Kyota.
I'm Chelsea Daniels and this is the Front Page, a daily podcast presented by the New Zealand Herald. The official cash rate has been cut by fifty basis points, bringing it down to four point twenty five percent. This marks the third consecutive cut to the OSER since August and brings it to the lowest level since November.
Twenty twenty two.
With inflation also dropping last month to two point two percent. Stats show an improving economy, but low spending is sparking concerns that we aren't out.
Of the woods yet.
Today on the front Page, we're joined by a simplicity cheap economist, Shamabil Yakob, to run through the numbers. So the ocr has dropped fifty points to four point two five percent.
Is that good news?
Well, it is good news, and it's expected news. The economy is weak. Infleation is not a problem. The Reserve Bank should be cutting interest rates because they're far too high.
What's the prediction for next year? Then, how low will it actually go?
Probably can get down towards three percent, so there is probably another one point two five percentage points of rate cuts to come. They're probably going to wait to see what happens over the busy Christmas period, and if the economy continues to be weak, they will continue to cut rates.
So an Z cut most of its fixed home loan interest rates ahead of yesterday's OCR decision, and straight off the bat there, Kiwi Bank has cut its variable home loan and business lending rates, ASB has dropped interest rates across personal business and rural lending.
I mean, this has to be some good news ahead of Christmas.
Right, Absolutely, we desperately need this good news. For the last couple of years, people have been ref fixing their mortgages from very cheap to very expensive rates, and we've now just turned the corner and these lower interest rates are going to give a lot of relief to people who are refixing in the next year or so. So absolutely good news, but it takes a little bit of time for them to flow through.
How much time does it take to flow through do you think?
And what kind of numbers are we going to be looking at after this decision.
Look, it usually takes somewhere between six and twelve months before these interest rate cuts really kind of become broad based better news for the economy. That's because the current level of interest rates are still quite painful. They're quite high, so people aren't borrowing and investing like we're doing during good economic times. So we probably need to assume that for the next three to six months things are still
going to remain a little bit painful. We'll initially get just a better relief that people are not paying so much when mortgages, and then eventually when interest rates get low enough, we're going to start borrowing and investing again, and that's when the party begins.
If you could explain to me, like I'm a five year old, how cur rights then translate to a better economy, could you do that?
Of course? So the OCI is kind of like the interest rates from very short term money. You and I don't borrow that money. But when the reserve Bank changes the OCA, it also changes your floating mortgage rate. It also changes your fixed mortgage rates, not by the same amount, but it influences all those costs of borrowing for all of us. And so when the reserve bank drives and the cost of debt, it means that we are paying
less for that. And when we see less expensive debt, when we see banks being more willing to lend, not only do we get relieved from the debt we already have, but we are willing to take on more new debt, and so we are spending, We're investing, We've got more spare cash, and it means there is just more money going around in the economy. We all feel better.
Since August, the right has now been dropped one point two five points, and this is welcome news for families and businesses. For people with mortgages, the impact will course depend on the size of their mortgage, whether they're floating or fixed, and what rates they're currently on. But to give one example, a family with a twenty five year, five hundred thousand dollars mortgage could expect to be about one hundred and eighty dollars a fortnight fetter off.
The OCR is obviously just one snapshot of the economy, right, what other data have you seen recently that shows that it's doing quite well well.
The OCR is very much the tool to try and influence the economy. What's going into the rest of the economy is we're just in a recession. We're quite late stage in a recession. It's this is probably the deepest and longest recession since the Global financial crisis, so you know, the pain that people are feeling, the kind of bloom that's out there entirely justified, but also as short lived. Once in a recession and the Reserve Bank is cutting
interest rates, we know things will get better. So right now what we're seeing is people are spending the people are investing less. We're not buying in something houses so much, businesses are not investing so much, and they're not hiring so much. So that's the kind of the I guess, the anatomy of a recession. But once we kind of work through this painful part, what we tend to start
to see is there is a return of hope. And once people see that customers are coming back, orders are coming back, we see the economy really starting to recover. And so to me, the big story of the economy right now is we're in the kind of late stage recession. And when I look forward to twenty twenty five, I start to feel quite optimistic that by the middle of next year we should start to see some really good growth.
How concerning is it that we aren't actually spending as much? What are the kind of flow on impacts of us holding onto our money for so long.
Look, I mean it's not surprising, right The psychology of not spending right now is pretty clear. You know, if you don't have enough money, of course you can't spend it. When you feel fearful of your job and career prospects, of course you're not going to go out and spend. If you can't borrow money or the cost of borrowing is high, you're going to be really careful. So right now, that reduction in spending and investing, that's really what a
recession is. A recession is not really going backwards. It's all of us going I just don't feel comfortable going out making big decisions right now. And so that's really the impact right now of what people are behaving at And the consequence of that is the retailers or the businesses that rely on your spending your money with them, they're going, oh, we have fewer customers, our costs are still high, our profits are down. And that then goes into the kind of cycle of businesses why I'm down.
