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THREE KEY FACTS
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.
OPINION
The chorus of cheers for today’s big Official Cash Rate (OCR) cut is
understandable. For many indebted businesses and struggling homeowners, the 50-basis-point cut will translate to much-needed cash.
It’s likely to deliver a more significant boost than the recent tax cuts. A 0.5% saving on a $500,000 mortgage is $2500 a year. That’s close to $50 a week – and many new homeowners will have bigger mortgages than that these days.
Not everyone will be refixing immediately, but they’ll be mentally booking the gains and – with good cause – expecting there are more cuts to come.
Most economists still expect to see another 50-basis-point (bps) cut in November.
Some, like Singapore-based Capital Economics, see another 50bps cut coming in February and the OCR eventually going as low as 2.25% by the end of 2025.
That’s great news for borrowers. But we should be wary of cheering the cash rate all the way down.
We should certainly celebrate the end of the inflation battle.
The Reserve Bank was confident enough to pre-empt next week’s Consumer Price Index data and declare that inflation is now within the mandated 1-3% target band.
But at some point, we need to pinch ourselves and remember that central banks don’t deliver outsized cuts to interest rates unless the economy is in very bad shape.
The Reserve Bank is suddenly moving fast to slash rates – having previously (in May) forecast that it would hold them high until next August. It’s doing that because (in its own words): “business investment and consumer spending have been weak, and employment conditions continue to soften”.
“Low productivity growth is also constraining activity,” it added for good measure.
The stimulus of lower rates will lift consumer confidence and will give retailers a much-needed boost. It might give the property market a lift.
But these are lighter, frothy bits of the economy that risk distracting from deeper problems.
We need to create jobs and lift wages.
Unemployment will keep rising through the next year, we’ll see more business failures and more people falling behind on debt repayments.
Kiwis will continue to depart these shores in high numbers and fewer immigrants will arrive.
These are the so-called “lagging indicators”, the fallout that economists expect to keep coming even as the grip of recession eases.
More serious work is needed to turn this economy around and, as much as we can cheer today’s call as a turning point, there is still a long way to go.
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