Kiodra. 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 to four point seventy five percent, which is being touted as welcome news for households all over New Zealand. It's the lowest the OSA has been in eighteen months. The Monetary Policy Committee said that annual consumer price inflation was within its one to three percent inflation target range and converging on the two
percent midpoint. While plenty of people are popping the champagne over this announcement is the latest cut, masking some of the other issues in the economy. Today. On the front Page, Herald Business Editor at Large Liam Dan joins us to discuss the stats. You need to know, Liam, what's the significance of this latest OCR cut? What does this actually mean for the economy?
Well, really, the cut just means cost of borrowing goes down, which means people who are paying who have debt will be paying less money out to service that debt, so they'll have more money to spend. So it's a way of putting cash back into the economy which had been removed by the Central Bank, by the Reserve Bank in order to get on top of inflation, because they put lots of money into the economy to cope with.
COVID, and in terms of inflation, that number is looking a lot friendlier. Now.
Hey, yeah, Well, the official rate is three point three percent, which is still outside the mandated target ban, but that's old. That's for the second quarter of the year. We don't get the official number for the third quarter until next week, which is a bit inconvenient. But the Reserve Bank is very confident that it is under control, and it has said that the statement this week that basically they see
it below three already. They've looked at I guess, second tier stuff like what businesses are saying about their own pricing and all that sort of stuff. And also, you know, when you look at the way the data flows through the way the statistics work, the third quarter last year had very high inflation numbers. We're in the near the peak of that inflation. They'll drop out, so we know that they'll come out of the average. So for the average annual rate over the last year, it is looking
likely that it'll be below three percent. So that I guess means we can say, in terms of high inflation, it's over. We've won the war against inflation. Doesn't mean prices won't go up necessarily, but we shouldn't be seeing those big spikes. And some things might go down, some might go up, but the average rate's going to be between one and three, which is where economists and central banks like to keep it.
And do we look at that rate when we kind of determine whether we're in a recession or a recessionary period.
It has an impact, but the recession is usually judged on in the output of the economy. If the output's falling massively and we're in a deep recession, then often pricing will fall as well. And that well, that has happened. That's why they talk about the reserve bank engineering a recession. I mean, they don't really want a recession necessarily, but they have to reduce the amount of activity in the economy just to get that inflationary effect out.
And how are we looking at the moment in terms of the recession.
Well, we're either still in recession or just popping out of a recession as we've sort of moved into the fourth quarter. But we don't get the GDP data till much later. But we know that the Reserve Bank in August forecast at the third quarter would be negative as well. We went backwards, so that would be recession. People talk a lot about per capita recession with the immigration numbers
over the past couple of years. We've been in per capita recession for two years, so you know, depending on how much weight you put on that per person in this country, the size of the economy has been shrinking for some time.
Most commons are predicting further cuts to the OCR in the coming months.
In August it dropped to the lowest it's been in four years, and there could be more drops up left, with some people saying that it could drop to his lowest three point five percent by the end of twenty twenty five.
Now another drop is predicted at the end of November when we'll see them meet again, and all predictions are now that by the end of next year the reserve banks of the OCR will be back within what they call the neutral range of two and a half to three percent.
Why doesn't the Reserve Bank just do them all in one big go, That's.
A good question. It would be very dramatic to do like some people have said, look, maybe a seventy five basis point cut after something like christ Church earthquake or when the global financial crisis hit. Sometimes I think we might have gone to a full one percent cut, trying to remember straight after COVID, at the worst of that
COVID as well. That's very dramatic though, And you know, we talk about monetary policy being a blunt and if you do that, it affects the balance of the cost of borrowing a lot, and it's hard to undo fast, you know. So if it was bumping around by a four percent from quarter to quarter or between rate calls, that would be very hard to plan forward plan as a business or even as a consumer or you know,
when you're looking at buying a house. So really what you want with monetary policy and central bank action is slow, stable change. You want it to be sitting somewhere really predictable for quite a long time. So even the cuts we're seeing now are probably you know, it's good to see it come down, but it's a shame that we're having to cut so hard because it's so dramatic, and you know, ideally it would be a smoother path, so you'd have a series of twenty five basis point cut.