They have fewer employees, they don't invest as much, and that's what the recession is. So we're kind of just describing I guess the current economy situation rather than anything else.
But you say next year it's most likely going to be party time. Is that when we're all spending more money.
Eventually, Absolutely, and that's because we'll probably have worked through this kind of this difficult economic period. We would have gotten hold of our finances. You know, right now people are really struggling with the financial situation. Right now, over forty percent of New Zealanders are saying, oh, my finance are worse today than they were a year ago, and a lot of that is cost of living, higher mortgage rates.
But when you look forward to the next twelve months, you can see that inflation is not that much of a problem. You can see that mortgage rates are going to become cheaper, and we are going to see people with better finances. And when people have better finances, they're going to go out and do more. And that's really what the economy is about. It's more of us doing more things.
AB's latest housing confidence survey shows a net twenty four percent of respondents expected house prices will rise in the three months to October, up from a net thirteen percent in the previous quarter.
Is this good news for the economy, Well.
Again, it's kind of people hoping that as the interest rates come down, things will get better. So it's good news and bad news, right, It's good news if you're selling houses, it's bad news if you're buying houses. Over the course of the last year and a half two years, banks have been really careful about lending money. There's actually not been that many mortgages being written, and a number
of houses selling has been really quite small. And as interest rates become cheaper, as banks become more encouraged to lend money, we are going to see more money chaseeing those houses and that should drive prices high.
A big draw card for voters was nationals tax relief policy. You kind of wrap up of tax bracket changes, family tax credits, things like that.
Has this actually done anything for the economy?
Look, I mean, we've still had a recession and households are still spending less. We can see that household spending is still falling and people are still struggling. I guess the counterfactual is they might have had even less money to spend, and they might have spent even less in
the absence of the tax cuts. So it's a little bit hard to kind of look at it and go, oh, there has been no effect, but it's not clear that those taxs have actually made any difference to the current recession, because on the one hand, there is more money in consumers hands, but on the other hand, the government investment in government spending, which is also part of the economy, has been a lot less.
And so do you expect that to perhaps change next year with the next budget, because there have been whisperings that this budget is going to be obviously economy focused and focused on building on that government spending.
Not really. I don't think there's going to be much good news in the next budget either. So this government is very focused on fiscal austerity. That means they want to spend less money. And when the government spends less money, those parts of the economy that are reliant on government spending will be smaller. Now, the question is if the government spends less, will somebody else spend more money? Well, not in health or infrastructure or education, right, That's just
not how it works. So my sense is that actually government will remain a bit of a headwind to the economy and the recovery next year is going to be much more about the private sector. It's in spite of the government, we'll have a recovery rather than because of.
Would we see benefits to say, if we start partnering with private entities to build things like roads and bridges and such.
Well, I think there are cases and stages when that's possible. So infrastructure investment is extraordinarily expensive, and a lot of infrastructure, like you know, like a normal motorway, it's quite difficult to get money out of it. Right. We don't pay tolls or anything like that, so it's not easy to get private money into that. But there will be other types of assets, like tolled roads or at least buildings.
Those kinds of things are absolutely possible to be done with private money, and private money can do a lot of that, so the government can get on with doing all the other things that you and I want, right, we want to make sure we have good hospitals, good schools, good roads, good bridges and some of those things. I think there's only one buyer and that's the government, and there's a bunch of things where private sector can be involved, and we should free things up and let them at it.
Particularly with kivsav I mean I'm a bit conflicted because I work for it. Keev server, but qvserver money could absolutely find quite a lot of the infrastructure in New Zealand and it's the perfect fit. Kiis saving for New Zealand's infrastructure.
Why don't we do that already? Do you think?
Well, I think it will happen, and it partly hasn't happened because one, we haven't had many government infrastructure assets that could be invested in easily. They're not kind of packaged up in a way that works well. And also the way that we have our rules and regulations set up for kivserver made it a little bit difficult for some for most to kind of justify doing that, and those rules are currently being looked at very closely by
Minister Bailey and others. And so I think by the time we can roll around to twenty twenty five, we are going to see a lot of those barriers being removed. So you know, watch this space. My projection is over the course of the next ten years we will see a significant escalation in KEYVY servers investing in New Zealand's infrastructure.
