Kielder.
I'm Chelsea Daniels and this is the Front Page, a daily podcast.
Presented by the New Zealand Herald.
The Reserve Bank is expected to cut the official cash rate today, but how deeply it will cut remains to be seen. Markets are pricing in the cut as a certainty, but the debate is now on how big.
It will be. So what could it mean for.
Mortgage holders and the average Kiwi?
Today on the Front Page ends at Herald Business Editor at Large Liam dan Is with us to dive into the Reserve Bank's upcoming decision and what's been happening behind closed doors.
So Liam, the economists are split.
Should the bank act boldly with a fifty point cut or play it safe with the twenty five Oh you.
Want me to guess? Yeah, well, I guess I'd probably lean towards front ending it and going fifty basis points get it done. That's an optimistic view on inflation that we're not going to suddenly see inflation come back to worrying levels. We've had this rough patch with food prices and electrisity prices and that has pushed inflation up. And so the Reserve Bank has this you know, single mandate on inflation now, so the coalition government changed that from
unemployment inflation to just inflation. So when people look at the decisions the Reserve Bank are making, and they look at how bad retailer is downtown and all that sort of stuff, that's really not what's driving them.
Their core.
Driver for all of their decision making is keeping inflation between one and three percent, and so if it's starting to get up towards three, that's a worry for them. It is they believe, because the economy is so flat that it must be going to start to ease away again. But that would be creating pressure on them to only cut by twenty five. So I'd like to see them cut by fifty. I'd like to see the economy get that sort of a little bit of stimulus that it
needs to get that recovery rolling. But I think it really is finely balanced. They could well be more cautious about inflation and go with twenty five.
What are the risks in holding back? Well, the risk in.
Holding back is that the downturn is just deeper than we thought, So you know, if it gets too if an economy just loses too much steam, it's very hard to get it rolling again, and some people are arguing that we're already there. But you know, we saw this big fall in GDP growth in the second quarter. So we had a couple of quarters the last quarter of last year and the first quarter of this year we had growth, and we thought, yeah, the recovery is happening. That is what's supposed to happen.
Thrive for twenty five Yeah, yeah, yeah, finally happening.
Yeah, And it just absolutely fell off a cliff in the second quarter. And some people, including the government, have pointed to the US tariff policy is sort of spooking everyone or hitting our economy. I don't think it has hit our economy that hard. It may have hit confidence, but our exporters of our primary products, so dairy, meat, horticultural products, are doing so well that tariffs haven't really touched the sides, So that hasn't hit the economy directly.
It may have hit confidence, but I think things like the property market, the employment market, it's all just combined a huge lack of confidence and it's spilled over a bit as far as we can see into the third quarter. So while the third quarter might be a bit better, there's some signs of life and card spending and people getting out and shopping a bit more, it still is pretty gloomy and businesses are pretty down or that you know, they were right that third quarter, So that will weigh
on the Reserve Bank too. Even though you know it's mandate is inflation, it still considers the wider economy as part of that and if anything, how flat and down that is, should give them some confidence that inflation won't stay and be persistent. Because when an economy is performing so badly that they say that, the economists will say excess there's excess capacity in the economy, which means that it's just not running at full steam. So that is
kind of disinflationary or deflationary. So it should be putting downward pressure on pricing. And so hopefully once we're through the you know, the peak of the food price spikes we've seen and power prices coming off with more rain and things, you know, we'll see inflation either way.
What impact could a bigger cut, so maybe like a point five have for the ordinary mortgage holder for examples, and will banks actually pass that on?
Well, the banks have passed on a little bit and ahead of this latest OCR announcement. If it's a fifty basis point cut, that just gives them a bit more leeway to cut a bit further. Now how far they go, it's there's a lot of market conditions involved and competition and all that sort of stuff. But what happens is with the you know, the interest rates setting, they look
at what the OCR is predicted to do. The market places all these bets about future prices for debt, and that kind of can set the parameters for what the banks can and can't afford to do with regards to cuts or hikes, and so what's priced in is often well ahead of the Reserve Bank actually moving itself. So if the Reserve Bank just as twenty five basis points, probably it's all priced in. If it does fifty, there might be a little bit more room to move and
you might see rates come down. But also important will be what the Reserve Bank says about.
The path ahead.
Now, there's not much coming with the announcement today. It's just a monetary policy review, which just means it's a shorter statement. It doesn't have all the forecasts, but the tone will matter, and if there's an indication that they still see more concern around the slowing economy than they do around inflation. That might encourage the banks to pass on a bit more in terms of rate cuts for the average person.
