Interest rate cuts might be nearer than thought

Despite the heavy hand of the RBNZ continuing to hurt households and businesses, New Zealand’s smallest main bank is confident interest rates will move downward as soon as November.

Kiwibank chief economist Jarrod Kerr says picking the exact timing of those cuts is a little more difficult and hinges on inflation playing ball.

“But by our forecasts, inflation is still set to fall back within the RBNZ 1-3% target band by the September quarter. We’ll see that data in mid-October, and hopefully receive confirmation of inflation back within the RBNZ’s band then. And from there rate cuts could come as early as November.”

After last week’s GDP figures showing the economy grew by 0.2% in the March quarter, while compared to a year ago per capita GDP is down 2.4%, Kerr says restrictive monetary policy is clearly continuing  to work - squeezing out demand, effectively lowering inflation, but strangling growth at the same time.

“We may have popped out of a double dip recession, but we’re still struggling,” Kerr says.

The bank’s forward-looking indicators suggest the June quarter will be a soft one for economic activity. Beyond that, Kiwibank expects the economy will struggle to eke out further growth this year. “Policy settings are restrictive. High interest rates hurt,” Kerr says. 

Westpac senior economist Michael says there are no implications for monetary policy from last week’s GDP figures.

“Interest rates are doing their work in gradually applying the brakes to the economy, and will continue to do so for a while longer.

There was one detail of interest – consumer imports of low-value goods have skyrocketed, up 50% in the past year and up 20% in the March quarter alone.

Gordon says this probably reflects the impact of new entrants to the New Zealand market and provides a counter to the weakness seen in retail stores.

Between the comfort with online shopping due to the pandemic lockdown, the return of freight and supply chains to normal and the squeeze on household budgets that is making people more price sensitive and encouraging them to hunt down bargains.

Overseas online giants, such as Temu, Amazon and AliExpress are strong performers amid the retail gloom.

It is of no benefit to New Zealand businesses and is a negative for the broader retail sector, as more consumer spend gets siphoned offshore. Each transaction through the big three online retailers is money lost to the economy.

“However, it highlights one aspect of the national accounts: for all of the belt-tightening that has happened so far, we’re still not spending within our means,” Gordon says.

He says the current account figures show the country is still running a deficit of 6.8% of GDP, a level typically more associated with an overheating economy, not one in recession.”

“There are several reasons why this deficit has blown out – tourism earnings haven’t fully recovered from the Covid shock, outbound travel is still in a catch-up phase after the border closure, and global inflation has ramped up the cost of our imports.

“These just reinforce the point: as a nation, we’ve taken a big hit to our international purchasing power, but we haven’t adjusted our spending habits to reflect this.”

He says the other shoe that needs to drop for the RBNZ to lower interest rates is convincing evidence that inflation is on track to come back down to target and to stay there.

CPI data and business pricing indicators remain the key things to watch.

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