Speaker 1: Gielda. I'm Chelsea Daniels and this is the Front Page,
Speaker 1: a daily podcast presented by the New Zealand Herald. This week,
Speaker 1: the Reserve Bank cut the official cash rate. Now it's
Speaker 1: down to five point two five percent. This is the
Speaker 1: first time it's been cut in four years, since March
Speaker 1: twenty twenty, when the country first went into lockdown to
Speaker 1: combat the COVID pandemic. Politicians have celebrated the news, and
Speaker 1: banks have started cutting interest rates already, but in amongst
Speaker 1: all that joy, there's also a grim warning for the
Speaker 1: state of the country's economy.
Speaker 2: Today.
Speaker 1: On the front Page, we're joined by ensat Herald Business
Speaker 1: Editor at large, Liam Dan to explain what this news means.
Speaker 3: For all of us.
Speaker 1: Liam, the reduction to five point two five percent unexpected
Speaker 1: move or long time in the making? Do you think?
Speaker 3: Well, it was certainly well discussed beforehand. In fact, markets
Speaker 3: had got to the point where they at one point
Speaker 3: had it priced in at one hundred percent. They were
Speaker 3: sure it was going to happen. Then the unemployment number
Speaker 3: wasn't quite so strong. So but even then by Friday
Speaker 3: before the decision, so last Friday we were looking at
Speaker 3: an eighty percent odds on a cut, So a bit
Speaker 3: difficult to call it a surprise on that basis, But
Speaker 3: I was still expecting them to hold, like a lot
Speaker 3: of economists, because it sort of looked like a fifty
Speaker 3: to fifty call. And I'm just a little bit more
Speaker 3: cautious about inflation. But then I don't have all the
Speaker 3: insight and data that the Reserve Bank has. You know,
Speaker 3: we have to wait for inflation numbers. They take a
Speaker 3: long time to come through, quite historic. But the Reserve
Speaker 3: Bank was looking at sort of measures like you know,
Speaker 3: inflation expectations and confidence surveys and all that sort of stuff,
Speaker 3: and it's all added up to a pretty grim outlook
Speaker 3: for the economy and they think bad enough to cut.
Speaker 1: So what's contributed to this cut coming out now after
Speaker 1: four years?
Speaker 3: Well, yeah, the short version is that the economy has
Speaker 3: really just slowed down enough to allow it. So we've
Speaker 3: had long recessionary period. We've been in and out of recession,
Speaker 3: and the Reserve Bank forecast suggests that we're probably in
Speaker 3: what would be the third recession that we've been through
Speaker 3: since the tail end of the COVID period. So even
Speaker 3: just you know, in the last couple of years. We've
Speaker 3: been in and out three times. To a lot of people,
Speaker 3: it probably feels like one long recessionary period. I mean,
Speaker 3: I don't know that the average person's picking up the
Speaker 3: macro thing that much. They just know that the economy
Speaker 3: has been slowing. It feels tough. Interest rates have been
Speaker 3: adding pressure. We've had the inflation as well, so people
Speaker 3: aren't spending. That's the main one. Really, people aren't spending,
Speaker 3: and also the government isn't spending. So the Reserve Bank
Speaker 3: did note that the fiscal impulse, the amount that the
Speaker 3: government spends is coming off, and that's also taking demand
Speaker 3: and out of the economy. With the caveat that, you know,
Speaker 3: there's a little bit going back for tax cuts, but
Speaker 3: it looks like it balances out and overall, you know,
Speaker 3: they're taking demand out of the economy in.
Speaker 1: The immediate What does this cut mean for the average keiw.
Speaker 3: Well, if you're about to fix your mortgage, it probably
Speaker 3: means you'll get a better rate. Banks have moved very
Speaker 3: quickly to you know, adddedly, they probably had their press release,
Speaker 3: two press releases pre written, and there's a lot of
Speaker 3: marketing advantage in being a first mover. But we'd see
Speaker 3: mortgage rates come off a bit already, just in anticipation.
