Speaker 1: always giving me ideas behind the scenes as well, and
• 15:34
  Speaker 1: I appreciate your knowledge always.
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  Speaker 3: Thank you so much, thank you