Central banks don't like to cut in big numbers unless there's really dramatic reason to do it, and that's why I've been saying that, you know, if we do have another fifty basis point cut and then some economists are even picking another one in February, that's three fifty basis point cuts. That is quite radical, and it's not the sort of thing a central bank would do unless the
economy was really in a lot of trouble. So I'm hoping that even though I've got a mortgage and I want rates to come down to sort of three percent or something, if we had to get there in the early next year, that would really be an indication that something was not right with the economy.
And we've already seen some activity from our major banks. Haleium, what's the latest on those.
Yeah, a lot of marketing stuff. I would say Initially we saw some banks move ahead of the ocr and there's a lot of competition and positioning. But more or less the fifty basis points has been passed through. I don't know if we'll see much more from here. Sometimes the bank rates are also affected by what's happening overseas and things, but it's been passed through pretty well, and
now it's just a matter of when people refix. Businesses are more likely to be floating or on very short term rates, and they pay higher rates and they'll feel some benefits straight away, and then businesses will get some indirect benefit as consumers have more money in their pockets. And it's not insubstantial. You know, it's bigger, probably for most mortgage holders than what the government's tax cut was.
I think if you're talking about fifty basis points or half a percent, or say a five hundred thousand dollars mortgage, that's two five hundred dollars a year, fifty bucks a week, almost fifty dollars a week, and a lot of people have bigger mortgages than that. And if you're not refixing next week, maybe it's a month or so, but you're still seeing, oh, that's going to be money that's coming
back into my pocket. Or you know, if you're lucky enough to be in a position to not adjust your payments, just leave it there and let the lower interest rates mean that you're paying off your mortgage faster. Then you'll be better off.
In the long run, Retail and Z is hoping the recent cut will bring some extra Christmas chair. What's the likelihood of better bending this silly season.
Well, I think there will be, particularly if we get another one or another fifty basis points in November, that will feel quite a substantial boost. It's not quite clear how much confidence is going to be boosted by this. It seems very upbeat at the moment, but then we have to remember the Reserve Bank was warning that it's doing this. It's comfortable doing this because inflation is falling and they know that the economy is in a slow patch.
They can see business stress rising, they can see unemployment rising, and they see that continuing well into next year. So if you're worried about losing your job, you're probably less likely to spend. And it's not necessarily a super quick turnaround for some of these businesses that have been under awful stress for a long time.
Does the OCR cauts and all this talk about interest rates, does this mean anything for those of us who don't actually have a home or a mortgage, Well, I guess.
For younger people, probably the bigger issue right now is unemployment and rising unemployment and the risk of losing your job. So as businesses feel like they're more confident consume, the confidence grows, then hopefully we'll start to see the employment situation turn around. I mean that to me is the biggest issue. I think, you know, in a way, during
the COVID stimulus, there was a labor shortage. There was actually a lot of opportunity for younger people in the job market, and that's obviously dried up, and that's making it a bit tougher to get a pay rise or to move around jobs and get pay rises in that we know, you know, wage inflation is part of the inflation that's falling away, which is not so good.
Well, that's kind of the process by which inflation comes down.
It's the overall weakning of demand and that comes through in terms of weaker inflation and unfortunately in terms of job losses and business closures. Maybe if you're saving a way and looking to buy our first home, then lower mortgage rates are going to make it a bit easier.
Hopefully it doesn't just spark another housing boom. And most commentators seem to think that even with lower mortgage rates, there isn't really enough pent up demand and to suddenly see house prices start spiking like they did a couple of years ago.
Well. L J.
Hooker has actually noted the reduction in interest rates is already impacting the property market. They say, we're seeing a significant uplift in buyer activity and confidence. More people are attending open homes, more people have been attending auctions around the country. So I guess people are getting a little bit more optimistic about their chances of entering the housing market. Yeah.