Speaker 3: Because the markets had already priced in lower interest rates,
Speaker 3: they were able to start moving. And then we saw
Speaker 3: a few banks move immediately after the OCR call and
Speaker 3: cut another few basis points off those sort of one
Speaker 3: year and two year fixed rates. So that's good news
Speaker 3: for people. Other than that, I guess it does represent
Speaker 3: sort of the beginning of the end of this sort
Speaker 3: of tough cycle. I hope we're not through all the
Speaker 3: tough stuff yet, but it is okay to sort of go, well,
Speaker 3: you know, this is something symbolic here. This means that
Speaker 3: the Reserve Bank feeling a lot more confident about the
Speaker 3: way their economy is tracking. And so if it is
Speaker 3: really tough, at least you can see maybe some light
Speaker 3: at the end of the tunnel. I mean, we know
Speaker 3: that unemployment is going to keep rising from here, so
Speaker 3: it's a bit hard if everyone's celebrating lower interest rates
Speaker 3: and you get laid off today.
Speaker 4: Well, this is great news for many people in New Zealand.
Speaker 4: Homeowners with a mortgage can now look forward to lower
Speaker 4: interest rates, those with credit card debt or loans, and
Speaker 4: businesses who are thinking about should I expand should I
Speaker 4: hire more people? And the number one thing that businesses
Speaker 4: say to me at the moment is we've got to
Speaker 4: see interest rates coming down. So we're on track.
Speaker 1: So for me as a renter, is there going to
Speaker 1: be much change at all?
Speaker 3: Well, I don't know how much interest rates will flow through,
Speaker 3: but I mean landlords. The equations for landlords should start
Speaker 3: to look a lot better over the next few months
Speaker 3: because they'll be paying lower interest. Now I'm no expert
Speaker 3: in this. They do they ever put rents down?
Speaker 1: You know, it's not in my lifetime.
Speaker 3: No, I'll tell you what happens. This is the complex
Speaker 3: way that they measure it. But there's these measures called
Speaker 3: stock and flow. And so when STATSNZ measures rental prices,
Speaker 3: they measure the rental prices for all of the rental
Speaker 3: that everyone pays, and that's the stock measure, and that
Speaker 3: doesn't move around as much. But they also measure new tenancies.
Speaker 3: And so when we look at the new tenancies, which
Speaker 3: is the flow measure, we see that in the last
Speaker 3: month or two the price for new tenancies for rentals
Speaker 3: as going into new tenancies actually come down. It's a fraction,
Speaker 3: so it's probably not going to come down a lot,
Speaker 3: but it's more likely that we'll see rents track sideways
Speaker 3: and not go up so much. So if your landlord
Speaker 3: suddenly putting rent up, maybe you know, have a bit
Speaker 3: of a debate with them about that. I know there's
Speaker 3: also council rates and energy prices and all that sort
Speaker 3: of stuff, but.
Speaker 1: Hey, I'll be getting you involved.
Speaker 4: Yeah.
Speaker 3: Yeah.
Speaker 1: Prime Minister Christopher Luxen and Finance Minister Nikola Willison they've
Speaker 1: really taken credit for this news, citing the efforts of
Speaker 1: the government to ease spending. Do they deserve that credit?
Speaker 3: Do you think, Umm, well, look some credit. They've they've
Speaker 3: done the right things more or less. I mean, you
Speaker 3: could make the case of, you know, if they hadn't
Speaker 3: done the tax cut, all the tax cuts haven't flowed
Speaker 3: through yet, and we've got there without the tax cut.
Speaker 3: So let's put that to one side and just say, Yep,
Speaker 3: they've done the right thing. They've cut spending, they've helped
Speaker 3: reduce demand. I mean, they've helped the Reserve Bank. I
Speaker 3: think really this is a monetary policy story, and to
Speaker 3: a large extent, what we're seeing, give or take a
Speaker 3: month or two, either side probably would have happened regardless
Speaker 3: of who was in power, I mean not notwithstanding that
Speaker 3: some people think labor government would have kept going and
Speaker 3: spending like crazy. They said they weren't going to. They
Speaker 3: said they were also going to reduce the fiscal impulse.
Speaker 3: So whether or not you believe that, but if we
Speaker 3: take them at their word either way, the Reserve Bank
Speaker 3: was going to be putting up interest rates until they
Speaker 3: achieved this result. And they've achieved the results, I think
Speaker 3: good on the government. They've done the wrong things into
Speaker 3: this storm. I guess they've been on the same page
Speaker 3: as the Reserve Bank and that helps. But it is
Speaker 3: a monetary policy story and it is some sort of
Speaker 3: victory for the Reserve Bank.
