The turning tide

Many of the globe’s central banks believe the war on inflation is close to being won and Kiwibank chief economist Jarrod Kerr says dovish comments from US Federal Reserve chairman J. Powell and European Central Bank (ECB) president Christine Lagarde reflect the turning tides.

“It’s all about confidence and for New Zealand businesses and households that means interest rate relief is just around the corner.”

Since the RBNZ’s February Monetary Policy Statement (MPS), Kerr says there has been a swift reversal in market pricing.

Rate hikes have been stripped and bets for cuts – as early as August and by as much as 50bps by November – have grown.

“We have pencilled in a later start of November for cuts, but a lower terminal cash rate (back to neutral),” he says.

“We’ve said it before, and we’ll say it again. 2024 is the year of central bank rate cuts. The ECB and US Fed are nearly there … just not quite yet.”

At its policy meeting last week, the ECB left its cash rate unchanged at 4%.

ECB staff are growing in confidence that inflation has cooled enough. Although there are still plenty of data points it would like to be checked off.

ECB president Christine Lagarde hinted at the potential timing of rate cuts – saying it will know a little more in April and a lot more in June.  This was taken by market traders as enough to run with the idea of rate cuts in June.

The US Fed chairman Powell’s address to Congress on Friday also caused a big move in markets.

Without giving any indication on the exact timing of rate cuts, Powell did indicate they were not far because Fed officials are confident inflation is sustainably moving towards 2%.

The latest jobs report should offer comfort to the Fed that the labour market is cooling as desired. The US economy added more jobs than expected in February, but the unemployment rate surprisingly rose for the first time in four months. February added 275,000, topping forecasts of 200,000, with job growth concentrated within the services sector.

February’s gain however, was overshadowed by significant downward revisions to the January and December totals.

Revisions showed there were 167,000 fewer jobs added in the past two months than initially reported. January’s blockbuster gain was revised down from 353,000 to 229,000.

The higher unemployment rate and slower wage growth however is Fed-friendly and should keep it on track to cut rates later this year.

Housing market

The NZ coalition government has outlined its hotly anticipated plan for reinstating interest deductibility.

Investors can only deduct interest as an expense if their property is a new build. But from April 1, 80% of interest expense can be claimed, and then 100% may be claimed from April 1, next year.

Kerr says the change will encourage investors back into the market and is a key tailwind for house prices this year – one long-flagged.

However, in the existing climate, he says the housing market is unlikely to take off. “For now, elevated interest rates and an expected deterioration of the labour market will continue to temper property demand to some extent.” Once OCR and interest rate cuts come through, it’ll be a new chapter for the housing, Kerr says.