Hilda.
I'm Chelsea Daniels and This is the Front Page, a daily podcast presented by the New Zealand Herald. The Reserve Bank has cut the official cash rate twenty five basis points to three point twenty five percent.
That's the lowest it's been.
Since August twenty twenty two, though there were discussions about holding it. Today's move is in line with most economists' expectations and is another positive sign of the growth of the economy, but there remains global uncertainty over US President Donald Trump's policies and what impact his tariffs.
And trade wars could have.
Today on the Front Page, Infometrics chief forecaster Gareth Kinnan is with us to dissect the decision to cut again and what impact global politics could have on our economy. Gareth, the OCEA has been cut again.
Is that good news?
It is good news for borrowers and mortgage holders expecting to see the floating rates come down, and signals from the Reserve Bank also suggesting that, if anything, there's still more downside risks to interest rates than they previously allowed for, so that could well see a bit more prescire coming through in terms of fixed rates.
Going down as well.
Market pricing, and I guess nearly all the economists had a twenty five basis point cut locked in, and that's exactly what happened. What does it mean for our economy?
I'm the Reserve Bank at the moment is effectively pushing against a whole lot of uncertainty that we're getting coming in from overseas with the international trade war and nobody quite knowing how that's going to pan out. The Reserve Bank themselves expressing a lot of uncertainty about what's going forward, so they're I guess trying to provide as much support for the economy.
As they can.
You know, New Zealand was in the early state pages of an economic recovery after the sort of very tough conditions through twenty twenty three and twenty twenty four. This international trade will was come at a really bad time in terms of sort of kneecapping that recovery.
So the Bank is trying to help there, but.
They have also recognized that position and downgraded their economic forecasts as well, so it is kind of just just trying to help the economy keep going, but you know, not adding too much fuel to that fire.
A and Z has forecast that had eventually dropped down to two point five percent. Others are slightly more optimistic, suggesting an endpoint at two point seventy five. This is the sixth cut in a row. How low will it go before it holds?
Do you think, Yeah.
We've got another interest rate cut factored in at the next review in July is taking it down to three percent. At this stage, we're still unsure about whether there will be further cuts after that. We haven't formally built any into our forecast, but recognizing that what is going on internationally does create some downside risks.
The problem for the Reserve.
Bank at the moment is that they are also looking though just a little bit of inflationary pressure coming through the system. Inflation sort of picked up in the latest quarter. Inflation expectations have lifted as well. Reserve bankers said that that will be temporary, but they also do have in their minds what happened three or four years ago where they said inflation will be temporary then and it turned out to be far from the case. So they're trying
to go down something of a medal path there. I guess it's a case of playing things very much by ear from here as to how things unfold.
Well, I understand as well that this wasn't a unanimous decision. There was some consideration of holding it at three point five percent, The Reserve Bank said in considering the merits of holding the OSA unchanged at three point five percent for this meeting. Some members noted that this would allow the committee to better assess whether increased economic policy uncertainty was having a noticeable impact on household and firm behavior.
Now unpack that for us, Why would there have been this sentiment.
Yeah, Effectively, they're saying there's the international trade will happening, the tariffs which may be on, they may be off.
As a result of that.
Uncertainty, there is an expectation that businesses potentially hold off from investment decisions, they hold off from hiring decisions, so the labor market might be slower to improve households as a result. Maybe they hold back in terms of some of the spending growth that might have been expected as well.
So all of those factors, it may well be that the Reserve Bank does need to provide more support, does need to cut interest rates further, But it's not a clear case at the moment, and I think the Bank will be looking at confidence surveys in particular over the next month or two to get a better gauge of just how seriously some of this uncertainty is weighing on people's decision making.
Internationally, developments look likely to lower global growth in the horizon ahead of US. Both high tariffs and elevated policy uncertainty is likely to weigh on domestic economic activity and inflation pressures. However, there's considerable uncertainty around these judgments.
I saw the Reserve Bank also said both tariffs and increased policy uncertainty overseas are expected to moderate New Zealand's economic recovery and reduce medium term pressures. And you've noted that as well. To translate that, are we just waiting to see what Trump will do next?
Yeah, there is a bit of that, and you know it can change from day to day very much in terms of the news that comes out around that. But in terms of that waiting, I mean, look, the Reserve Bank has revised down their expectations for economic growth this year. They do think there'll be a bit more of a catch up when you get through into mid twenty six
and out into twenty twenty seven. But for now, the expectation is that growth is just slower to recover as a result of, like you say, waiting and seeing what.
