Cureda and welcome to this episode of Shared Lunch, where we briefly touch upon everyone's favorite subject, interest rates. As you may have heard, the Reserve Bank has decided to again hold the official cash rate at five and a half percent. But why does this matter? Well, this is what sets the rates we all pay on our mortgages, loans and what we receive when our deposits. My name's Laton Robertson, the co founder and co COO at Chazy's.
And to understand the impact of this, we're joined by Inframetrics principal economist Brad Olsen.
Investing involves risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and hear is current at the time of recording.
Hey Brad, thanks so much for joining us. You're in Geneva, but obviously news travels very fast. How you going on?
Well, thanks, you know, it's pretty hot over here, but thank you everyone backing. New Zealand is pretty hot under the cholera. As to what's happening with interest rates, so a lot of interest a lot of intrigue still going on about what the Reserve Bank thinks and importantly what they'll do and when.
Yeah, completely, So you've had a bit of a chance to read the statement and what time is it.
Over there by the way, at about six am?
Oh, good on you. Hey, Well, look, the consensus from what we're reading so far seems well that was that there's going to be no change and that's what's happens. But specifically there was a lot of talk about with regards to inflation in this one and when rates are going to be about to be cut. So what's your take from what they put out today?
Yeah, look, actually quite a flip flop really from the Reserve Bank in their view. Remember back in May they were talking about how they considered increasing the official cash rate. Now they're talking and saying that they're confident that inflation will be back within the target band of one to three percent by the end of this year. They're talking about how interest rates have to remain restrictive, but that'll be tempered over time depending on how inflation actually goes.
So really they've gone from sort of talking about a hike three weeks six weeks ago to effectively opening the door to an interest rate cut. Now it's not going to come immediately, but it does start to bend your air a little bit towards maybe November this year is actually likely for the Reserve Bank. A little bit hard to understand how they got there, but I think this is probably the right flip flop. Because all of the data we have been seeing recently is showing the economy
slow down, showing less inflationary pressure. It should open that door, and I think the Reserve Bank has just put a little bit of a crack in that door and opened up the opportunity.
Yeah, it really is a flip. I think the assessment last time was more hawkish than expected, this time more dubvish. So for listeners, the hawks normally asking for a more aggressive stance and wanting its straits to increase normally, and then data's being the opposite. So looking for Laurence Trase, which it's very much the read of how this one's coming out. So you mentioned November, would you say that's your pack at the moment as well?
Well? The question here really is that do we think the Reserve Bank is going to stick to its message? Because again it's completely one eighty in the last six weeks. Who knows what they'll come out with in six weeks time again. Gosh, they could be back up to a fifty basis point i'd given how they sort of go between one or the other. Now, I don't think that's
actually seriously what's going to happen. But I guess I'm a little bit worried that we seem to sort of be jumping at every single shadow of every data point that comes out. You look at the bank last time, they were looking at inflation that had come in at a headline level, better, at a non tradable level, worse than i'd expected. You look though, at sort of a week or so ago, you've got the latest quarterly survey of business opinion from NZII looked a lot better in
terms of inflationary pressures pulling back and similar. I guess I'd hate for inflation to come out next week in the bank to go well, all of a sudden, it's worse, and therefore we're back to our hawkish stant So I just don't think they have enough confidence in the Reserve Bank's ability to get out of the same bed every morning at the moment to say what it is. Here's I think the frustration infametrics we were at November twenty
twenty four being the first cut. If you go back a couple of months after the last statement from the Reserve Bank where they're like, oh, geez, we need to hike it up, we actually pushed it out till February. Now, I'd hate for us to also flip flop and go straight back to November, but I guess what we're sort of seeing is that we were pretty convinced that there's enough information that will come through by November to cut.
We just didn't think the Reserve Bank would have that much gumption because of how strong their talk was so between November and February. I think is a very live possibility. I don't know if i'd put money either way on it, because I don't know if the Reserve Bank is particularly
consistent on their view. But given everything we've seen so far, given that weaker data coming through, it does seem to be consistent that if you can get inflation below three percent by the end of this year, that should open the doors for the Reserve Bank to go Yep, we're definitely on the right pathway now. Is the right time to ease, because it's going to take at a time for any of their decisions to actually fully hit the economy.
Yeah. Interesting, and there's a few changes still to flow from here.
You know.
One of the things that the statement today will do, I'm sure is well, swap breaks will adjust over the next few days, and swapbrates are where the mortgages are priced, and I do expect we might see a bit of home loan rate easy and off the back of this that will have an impact. And then of course we'll have the new changes from the government with tax relief coming in over the next month. So I very much
agree there's a lot of movements still to happen. But if we just bring it back to sentiment in New Zealand at the moment, it feels like there's a bit of pain now, you know, really in the households and businesses alike. And I think that's not so flip floppy. I would say that's feeling reasonably embedded. So you know, what do you think if we had enough pain?