The most obvious takeaway from a double cut like this one of the back of all of the fast cutting that's already taken place in the last few weeks is that our economy is kind of stuffed. As Kiwibank points out, hardship withdrawals from Kiwisaver have spiked from ten million dollars in January last year to thirty eight million dollars in October this year. Now, those withdrawals are not easy to make. You don't just rock up to your Kiwi Saver provider
and go you have some cash. Thanks. You've got to be in big financial stock and you've got to be able to prove it and only then do they give you the money.
Last week, a group of economists, and I might say many of them left leaning, wrote to the Prime Minister and Finance Minister to critique the government's approach, mainly for drawing out the recession.
Where do you stand on this, Well.
I mean it's just evidence, right. So over the course of this financial year, so the year to June twenty twenty five, the government will be sucking out four percent of GDP through reduction and government spending. So the government is leaning against the economy. But we should not be surprised. This is exactly what the government stayed when they were out there looking to get elected. They said we will cut taxes and we will cut spending. That was the promise,
and that's what they're doing. So I don't know why people are surprised by what the government is doing, because it's exactly as it was signaled. Now the impact on the economy is absolutely the government is taking money out of the economy, and that is making the recession deeper and longer. The econ one to one prescription during a recession is the government should pump prime the economy, especially
by investing in infrastructure. We haven't seen that yet. The challenge here, of course, is that there's only a three year window for any government to do what it wants to do, and this government, again came on the back of a promise to reduce government spending, and you have to do it in those three year window in the window.
So I think it's very much that it was a political reason in terms of why they're pursuing this policy, and the recession just happened to come at a time that was very inconvenient for their program.
So the only reason you're saying that the government may be drawing out.
The recession would be to look better in the end.
They're doing it because they made a promise of what they wanted to achieve when in government, and they're doing that. So I think I don't think they're sitting there going, oh, we want to have a really terrible recession, because nobody wants that. But I think the motivation is political in that we promised that we would do this in terms of government spending, and that's what they're doing. So in my mind, it's not really an economic rationale or economic
reason why they're doing this. It's a political rationale in terms of what they wanted to achieve in their term in government.
Yesterday we also had news of more health and Z jobs cuts coming. That letter to the Economists spoke about the long term impacts of these public cuts on the economy.
How worried are you about all of these cuts?
Yeah? Look, it is always difficult, right because on the one you can have two truths that are together. One is that there can be public sector efficiency against and the other is we can cut in the wrong places. And so right now, what we've got as a reduction in headcount, and it's pretty broad. There is not a lot of thought around what type of capacity we're losing. Is it wasteful employment, wasteful spending that we're cutting or is it all kinds of spending, Because the reality is
that we need to cut all types of spending. You are going to cut out some of the good stuff as well as the band staff. So to me, that's probably the bigger concern is the lack of deliberate identification of the kinds of things that you want to root out and the kinds of things you want to do more of. And our public sector is actually under quite
a bit of strain. Particularly the health sector has been through a huge amount of disruption through the pandemic, and we are faced with a sector that we are still going to need. Right we have an aging population, which means that we're going to need lots more health services, and weakening or disrupting the health system really does expose us to a lot of future and long term risks.
Well, the government keeps saying that all these cuts are coming from back room bureaucrasy.
Do you not believe them?
Well, again, it's I don't know what backroom bureaucracy is, because you know, health is not delivered just by doctors. It is a team effort. There is a whole apparatus that has to work together to deliver these things. And again, I think it's that being deliberate about really identifying It's too simple to just say these are good jobs and these are bad jobs. You have to be a lot more deliberate about identifying waste and getting rid of that
and growing the stuff that actually delivers. There's good outcomes, good services that New Zealanders want and deserve. So now I do have some quite a lot of resistance to the idea that just cutting people from head office or support services is going to get better outcomes, because that is absolutely not true.
We're coming up to the end of the year. What does twenty twenty five look like to us. You've said, get ready for a party.
I think a bit of a cul shower first before the party. But absolutely, look, I think the Christmas period is still going to be a bit hard, So please look out for each other, look after yourself, because I think Christmas period we put a lot of pressure on ourselves and there's a lot of demands to spend money and do things, and you really got to be really I think, confident and take a lot of care in
what you do. But once we come out to the other side, I think we'll start to see some of those positive signs starting to build, but it will take a little bit of time, so I don't think we're going to see those really good times really kicking in until the middle of next year. But once that starts, I think things will feel a hell of a lot better. It's been a long time coming. It's been a long, deep recession. But when that recovery comes, boy, we should all go out and enjoy it.
Thanks for joining us, Shamabel, Thanks Chelsea.
That's it for this episode of The Front Page. You can read more about today's stories and extensive news coverage at enzdherld 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.
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