Kyoda.
I'm Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. The Reserve Bank has delivered their last judgment on the official cash rate and surprise, surprise, there's been no change. The Reserve Bank still says it won't be cutting rates anytime soon, but economists believe that such a cut will need to
come later this year. It comes as the economic outlook for New Zealand continues to look bleak and more people are heading overseas or to the job seeker Q. Today on the Front Page, we're joined by ends at Herald Business Editor at Large Liam Dan to discuss what the OCR rate says about the state of our economy. Can you just remind us what the purpose of the official cash rate or OCR announcements are? What does it dictate in our economy?
What effectively dictates the cost of borrowing in the economy and the value of saving? I guess because it's the interest rate, the official interest rate going up and down, the one that does the most to determine what the banks are going to charge us for our mortgage or give us on our deposits. If we've got savings. What that does is effectively allow the economy to speed up and get more active if interest rates are low, because it's cheaper to borrow and do things and less lucrative
to keep money in the bank. And of course, if you push interest rates up, as they have done in the last year or so, then it's harder to borrow and it's harder for business to do stuff. You see, the housing markets slow down, so the economy slows, people save more, and all of that adds up to taking inflation out of the economy, whereas low interest rates tend to make things more inflationary.
Unsurprisingly, the ocr remains unchanged at five point five percent for the eighth consecutive time. I guess this isn't a big surprise, is it. But what is their strategy for keeping things so rigid? Well?
I think the strategy is that they've pushed the rate up to really suck the life out of the economy or the activity out of the economy, and really try and hit that high inflation. But they know that it takes quite some time for that to work because we're all on our fixed mortgages, you know, So people have two year mortgage at fixed mortgages and so on. So it takes a long time for that sort of pain from the higher interest rates to flow through to people's pockets.
And that's obviously happening now. It's been over a year we've been at this peak of five five. But you know, they got their fast and then they decided they want to wait and watch the economy and see how quickly inflation was coming out. But you know, there's a risk it's a balancing act if they go too high. If they kept going, they'd certainly squash inflation, but they might push the economy into such a deep recession that we
were stuck there for longer than we'd like. And of course if they don't they cut to early, or they don't go high enough, then you know, the inflation just keeps simmering away.
Is there any sign of movement on their side around future interest rate cuts?
Yeah, well that was probably the big news from the announcement yesterday. So the tone, you know, we knew that the rate wasn't going to be moved, but you get the statement from the Reserve Bank and everyone's pouring over every word of that statement for clues, and there's a few lines there that suggests that they're softening their stants, that they are seeing some signs that the pain is
moving through the economy quite quickly. There was a really grim business confidence survey, for example, and so that's, you know, just a few things in the tone of the language used by the Reserve Bank and this latest announcement have convinced the economists and the markets that we're going to get rate cuts sooner than the Reserve Bank has previously forecasts. They've got forecasts out there a sort of September next year,
which seems pretty tough. No one's really believed it. But this is the first time we've seen the Reserve Bank offer some sort of signs that maybe they are softening their stance and perhaps we're heading to more like cuts in November or February, which is where most of the bank economists are picking things at the moment.
Well, certainly we've seen data in the last couple of weeks suggesting that there's not as much additional inflation pressure in the economy. That's a good news story, and certainly some economic forecasters have been pulling back their expectations, with at least a couple now picking that November would be
the first interest rate cut. To be fair, we're still a little bit in the dark as to how much and how the Reserve Bank can flip flop from one end to the other so quickly, and we're not therefore confident in knowing if we're going to keep getting that consistent view or if things might change again in six weeks time.
Why is there this big divide at the moment between the bank and economists, Like you said, the bank is still saying September next year, but economists are predicting what November ish. Why is there such a big gap.
Yeah, it's interesting because it sort of seems very confusing to the outside public looking and I'm sure I think you know, well, some people would say that it shouldn't be there, and that maybe the markets and the economists are too optimistic, and maybe the Reserve Bank's too pessimistic,
and they've got to come together. There's an element of the Reserve bank caution being built into the where the Reserve Bank forecast things, you know, the bank economists and the market investors who sort of set the daily price of future interest rates, they're e actively taking bets and the economists are taking a punt and is they haven't got skin in the game, so they can change their forecast very quickly at any time. Whereas the Reserve Bank has to get it right. They have to send the
right signals. And the signal they've wanted to send is that they're all about squashing inflation. They're giving inflation no quarter. They are far more concerned about inflation than they are about the downturn to the economy. That was the signal.
And of course we don't get a full another full set of forecasts from the Reserve Bank until their full monetary policy statement in August, but the tone in this one was enough that I think it's being read as a slight pivot towards that softer stance and moving towards where the rest of the market sees things might land.