Might come of the trade war, what Trump will.
Decide and how China is our largest trading partner, will be affected.
Where are the markets at now that initial flurry of the Trump terrists has that passed?
Yeah?
Look, I mean markets if you go back to early April, they felt substantially they had been falling anyway, but there was a significant drop of course following the announcement on Liberation Day. As we've seen the tariffs paused for ninety days across most countries, we have seen markets rebound. But then, of course we had last week the sort of announcement or rhetoric around.
Europe potentially being slapped with fifty percent.
Terroriffs by the US, which again was reversed out pretty quickly, but it's just enough to sort of keep markets unsettled, and.
So there's still a fairly high degree of.
Volatility and uncertainty on financial markets at the moment.
Yeah, will be tariffs.
What they've done is other nations happened stealing the movies, the movie making capabilities from the United States, and I said to a couple of people, what do you think. I've done some very strong research jobs last week, and we're making very few movies now Hollywood have been its slow Now you have an incompetent, grossly in competent governor
that allowed that to happen. So I'm not kids claiming other nations, but other nations, a lot of them have stolen our movie in this and I'm saying, if they're not willing to make a movie inside the United States, and we should have a tariff when movies should come in.
It does feel like we don't quite know where Trump will go with the economy. You mentioned the steep tariffs with the EU, then that's now been paused. The other week he was posting about film tariffs that haven't really gone anywhere. He's demanding now that Apple and Samsung move phone production to the US. Are there any thoughts on what his plans are or where this is all going. He seems pretty committed to the idea of tariffs, even though that didn't go down too well with the markets.
Well, they're one of the beautiful things I think is he Phraises is one of the most beautiful words.
This is the tariff.
So look, I genuinely don't know what his endgame is. I don't know if he even knows what his endgame is either. I mean, certainly the volatility on financial markets has caused of a lot of unsettlement. But what I struggle with is take the China one as an example, where you know, he's trumpeted the fact that we've got the tariffs back down to thirty and ten percent across
the two countries. Well, that's where we were six weeks ago before all of this kind of started, and you back there, haven't achieved anything, and we don't quite know
what the end game is. So you know, there's certainly a sense that he wants to, you know, bring employment and production back to America, but the reality is that can't happen overnight, and there's a hell of a lot of pain and difficulty to be worked through before you even get close to getting to that point where the American economy can maybe be a bit more self sustaining
in some of the areas. And let's be real, it's not going to be self sustaining in all the areas he's been targeting, but some of them even the sort of most optimistic ones. It is going to take time for that sort of factory production to move back closer to home.
And I can imagine if Apple phones and Samsung phones and devices are manufactured in the US, I mean, we could be paying eight grand for an iPhone in future, right well.
And I think that was the sort of maybe it's a bit of a shock to them, but you know, the sort of analysis done that the price was going to be two or three times what it was for coming out of China because America just didn't have the sort of the systems in place and the technology and all that sort of stuff to produce at that rate.
And that's before you even start to think about some of the retaliatory measures that China had taken in terms of limiting the sort of exports of rare elements and earth materials to the US to try and sort of undermine the goal that's there. So, yeah, there's real potential inflationary impacts or sort of shocks to the system in terms of some of those products potentially becoming a lot more expensive if you go down the tariff route.
It'd be pretty difficult to talk about the economy without mentioning the G word, and that's growth. Prime Minister Christopher Luckxon has been pretty quick to praise National's strong economic management for the OCEI Cup. But how much can actually be attributable to the government. How much is just dumb luck and how much is just controlled well, I mean.
The economy was already struggling, of course, already slowing down before National came in. We've seen you know, big interest rate rises through twenty twenty two and into twenty twenty three from the Reserve Bank just to try and get that sort of excess heat and excess.
Demand out of the economy.
Anyway, I guess in terms of government policy, where potentially the government can take some credit as they have obviously taken a tight rain, a tight approach around fiscal spending and continuing to sort of target savings through there. Now, that's not great from an economic growth perspective in the near term, because you know, the economy typically when it's slowing down, you'd look to the government to provide a bit of support to cushion the downturn that you're having.
It's not appropriate for government to be doing that at the moment given the extent of growth and government spending that we've had previously. But it does mean that if the government is cutting back, it does mean the Reserve Bank does have a bit more scope to maybe bring those interest rates down because across the economy, as the sort of excess demand, the excess heat through the economy is being wound back a bit more quickly than if the government was still throwing money out the door.
With Gay abandon right, So the government does deserve a part on the.