How much can you read into the tone of those statements?
What are you looking out for?
Well, you can read a lot and I I don't know whether it comes to passing it is all true and everything, but we do read a lot into it because often you've got a one if you've got like a sort of a one page statement, you know, it's a very finite number of words, and so people are looking through to find any change in key words, you know, sort of they might sort of see it move from for the for some time to for the foreseeable future or something as subtle as that, and see that that
is a change in tone. So, yeah, every word is poured over to get a sense of how the Reserve Bank is feeling. And it's a weird sort of game, Like you wonder, why don't they just come out and tell us exactly what they're feeling every time? And I'd like to think they could do that a bit more, but they also, you know, they're also very keen to emphasize that this is only a point in time, and their view can change anytime. So if the market's collapsed
next week, you know everything's changed. So does the.
Language depend on who's in charge? Though, like a director in a movie, you can kind of gauge or the ambiguous endings on who's directed a piece or something.
Yeah, probably a little bit. I mean who's in charge as on the Reserve Bank governor has mattered less and less in the past few years because we have a committee struck sure, and the decision is made by the Reserve Bank's Monetary Policy Committee and they only get the Reserve Bank Governor involved to vote if it's sort of a completely slit decision, if it's a tie. But the Reserve Bank governor does tend to set some of the
culture and the tone. And I'm sure a strong Reserve Bank governor like Adrian or was would have influence in the meeting and also yeah, in the way that the bank communicates, so that that is pretty key. And I don't know that we've seen a huge difference in that written language. I mean, Adrian Orr and Christian hawksby pretty different personalities, not a massive shift in language in the in the written takes. But yeah, I think over time that that is where the Reserve Bank governor does.
Influence things the bank is seen.
Obviously a wave of executive exits.
Tell me about ores leaving payout.
Yeah, well, we found out earlier this week that Adrian Orr got a restraint of trade payout for about four hundred and sixteen thousand dollars, taking his annual pay for what was paid for the nine months he was there up above a million. Yeah, it was an interesting one. It had people scratching their heads a bit because you know, there isn't any other Reserve bank governor role in New Zealand. Doesn't sort of seem like it would impinge upon the Reserve Bank if he was to take a role elsewhere.
I sort of wondered whether you know that included as encompassed a non disclosure agreement as and to not talk about it until he had got through that period. I don't know how they do that. I mean, it's all how the contract's written. My experience with those sort of contracts and restraintive trades as they're usually written into a contract in advance, and you don't get paid for him sticking to it or not. It's there in the contract at the beginning.
Perhaps it might be in the next contract.
Well, yeah, some interesting questions there for the Reserve Bank, which probably won't get answered because you hear the politicians and all the you know, everyone says, oh, it's a employment matter, so therefore no one's going to talk about it. But yeah, it did raise a few eyebrows.
There are three main areas of responsibility for the Reserve Bank. The first is price stability, and we will stay laser focused on delivering on low and stable inflation. The second is prudential supervision of the financial system that promotes financial stability and that is important for healthy and growing economy. And third, but not least, it's a safe and efficient payments system and that includes issues of notes and coins.
So a key component to build trust and credibility for the Reserve Bank is transparency and openness.
When is Anna Bremen meant to step into the row a new Swedish Reserve Bank governor and starts in December one, so.
She will probably be inheriting a sort of a clean
slate in terms of monetary policy. Certainly the staff turnover means that there'll be a lot of has been a lot of change, but also the current forecasts are that we get either our twenty five or fifty basis points with this October cut, and then probably another one in November, and then after that the Reserve Bank in theory would have rates down as low as they need them, economy would start moving again and it would be a more stable period for the new governor coming in, and so
there might be a period of do nothing, do nothing, do nothing. That'd be ideal, hopefully, hopefully that if things go to plan, that's what we'd be hoping for.
What's going to be her main mandate when she comes in, Well, she's already talked, you know, her mandate is inflation.
So again monetary Policy Committee is deciding which way the rate goes. The single mandate is to keep inflation in the band. But in her short speech, you know, when she was introduced to the public last month, she did hit a few key marks that probably land pretty well with people who've been critical of the bank and with the finance minister. She talked about transparency, which is a
big deal at the Swedish Reserve Bank. They have a policy of publishing all the minutes from their Monetary policy committee meetings and letting people know which way everyone voted, which we don't do. She talked about, you know, clear communication around forecasting, around modeling different scenarios and explaining that to the public. Now, you know, to be fair, the Reserve Bank has done some modeling. They've also they had a bit of an issue with how they're forecasting was
being interpreted, and they've sort of proactively addressed that. They've the chief economist there, Paul Conway's written quite a bit about how we should view Reserve Bank forecasts. But still I think you know, that focus on you know, communication, transparency will be welcome. But she also emphasized very much that you know, we've all learned if we didn't know beforehand,
inflation really really sucks. What we've been through since COVID has reminded us of that, and she will stay very, very focused on keeping inflation in the right place.