If I had a mortgage and I was following these ocr rates in these and it remains unchanged, and I'm looking at what the economists are saying and what the Reserve Bank is saying, How will it affect my back pocket? What should I be looking for?
Well, I guess you know, when you refix, you're taking a bit of a punt on what you think might happen to interest rates in the future. I mean, I would caution that people should certainly fix their rate for their own personal circumstances and how much they can afford, and how much they can afford. If the rate was to not come down, you wouldn't want to bet on it coming down because something could happen, you know, oil prices could spike or something like that that requires the
Reserve Bank to change its mind again. But you know, overall, I think it looks like you can sort of start to assume that we're on track as of today. Anyway, it looks like we're on track for rates to start easing probably early next year. You know, I'm just weary of anyone sort of betting on future movements because you need to be aware that things can change overnight. You know, the geopolitical situation, all sorts of things can unwind it.
The standard model would be to sort of probably fix a bit shorter now if it was coming up, and not get locked into sort of The banks do tend to offer good looking, you know, the best deals on those longer rates, but they kind of you know, if you get stuck on a long rate, you're not going to benefit as they do come down, So that would be the sort of thinking with all those sort of caveats that have to put there for legal reasons.
In terms of betting on that rate drop, our colleague Geno tib Strainey reported that there's been an upteck in mortgage holders betting on a rate drop, with an increase in six month terms at the start of the year.
Proportionately, a lot more of the new mortgage lending was going to people fixing for relatively short periods. So that's seventeen percent for owner occupiers. For investors that was even higher at twenty two percent, quite a big jump from where it had been.
Are we basically gambling on house prices at the moment?
Well, it's a sort of funny sort of game we play in New Zealand with fixed rates that we think we can somehow game the market, you know. Yeah, I mean it's logical that you would be looking at shorter terms right now because that's the sort of consensus. The narrative is that we start to see rates come down through twenty twenty five, and so you don't want to be locked into two years at a higher rate, But
we don't know how far they'll come down. And as soon as you start looking out over about a year, it's very hard to predict what's going to happen to global inflation and all those things. So yeah, I always think it's odd. In some countries. We've talked about this before. In Australia, people tend to float more and just rise and fall with whatever's going on in the market, And in Europe and America they take much longer term fixed rates and just sit there because in the end, it
has to be something that you can manage. You don't want to get caught out, as some people have with the super low interest rates for example a couple of years ago, and you know, people get caught out because they misread it. They thought they would stay low for longer, or they thought that the spike was not going to be as bad, and they're caught with mortgage repayments they can't afford. So the first thing to do is really just make sure that you've tested what you can afford
to pay on your mortgage. On either side of all the market expectations, a little bit on the negative, a little bit on the positive of where those forecasts are made because they sort of more often than not, they'll land one side or the other of where people are exactly predicting. You know, there's no guarantees about the future.
How is the economy firing at the moment, and is this Duvish ocr decision having a big impact on how it's tracking? And my secondary question, what does duvish and a hawkish mean?
Those are good questions. Yeah, Hawkish means you really really hate inflation and you are going to do everything you can. You think you're more worried about inflation generally, so you're going to keep monetary policy tighter, which is jargon as well. I know, you're basically going to keep interest rates higher
because your big concern is inflation. And if you're duvish, you feel more relaxed about inflation, and you're going to go with lower interest rates and try and stimulate the economy and get the money circulating around the economy a bit more. I mean, they're sort of old fashioned terms that we borrow from the US military, I think in terms of how people are feeling about going to war or not. So I guess it's the war on inflation. I mean, I wouldn't want to overread this week's decision.
It's in the tone, it's in the language. It does flow through to the markets very quickly. So we probably see some pricing move forward and expectations in the market that rates will come down, and that actually can because of some of that pricing that goes on does affect your mortgage rate. That actually can put a bit of
downward pressure on mortgage rates. And so if the markets really believe they're coming down, then they sort of start to But that's something that doesn't help the Reserve Bank because and that's one of the reasons that they like to you know, I thought they might have stayed talking tougher for a bit longer, is that, you know, you start to lose effectiveness if the markets get ahead of
you and start pushing the rates down. But I guess what it's saying in the commentary there is that the Reserve Bank is seeing real signs of pain in the economy. They are listening some of those signs of credit to stress, business liquidations, all that sort of stuff. It is adding up. I would say that we're just a bit shy of some really good solid data. There's you know, the full inflation figure comes out next week, so we haven't got
really solid data to base the stuff on yet. But you know, you've only got to talk to anyone in business or get out and about in Central Auckland or something at the moment to know that it's really tough. It's definitely a very recessionary feeling economy, even though technically the top line might not be. But it feels like a pretty grim economy right now. And the longer rates say where they are, the worse that's going to get. So the Reserve Bank clearly paying some attention to that
and hopeful that that's working on inflation. But we haven't seen yet the proof that that's working on inflation, so that's the caveat. We're still waiting to see those inflation numbers really hit the target.