I think that you're right. I mean that pain is quite clearly hitting now. You see that in all of the indicators. What is interesting is andcdotally going around the country, I've been hearing from a lot of people that sort of said, look, the first three months of twenty four were hard, but not sort of you know that they
were manageably hard. From April on, it feels like things have gotten a lot darker, and I think again, you're starting to see that through in a number of different indicators, which are effectively saying, look, I'm finding it tough as a business to just get sales. Households are fighting it tough to find the money to go out and spend, and so all of that does imply and you see that in the business surveys people saying look, it's tougher at the moment to get that sort of economic activity.
I'm not wanting to put up prices quite as much, people who are saying, look, I don't think that my job security is all that good anymore. Therefore I'm probably not asking for the pay rises like I might have been before. All of that, I think you're right, is consistent with that view that the hits come through, that inflation should fall back, that the Reserve Bank's got enough evidence, and I think probably the two things we're looking out for in the short term, You've got inflation data out
next week. You've got labor market data out in a couple of weeks time after that. If both of those continue to show that softening, and we expect they will, then I think that really does add that weight of evidence behind the Reserve Bank being confident and then did confidently.
Yeah. Interesting, The labor market has sort of been the savior, hasn't it with regards to the economic or the positive story out a lot of these lately. But that data will be interesting because it feels like that is most likely turning. One of the interesting things, just as a point is, we've just done the investor survey that Cheesy does as well out index and investor sentment has turned.
Sentiment has turned back to a balanced view, which you know, one of the things that may be is people expecting to see interest rates start to cut, and as interest rates change or go down, and then people do look down the asset classes like equity. Sort of interesting to see how that plays out. Anyway. What's your key takeaway from the from the MPUs to the monetary policy statement? Was it an EP sectually? I don't think it was today was it?
But it's just just a monetary policy review. Yes, look, yeah, the main message here, I think is that, look, rates cats are sort of more live, more on the table than before. It's going to be interesting to see how the Reserve Bank squares this up in a couple of weeks when they release their next actual monetary policy statement in their forecast. You remember, you know again, six weeks ago they were picking an increase and no real cut
until August September next year. If they're going to be realistic on the talk that we've just had today, they'd have to bring their pick forward like ten months. That would be pretty substantial and would require some pretty serious explaining. But I think you're right that sort of this is a bit of a sentiment shift as well, and that people are feeling quite challenged at the moment, but also a feeling of some of those greenish shoots maybe emerging
next year. You know, people have been taking out shorter and shorter home loans because they're expecting those interest rate cuts. You noted that sort of shift and sentiment from the Shears's index. You're seeing, you know, consumer confidence not good at the moment, but expectations for next year look better. It does seem to be that sort of still survived till twenty five story, but maybe a slightly earlier pitch
for their interest rate relief. It's not going to be huge, but it will make a difference when it comes, and the Reserve Bank seems more open to it now than certainly what they were six weeks ago.
Yeah, nice, great brand. I've heard a bit of that survived twenty five, Like I saw someone else right about thrive to twenty five the other day, which I thought was a great mantra for us to carry forward forward. And certainly what I got out of my experience in the US a few weeks ago was people taking more of that view. But certainly a lot of complexity out there in the market still in interest rates, adding to
that with regards to challenge. So I'm personally of the view that i'd like to see them drop sooner rather later, but completely understand the pressures and I wouldn't want to be sitting in that room making the decision myself. So one last question for you, what do you think the risks are of them having gone too far and it's been harder to pull back into a growth cycle because of holding it straights too long.
I think that sort of the longer we leave it, and certainly almost every passing day it feels like they're at that risk grows greater and greater. They almost have certainly overcooked it a touch. It's just do they bring it back by moving by the end of this year or do they sort of leave that just that extra three months over summer, you know, sort of starts the year off with a slower start. I think that might
well be a mistake. I'm just not sure if they're sort of going to stick with that view that they hold, if they were going to move sooner, I think they've opened the door and so that that might signore a bit of a shift. But like I say, we've been here before, we've seen these changes come through, and I'm never quite sure if I back it. I want to see a little bit more data and certainly a few more resounding words from the bank to really lock in that expectation.
Yeah, do you think we'll be first to go? Like us haven't gone yet, Australia still talk of higher inst rate. Still, do you think we'll be the first to start cutting?
I don't know if we'll be the first. I'd still expect probably the THEED will go in the next month or two, maybe three months. I do think though, that OZ is a real life possibility of having to type further. I mean, their inflation has actually been reaccelerating at least we don't have that. Sure ours isn't going down as fast as we might like, but at least it's not going up. So I think, you know, definitely a different risk profile depending on where you are in the world.
Yeah, hey, great, thanks for joining us Brad and Geneva the morning with a hot day of your head of you really appreciate it. Thank you, and thanks also to everyone for tuning in for this short episode of Shared Lunch. You can watch Shared Lunch on YouTube or wherever you get your podcasts.