So as we know, New Zealand's GDP is down, business sentiment remains fragile at best. If the mood of the boardroom is anything to go by, and the future is of course uncertain, how much faith do you have in the Bank's ability to steer us back to that growth period.
Well, I still believe in monetary policy doing the job. So in the end, we saw it in COVID, if you drop interest rates low enough, you're effectively putting more cash into the economy because people aren't having to pay those rates to those mortgage rates, so you know, more dollars in their pockets, and eventually that gets the economy going. Now, it can also overstimulate an economy and create inflation, but
I think it will work. It's just it is taking a lot longer than we are used to to transmit. And there's probably a couple of ways of looking at it. One is that the economy has just been worse than we've expected all the way along, and people when they do get a bit of money back from their mortgage, that the savings on their mortgage, they're saving that or putting it on the mortgage because they're worried about their employment or their business. They just want to be secure,
so they're not going out and spending. And the other one is this sort of idea that more people than usual are trying to game the thing. So we've had higher numbers of people on floating interest rates or very short term fixed rates because nobody wants to lock in for a long time and actually which would realize the
savings that the Reserve Bank's trying to give us. But people don't want to do that until they sort of get to the bottom of the cycle and everybody wants to lock in at a lower rate, maybe the end of this year, or you know, when we get to the low end of this interest rates cycle. Which is a nice idea, but it's actually working against what the Reserve Bank's trying to achieve. It's keeping people on higher rates for longer because they're not taking the lowest available rate.
When it comes to the economy correcting itself, you would have been reporting around two thousand and eight, right, I mean how long did the economy and GDP take to correct itself after.
That, Well, it was a bit of a slow train wreck the GFC, so it was pretty horrible through two thousand and eight, two and nine. I think the government books were hit pretty hard because we will we have to remember we had an earthquake in twenty eleven, so the government books are terrible from that period. But the economy itself bounced back quite quickly. We didn't apart from the obvious thing of the finance companies that all went over,
which was very specific. The broader economy wasn't hit so
badly like our sheer market bounced back reasonably well. We did have after the GFC a long period of relatively relatively low growth, but it was also really low inflation, so it was you know, we were talking about deflation and so yet a period where while things weren't booming for quite a while, prices weren't going much up much either, so things were stable and that was that's important, And I think that's kind of what's been lacking for people
through this period since COVID is just the volatility is really plays havoc with your you know, psychology around the economy, and that goes to the confidence. And I think there's just a lack of confidence in the future at the moment, and we need a period of stability.
Yeah, because that's what I was thinking.
How long can the government perhaps blame COVID for economic woes now in twenty twenty five, Well, I.
Mean there's there's two ways, two parts to it. So if they're talking about the big picture government finances, they could they still can be blaming COVID, you know, or they can blame the last government. You can take your pick. Either they had to do it or they didn't. But the government accounts blew out during COVID one way or the other, and that's going to take a long time, many many years to correct. But then if you focus in on the current economic cycle, that's a bit different
to the big macro stuff. So you know they're linked because this government has felt a need to address some of that macro stuff at a rate and it believes that's the right thing to do. But that is also meant it's not it's not actually cutting spending overall, but it's not maintaining the increases and spending. It's trying to cut back here and there to pay down debt and
get us into surplus by a certain date. Those are political decisions and they've had an impact on the on the shorter term economic cycle because you haven't had government
fiscal stimulus pushing the economy along. So yeah, I don't think you can look back much longer at the current economic cycle unless you tie it to that that and you believe that you know that we must address There are a lot of people who believe that that that we're in sort of a crisis around the government's levels of debt and you know, the deficit and all that sort of stuff, and there are other people who are more relaxed about it. So yeah, those are political decisions I think for joining US.
Liam cheers.
All right.
That's it for this episode of the Front Page. You can read more about today's stories and extensive news coverage at enzidherld dot co dot nz. The Front Page is produced by Jane Ye and Richard Martin, who is also our editor.
I'm Chelsea Daniels.
Subscribe to the Front Page on iHeartRadio or wherever you get your podcasts, and tune in tomorrow for another look behind the headlines.