Other figures out this week four five hundred more people have signed up to the job Seeker benefit since the start of May.
Is that worrying?
Yes?
And Noah, it's probably in line with expectations. So it's a tough one. It's not just people losing their jobs. Some people losing their jobs, it's people coming out of university, in school and not being able to get a job signing up to Job Seeker. We expect the unemployment rate to rise by a few more tens of thousands, which
sounds brutal, but that's really weird. The current consensus thinking is, and that would take it up to about five point three percent unemployment rate, five point five maybe, and that is our historic average. Historical average in this country is around five point five percent unemployment. So we're coming off a low base. We're coming off a time of really high employment when it was really easy to get a job. Doesn't make it, you know, any better for anyone losing
their job. And if you've got a big mortgage right now, to lose your job, there isn't going to be a lot of other work out there. There's a squeeze on hiring for a lot of companies, and so it feels very tough because we're in that transition into a higher unemployment economy. But overall, when you step back, it's it's not as grim as many times throughout New Zealand's history when unemployments has spiked to you know, seven or eight percent after the GFC, or you know, ten or eleven
percent in the early nineties. So in terms of you know, people worry about, is this the worst economy ever? Is society crumbling and all that sort of stuff. Well, you know, you have to step back a bit and remember that we've we've lived through worse, or I've certainly lived through worse.
Our economy could be pushing more Kiwis to see greener pastures abroad. Statsen's ed figures show a net migration loss of sixty thousand Kiwis in the year to May, the biggest loss on record. Numbers of citizens leaving are at a record high of eighty five thousand, six hundred people.
We've also seen more worrying migration data about how many people are flocking overseas. What can you tell us about that?
Yeah, I mean, if I was going to worry about one statistic, I'd probably be more concerned about that. It's hard to know that. You know, you have got the borders opening up after COVID and probably still a large number of young Kiwis heading off on Oe's that they weren't able to do, going off to London and around the world to work. But there's also a growing number of people going to Australia for higher wages, seeing more opportunity there, and the idea that young New Zealanders don't
see opportunity is worrying. And there's two aspects of that. One is we're in this downturn right now and that might might start to look a bit better a year from now, so that's hope. That's just cyclical. But the other one is sort of what Prome Minister when he was campaigning a pre election called New Zealand losing its mojo and he was going to help us get it back.
So hopefully he's working on that. That just that sense of what we'll you know, lead the growth and the good feeling about New Zealand's economy in the next ten years or so. Where's all that vibe going to come from. Which industries are going to be there for young people to get into and find them make an amazing life
for themselves in New Zealand. And that's a bit tougher and you know, but it does pile on and you know, the gloomy winter bottom of an economic cycle, a lot of people sort of heading off after in the post COVID wave, so you know, you've got to look through the mix of that. Also, I would mention that we're
not losing population. We're still those same stats showed that we're still getting a lot of migrants in eighty thousand net gain in the last year, so so you know, maybe the shape of New Zealand's demographics is changing, but the population is still growing and that's at least a sign that some people have got faith in this country long term.
And Liam, what's your outlook for the coming months. I know we ask you this every time, all the time, but people want to see some light at the end of the tunnel, don't they.
It's funny that it's all hooked around interest rate. The cyclical bit will turn. I can't tell you exactly which month it's going to turn in. Is it November, February? By May? But the cycle of this economy will turn, and you know, interest rates will come down a bit enough for people to feel a bit more relaxed, for the property market to come back a bit, which you know, nobody wants another housing bubble, but you know, the middle classes feel a bit wealthier, they start spending again, and
all of that stuff turns round. So I think that is the light at the end of tunnel. Just trust that the process is working. It's been slower and a tougher grind than we would have liked. Some of the damage done through the pandemic was probably worse than hoped, so it's taken more time to get things rebalancing, but that inflation really is coming out now. Bigger challenges for New Zealand are still there, infrastructure and new industries and jobs growth and all that stuff getting the mojo back.
I'm hopeful that as the cycle turns, the government will sort of use that momentum to try and get a few things going and spark a bit more of an upbeat feeling in the country.
Thanks for joining us, Liam, That said, for this episode of The Front Page. You can read more about today's stories and extensive news coverage at enzat Herald dot co dot z. The Front Page is produced by Ethan Seals with sound engineer Patty Fox. 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.