Inside Economics: One cut or two… will the RBNZ reach for the big bazooka?

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Will Reserve Bank Governor Adrian Orr cut again at his next opportunity? Photo / Mark Mitchell

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OPINION
There’s a lot of appetite for the Reserve Bank (RBNZ) to go with a 50-basis-point (bps) cut to the Official Cash Rate (OCR) when it delivers its Monetary Policy Review next week (October 9). I’m not sure it should.
The debate seems to be focused on just how bad the economy really is right now. It’s clearly not in great shape. But surely this is the big question for the RBNZ: is inflation safely back below 3%? It is currently 3.3%.
Don’t get me wrong. I’d really quite like to see a 50bps cut. I’m due to refix my mortgage later this month so – disclosure of interest – more aggressive cuts will put more money in my pocket.
But we don’t actually get to see what has happened to the inflation rate until October 16. Not helpful, I know. A few months ago, this timing mismatch was being talked about as one of the reasons we might not get the first rate cut until November.
Of course, the economy went further downhill and the RBNZ changed its outlook quite dramatically. The 25bps cut in August was warmly welcomed but a chorus of concern about the economy hasn’t abated, boosting expectations that it will go for a double – 50bps – cut next week. Markets, as always, are keenest.
It seems risky to me to pull the trigger on a 50bps cut before we’ve seen that latest inflation number. I know the impact of rate cuts takes time to unfold and the inflation data is backward-looking, but I’m always wary of that last sting in the tail.
That’s why I think a 25bps cut is more prudent. The RBNZ will get another shot in November and could deliver 50bps then to cheer everyone up as they head into the summer break.
As ANZ chief economist Sharon Zollner noted after Monday’s upbeat Business Outlook, the growing confidence of local businesses “highlights the risk that the economy’s response to lower interest rates could be more vigorous than is generally expected”.
Or as BNZ’s head of research Stephen Toplis put it: ”If you were looking for a reason why the RBNZ should cut rates 50 basis points at its October meeting, this wasn’t it.”
Yesterday’s more comprehensive NZIER Quarterly Survey of Business Opinion (QSBO) was a bit less upbeat. It still showed a big improvement in confidence but showed continued weakness in demand when it came to firms’ own activity.
NZIER’s QSBO is a quarterly survey so responses will stretch back into July (when we were all a lot gloomier) although conversely, it asks businesses about their outlook for the next quarter, as opposed to ANZ’s survey, which asks about the outlook one year ahead.
That explains why one is a lot cheerier than the other.
NZIER was gloomy enough to prompt Toplis and BNZ to call for a 50bps cut next week (although he describes it as a line-ball call).
The rest of the bank economists will be publishing their picks over the coming days. We’ll collect those up and run them as a proper OCR preview on Monday.
Meanwhile, the global economy is already looking a lot better and those fair winds might even start to rub off on us.
In some respects, the big stimulus package unleashed in China might be the best thing to happen to the New Zealand economy all year.
With all due respect to the Government’s solid efforts to tidy up fiscal policy and big talk about boosting foreign investment, the results so far have been limited.
The 25bps rate cut in August is significant but just a start. Cuts at some point were widely anticipated and are only reversing us out of the post-pandemic inflationary mess.
But China’s economic doldrums have been very real, dampening export demand and curtailing hopes for a tourism comeback this year.
The People’s Bank of China (PBoC) has reduced its main policy interest rate from 1.7% to 1.5%. It has also reduced the amount of reserve capital it requires banks to hold.
The cut will add one trillion Yuan (¥1t or $225b) in liquidity to the banking system.
The PBoC also lowered mortgage down payments for second homes from 25% to 15%. It also eased restrictions on borrowing to invest in stocks and shares on Chinese exchanges.
Markets rallied. China’s blue-chip CSI 300 index soared 8.5% on Monday, for its best day since 2008.
Suddenly the global powerhouses of the US and China have delivered a double whammy of good news in the past few weeks which has buoyed markets and lifted hopes for global economic growth.
The US economy recorded a strong GDP result of 3%, year on year, for the second quarter.