Back look to some degree.
Look, there's a consistency at the moment, I think between fiscal policy and monetary policy, or there has been in terms of trying to get that economy back, as I say, at a more sort of sustainable growth rate than what we've had previously.
And I think, look if interest if.
The government was spending more than it is at the moment, then there is potential that interest rates wouldn't be able to be as cut by as much as they have been.
This budget supports the economic recovery while also taking a longer term view with initiatives to boost investment, growth and savings. Kiwis have been battling through an extended period of high inflation, high interest rates, and low growth times are still tough for many. The good news is that strong economic and physical management is ensuring our recovery is underway, supported by lower interest rates and a strong export performance.
What about the impact of the budget that has emphasized a lot of individual responsibility towards things like savings and looking after your kids when they grow up. What impact do you forecast that having on the budget in the short to medium term.
Yeah, I mean, I think in terms of the way the economy is a performing going forward. Probably the sort of headline grabber was around in VS Boost and it's been interesting to see the forecast of Treasury particular around that, where they've said, okay, our baseline forecasts for investment by businesses going forward will lower because of global conditions and the uncertainty out there. But when we bring in the investment boost policy, we do think it just will encourage
a bit more investment. And while that doesn't necessarily impact growth a great deal immediately, it does facilitate more growth a bit further down the track. So for me, that's probably one of the key parts of getting a bit more momentum into the economy. Not necessarily this year, but if we look forward to twenty twenty six and twenty seven just helps to provide a bit more growth coming through.
We're always looking overseas.
First it was COVID and now we're just on the edge of our seats looking to see what Trump does and how that affects our economy. Because we live in such a globally connected world. Is there any escaping those overseas pressures?
Do?
We just have to live with them?
Pretty much, we do.
And that's not just the fact that the the whole global economy is interconnection, but from a New Zealand's perspective, you know, we are so reliant on exports, is a key part of our economy and driving our growth story, and certainly at the moment when we look at the expected recovery in New Zealand over the next twelve to eighteen months, two key contributors to that right. One is lower interest rates putting more money back into household pockets.
And you know, eventually over time as they roll off higher fixed rate, as the labor market turns and consumer confidence improves, more of that money will be spent and flow through the economy. But the probably even bigger aspect of the recovery we're looking at at the moment is just around the sort of high export prices for the likes of dairy products, meat, horticulture. Those are all really good levels and we're expecting that money to flow through into provincial economies over the next.
Year or so and stimulate more growth. It's quite different to the sort of recovery that New Zealand has had.
From an economic perspective, probably over the last thirty years, where a lot of the time our economic fortunes have been driven by changes in migration and population growth and that moving around.
Quite a lot. This time around, it it's more like an early nineteen nineties or even prior to that recovery, where it is those export prices, that export revenue coming in, there's more.
Money for farmers, they get out and spend it, and eventually it flows through from provincial areas and flows through into the urban centers as well. So yeah, from that perspective, g the global economy is a real sort of lynchpin of where New Zealand is going at the moment.
Gareth, is there a fear that the positive trajectory of our economy has hit a kind of juncture because there was acceleration that we saw at the end of twenty twenty four, even the beginning of this year. But now we've got all this global unpredictability.
What do you think will happen next?
Yeah, there is a sentence I get from getting out there and talking to businesses that late twenty four early twenty twenty five, the data we were getting through, the messages we were getting from talking to people were they weren't massively positive, but there was certainly an improvement on the sort of wholesale pessimism that we'd had through much twenty twenty four. And I get a sense just the last three or four weeks again talking to people, that
that positivity has just evaporated away a bit. That's not necessarily to disappeared across all parts of the economy, but certainly some of the people I talked to are going, Yeah, it's just it seems to just.
That momentum have petered out a little bit.
And I think that's partly a function of those international events that we've talked about and the tariffs and the uncertainty associated with that, but it is also partly a function that you know, there's still aspects within the new Zealand economy, where take consumer confidence for example, it's improved, but it's still not that great. People still don't feel
fantastic about their own financial situation. So it's almost a sense of some of that turnaround or emerging turnaround we saw in late twenty twenty four was maybe a little bit premature and some of the fundamentals behind it still need to improve further. Get the labor market improving a bit, get employment growth picking up, and then you'll have a bit more solid base to start accelerating economic growth from notwithstanding what may be happening internationally.
Of course, thanks for joining us, Gareth, Thank you very much, my pleasure. 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 Ethan.
Sills and Richard Martin, who is also our sound engineer.
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.