Curder and welcome to this short episode of Shared Lunch where we look at everyone's favorite subject, interest rates. As you may have heard, the Reserve Bank has decided to cut the official cash rate, the OCR to five point two five percent. Colbrookaho, I'mbrook Roberts, one of the co founders and co CEO's at Chares's, and to understand the impact of this cut, we're joined by Qubank Chief Economist
Jared Kerr Cyder, Jared, thanks so much for coming along. I, as you probably may know, I used to work at Qbubank and I've been thinking of you and maybe the Price and Committee, which I used to be a part of, where we would get together and talk about what we're happening with the OCR and the changes we might make for savers and borrowers.
But also we are.
Both on the nz EIIR, the New Zealand Economic Research Institute sorry shadow board, and we both made the same prediction of what we thought would happen with this OCR.
We both I think, gave it a.
Sixty percent chance of a cat and funny enough, the market did too. They also thought there'd be a sixty percent chance of a reduction, and we have seen that we've seen the ocr drop by point two five to five point two five percent. Could you give us a bit of an overview of what's happened in the economic environment that's led to this and we're at with inflation today.
Yeah, thank you for having me on. And it is a lot of fun during these periods when you when you're involved in pricing committees and the and the likes. But you know economically that the country has been in a recession since two thousand and twenty two, right, We saw that in the Bank's data. We've seen it all and all the data out over the last year and a half. We will be in a recession for another couple of quarters yet, so the inflation outlook.
Is subdued.
We expect inflation to be below three percent in the quarter that we're in now and back to two percent next year. And as of you know, the latest March policy statement from the Reserve Bank, they think the same thing.
Finally, they've seen.
That coming through in their own forecasts, and that means that, you know, a job done from the central banks perspective.
They've tamed the inflation beast.
It's dropped from seven point three percent and it'll be back to two percent pretty quickly. That's great news for the central Bank and it's boosted their confidence and they've started cutting interest rates.
Yeah, and so we saw their first round of cuts. Now this is I think the first since March twenty twenty, if I recall correctly, it has felt a lot tougher here in Alto for households and businesses. Do you see that this will make much of a change. Is it's just a start, as you mentioned, might see it go down further over the next more reductions come ahead. But do you think this will start correcting that slowdown?
Definitely? Absolutely.
Households and businesses are doing it tough, and they've been doing it tough for a long time, and they've been waiting patiently for rate cuts to come, and they've come a little earlier than most people and even businesses had expected. So that's good news. But it's not just about the timing. It's about the magnitude. So you know how many rate cuts are we going to get? And what we've been telling our customers, businesses and households alike is that there's
going to be quite a few rate cuts coming. We're expecting a cash rate to fall from five and a half to two and a half. So with that in mind, you know, businesses are now thinking well into next year. The economy is going to improve, twenty twenty five is going to be a much better year than twenty four, and let's forget about twenty three. Let's start positioning for some growth, and hopefully they'll start thinking to themselves, let's
start positioning for some investment and expansion. And households will similarly be thinking, my budget's going to get a lot better, the pressure is going to be a lot better, and you know, hopefully I'll be spending a bit more next year.
So big changes are coming.
So that is it they're saying.
Staying alive to twenty twenty five, you know it's going to be there might be. There might be some more continuous drops we might see this year, which will relieve some pressure for those with lending, whether it be businesses or or home loans of the lake, but you.
Will start to see recovery over time.
What you know, with people with mortgages, what should they be thinking about at the moment.
I think they've been thinking the right thing.
You know, most most people have gone for a six month rate, so they have been well aware that the next moves down, not up, and they've been fixing for a very short period of time, sort of six month and no more than a year. So I think it's it's over seventy percent of mortgage mortgage holders have have rates fixed for less than a year.
That's great because it means they don't have to wait.
Very long to get those rate cuts that are coming through now, and that's important. And it's good news from the Central banks perspective as well, because normally it takes about eighteen months. You know, kiwis tend to sort of love a two year rate, but because of all this talk about rate cuts, they've gone to six months, which means those rate cuts are going to feed through to households and businesses faster.
This is good news.
Yeah, and then what about for house prices?
What do you see will happen into house prices here and now as rates start to reduce.
So interest rates are one of the biggest influences on house prices. We saw rapid rate cuts during COVID and that led to house prices taking off and they rose, you know, forty five percent and eighteen months, which was just.
Unsustainable.
And then the Central Bank started hiking quite aggressively to reverse that, and we've seen house prices full, you know, around twenty percent in parts. Now they're cutting rates again, so they will cut the cash rates we as we mentioned before, and that'll start feeding through into the housing market. Looking at the fundamentals of the housing market, there's a
massive shortage and that shortage is getting worse. We're not building enough homes here to keep up with the surge and migration that we've had, so that shortage is getting worse. Investors have been sidelined, they've been targeted, they've been hunted by policymakers with changes to bright line tests and intratroductibility
and you know other bits and pieces that's reversing. And with interest rates being cut, and with rental yields improving, so rents arising as house prices are going down, all of these things point to investors coming back into the market as all this plays out. You know, we're expecting house prices to rise by at least five to seven percent next year, which you know might not sound like a lot, but it's a big improvement from what we've seen over the last couple of years.
So may see house prices increase for savers, you know, they're likely going to get less of an interest rate on the savings accounts or term deposits that will be coming up. What we typically see on chess when there are lower interest rates is that people do start to move into different risk are assets like investing, where they may believe that they'll get a you know, the higher return than.
Lower savings accounts.
Will be interesting to see that play out over that over the next year too.
Anything you want to add to that.
Oh, it's just going to say, that's exactly what muniture policy is designed to do. So what you're talking about is exactly what the Reserve Bank relies on. So you know, cutting that cash right lower and lower, you know, reduces the returns that you get on your simple savings products like a term deposit or having your money in a shares, these savings account and it forces people out the risk
spectrum to look for high yield elsewhere. So that's exactly what's supposed to happen, and that'll be exactly what they will rely on happening over the next couple of years.
Now, I know you're a very busy man, a very busy economist on a busy day here and now as you are, so just leave with one final question, which is just could you just give us the key takeaways of them monetary policy statement that was made today and so that people can go what are the key things that people to take away from the statement that was made.
I think the key thing is that the inflation beast that we've been trying to tame in recent years has been tamed. Inflation is going back to two percent. We're all more confident in that, which means that the central banks job is done. So they've lifted interest rates to very restrictive levels. They're now going to take that restrictive interest rate and they're going to put it back to more of a goldilocks rate where it's neither hurting nor
exciting people. So that's the big move, is that interest rates are falling, and they're falling fast.
Nice.
Hey, Well, thanks so much for your time today, Jared really really appreciate it, and I'll let you get back to all the other busy conversations I'm sure you've got lined up.
Today, pleasure. Thank you for having me.
On, Thanks heaps for tuning in.
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