The US Federal Reserve’s 50bps rate cut has garnered most of the attention. Since the big Fed call on September 18, Wall Street has been on a roll. The benchmark S&P 500 index has hit a series of record highs in the past two weeks.
That’s good news for our KiwiSaver accounts but the US economy has less direct impact on New Zealand these days.
China’s stimulus, on the other hand, could directly boost GDP here if it succeeds in boosting consumer spending and getting GDP growth to the official target of 5% this year.
At this point, keen readers may recall that last week’s column quoted an economist predicting little appetite in Beijing for large-scale economic stimulus.
It seems that narrative – that Chinese officials wanted to let property market supply issues unwind organically – had really taken hold with commentators. Beijing’s move came as something of a surprise and even after the initial announcement, there were suggestions that this wasn’t really the full-scale stimulus it might have been.
ANZ economists (out of Australia) described it as “far from being a bazooka”. Others weren’t so sure: “Did China just launch a bazooka?” asked Yahoo Finance.
For some reason, the World War II-era rocket launcher has become the primary unit of measurement for Chinese stimulus.
A quick Google search reveals an even split with the Economist, South China Post, Bloomberg and Wall Street Journal all coming down pro-bazooka.
It’s weird how memes take hold … even in economic coverage.
Military enthusiasts will note that the bazooka was famously a single-barrelled weapon but China has unleashed both stimulus barrels with fiscal and monetary policy support for the economy.
Fiscal measures, as reported by Reuters, are tipped to include an issue of special sovereign bonds worth about ¥2t ($450b).
Some of those funds will be used to increase subsidies for the renewal of consumer goods and to fund large-scale business equipment. Some of the funds will be used to provide a monthly allowance of about ¥800 ($180) per child to all households with two or more children, excluding the first child.
That’s got to be good for dairy consumption.
Last week I previewed the release of Stats NZ’s latest “wellbeing” data. I’ve got to say that I thought, given the gloomy pall that inflation and recession had cast over the country in the past couple of years, the numbers that landed all held up quite well.
We went backwards but not by much.
People aged 15 and over reported an average overall life satisfaction score of 7.6 out of 10 (where 0 is low and 10 is high), which is similar to the mean rating of 7.7 out of 10 in 2021.
But other commentators took a more downbeat view. Columnist Matthew Hooton made the point that, given we were locked down and in the grip of pandemic restrictions, we ought to have been a bit happier by 2023.
I’m not so sure. People don’t just bounce back from miserable events. It takes years to get over them. For example, it’s a common myth that the world sprung to life after World War II and we entered a golden era of economic growth and social stability. The post-war boom didn’t actually kick off until around 1952. New Zealand experienced a recession in 1946 and 1947. The second half of the 1940s was tough going, so much so that the era barely figures in our collective cultural memories.
Columnist Richard Prebble focused on the finding that diminished trust in social institutions – courts, police, Parliament, media and the health and education systems – has never been lower.
People rated institutional trust on a 0 to 10 scale. Most reported having higher trust in police compared with other institutions, with a mean rating of 7.4 out of 10 in 2023, down from 7.7 in 2021. People had the least trust in the media, at 4.3, down from 4.7 in 2021. Trust in Parliament decreased the most in 2023 compared with other institutions, down to 4.9 from 5.7 in 2021.
The annual number of homes consented in New Zealand has fallen by 20%. There were 33,632 new homes consented in New Zealand in the year ended August 2024, according to figures released by Stats NZ.
In the year ended August 2024, there were 15,597 standalone houses consented, down 9.7% compared with the year ended August 2023. There were 18,035 multi-unit homes consented, down 27% over the same period.
“The number of multi-unit homes consented in the year ended August 2024 is the lowest in the last three years,” construction and property statistics manager Michael Heslop said.
There are expectations that lower interest rates and the Government’s new, more streamlined consenting rules will help turn this trend around. But as I’ve written over the past few weeks there may be a bigger issue – our falling immigration rate. If the current trend holds then we’ll see a “net-zero” migration rate next year, which means there will be little incentive for construction firms to come out of hibernation and start building again.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to [email protected] or leave a message in the comments section.
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