Long term rates need to also come down

Long-term interest rates face relatively more pull from overseas rates, particularly US ones – and that pull has held those rates up to an extent, Nick Tuffley, ASB chief economist says.

The RBNZ noted that investment decisions are influenced by rates across the yield curve, not just short-term ones.

Project horizons and any preference for locking in funding costs mean long-term term rates, such as 5- or 10-year terms, can commonly get used for benchmarking when making decisions.

Tuffley, says with that in mind, the stickiness of longer-term rates could be curbing businesses from making decisions, as businesses may not yet view the interest rates relevant for their business as being low enough yet.

“All other things equal, the steepness of the yield curve adds to the case for further easing.”

He says to some extent, there is also a question mark over how low would-be residential borrowers see current interest rates, given the relatively subdued state of the market.

“Given the amount of spare capacity, it has become more critical to get growth to pick up and start absorbing those underutilised resources. And so far, the signs are that the economy is picking up – just not particularly fast.”

A further cut, of 0.25% is highly likely next month, the bank says. Beyond that, the need for further stimulus will be based off the signs of recovery that are evident early in the new year.

From now, a GDP read, two labour market surveys, a further QSBP survey will be out – along with two CPI reads.

That, and over four months, is time to get a better handle on how the recovery is faring.

Challenges persist

Meanwhile, one of the world’s biggest accounting bodies, CPA Australia, says while slashing the OCR to 2.5% is good, the economy still needs structural reforms to maximise the impact of interest rates to boost small business performance.

Regional head Rick Jones, the OCR reduction will ease immediate financial pressure on New Zealand’s small businesses ahead of the critical summer trading period.

“This decision aligns with what our members have been seeing on the ground. Many small-business clients needed immediate cost relief to stabilise cash flow and maintain confidence heading into the final quarter of the year, even as deeper productivity challenges persist.”