I mean that's from a real estate agent, right, yeah, Okay, Well, I mean and it came out the day of but look, yeah, there's going to be more confidence and optimism seeping in, and there will be people on the sidelines who are actually cashed up properly, investors who were thinking, oh, the numbers don't add up, don't add up, and then suddenly the numbers do add up now, or they can see that they're going to add up in terms of mortgages and the rent you can charge and all that sort
of stuff. So I would say some investors will be coming back. And it does tend to pick up and spring as well, So I don't know if that's a seasonally a press release, but there's a few factors that are just you'd call headwinds to that. I mean, we're not seeing immigration rise now. The immigration rate is falling, so you know, we're not seeing masses of new people arriving into the country, and we are seeing a lot of new Zealanders leave, So just the sheer population effect
there won't be that kind of pressure. There could be further changes the government regulations, you know, if they were to open up to foreign investment in the residential market something like that could be a further boost. But yeah, I think we will see it start to improve. But I just don't think it's going to suddenly turn into one of these housing bubble price spikes.
Double whammy, double heavy. It's a sign that we've got inflation coming under control, which is what we need to get a lit on the cost of loving crisis.
Nikola Willis said we're seeing green shoots after this announcement. What does she mean by.
That, Well, green shoots is a kind of colloquial economy term for the return of growth after a period of recession. Remember it being very popular after the GFC and often gets used too early. I think it's how hard you look for the green shoots. She's right that the conditions are coming right for growth, you know, for people to start investing in She's obviously she's got an interest in
encouraging that. And I don't want to sound too gloomy, but you sort of have to ask where does the growth come from other than just a bit more cash in the economy, a bit more consumer spending, and a bit more maybe life in their housing market. Those are the sort of the frothy, lighter ends of the economy. What the economy needs is I don't think I don't think Nicola Willis or Christoph Luxe would argue with this, because they're out there saying that they're trying to affect
this change as well. But what the economy needs is growth coming from the actual engine room, which is the productive end, manufacturing and agriculture and investment in those areas to boost our economic output, our export earnings, those kind of things, rather than just money going round again. You know, you can pour money into an economy, as we've just
seen through COVID. You can pour money into an economy and GEDDP can look very good for a while, but it starts to cause inflation unless you've got real wealth creation, you know, goods that we're selling and earning money from, etc.
So, Liam, is the economy actually really in a good place? Reading a lot of these press releases, like we've said a post announcement, it felt like Santad come early. And I know you like being cautiously optimistic.
Yeah, it isn't in a good place right now. But sometimes you'll see business confidence surveys and they'll be very They'll be like a decade high. The confidence is at the highest it's been in a decade. I think that was the A and Z Business Outlook. That's asking people what they think the economic conditions will be like in a year. So things are so bad they can only be better. So most people in that survey are now saying, yep, they'll be better in a year. So you get a
really strong result. But really there are still a lot of businesses doing it really tough, especially in retailing. You know, I've done some work with retail in Z the Association. You know, they talk about a lot of businesses still really really struggling. And of course there's businesses that are dealing with a whole bunch of structural change as well. So you know, retailers are competing with online stuff out
of China, Temu and all the rest of it. People, even though they're going to have a bit more money in their pocket, may be a bit shell shocked from the whole experience of the last two years or so, so they may be inclined to save a bit put a bit aside, which is a good thing, but doesn't translate to immediate stimulus. So I guess it's just not quite clear yet how quickly this will turn around. There's a lot of external factors too, so New Zealand is
very reliant on the strength of the global economy. American economy is going quite well, Chinese economy not so well, but it's had some stimulus, so we have to wait and see really how strong demand out of China will be and what that does to our export prices, that kind of thing.
Thanks for joining us, Liam, that said for this episode of The Front Page. 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 sound engineer Patti Fox. I'm Chelsea Daniels. Subscribe to The Front Page on iHeartRadio or wherever you get your podcasts, and tune in on Monday for another look behind the headlines.