Speaker 1: So while there's some good news here, there was also
Speaker 1: a warning in Adrianaw's address, wasn't there.
Speaker 3: Their forecasts show that we're in this third round of recession.
Speaker 3: So they see that the next set of GDP data
Speaker 3: we get will be negative, and that the quarter we're
Speaker 3: in now, which is in GDP data we don't get
Speaker 3: for a long time, will be negative, and they see
Speaker 3: that unemployment will keep rising. So you have to be
Speaker 3: a bit cautious with sounding celebratory about all that, you know,
Speaker 3: it's the beginning of the process of things actually starting
Speaker 3: to get better. But I think Adrian or used the
Speaker 3: phrase its darkest before the dawn. He thinks we're right
Speaker 3: at that point, right before dawn. Right now, here's the
Speaker 3: dawn breaking through. So it's still pretty dark out there,
Speaker 3: but at least we can see that the direction we
Speaker 3: are moving in is the right one.
Speaker 5: And talking to this out look, economic growth remains below trend,
Speaker 5: and inflation is declining across our economies. Yes, services inflation
Speaker 5: remains elevated, but this is also expected to de climb.
Speaker 2: Well.
Speaker 1: With that warning in mind, I understand that there's some
Speaker 1: concern about the bank making these cuts now, given they
Speaker 1: released hawkish statements earlier this year. What did they say
Speaker 1: back in May? That's sparking some backlash now.
Speaker 3: Yeah, a lot of debate and controversy within especially within
Speaker 3: sort of economic circles about this. So in May they
Speaker 3: took a hawkish turn. That means that they were considerably
Speaker 3: more worried about inflation, and they suggested that their forecast
Speaker 3: rate track suggested that we might not see a rate
Speaker 3: cut until August next year, and of course that didn't happen.
Speaker 3: So some economists brad Old some for examples, called it
Speaker 3: a U turn and a flip flop. Others have said, well, look,
Speaker 3: it might have been a misstep, but they've landed in
Speaker 3: the right place now, And Adrian or in the Reserve
Speaker 3: Bank have said, well, those were the facts at the time,
Speaker 3: as far as they can see. When the facts change,
Speaker 3: they change, and that's as far as I can see,
Speaker 3: the right approach. Whether they should be admitting that they
Speaker 3: made a mistake, they certainly aren't admitting that, but some
Speaker 3: people feel that they should admit that they made a
Speaker 3: mistake around those forecasts, and may I don't know. The
Speaker 3: thing to me is that it's all sort of off
Speaker 3: the ball play. It's not the actual results on the board.
Speaker 3: So to me, if you're saying it's a U turn,
Speaker 3: that's what happens when a reserve bank actually puts the
Speaker 3: rate up and then has to put it down again
Speaker 3: because they got it wrong, or they put the rate
Speaker 3: down as they have now, if they had to put
Speaker 3: it back up again because inflation bounced, that would be
Speaker 3: a U turn. This is all happening sort of off
Speaker 3: the ball. Those forecasts did seem really hawkish. I don't
Speaker 3: think anybody really quite took them seriously, and market certainly didn't,
Speaker 3: so mark have sort of stuck to their guns the
Speaker 3: whole way through and have thought that these rate cats
Speaker 3: would be coming around now because usually it's the case market.
Speaker 3: So just you know, the investors are far too enthusiastic
Speaker 3: and optimistic, but they've got it about right.
Speaker 1: The ocr is only one measure of how the economy
Speaker 1: is going. Hey, earlier this week there were also some
Speaker 1: new stats around migration. How many people have left New
Speaker 1: Zealand this time around.
Speaker 3: Yeah, well, I mean, on balance, we should remember that
Speaker 3: we've still got a net migration gain of seventy three thousand,
Speaker 3: so that would have been really high level a few
Speaker 3: years ago, but it is down from record levels like
Speaker 3: one hundred and thirty six thousand that we had in
Speaker 3: the October twenty twenty three year, so that's falling. The
Speaker 3: population gain we're getting is falling. We're still seeing a
Speaker 3: very high number of New Zealand citizens departing, not quite
Speaker 3: at record levels, but we saw fifty five thousand New
Speaker 3: Zealand citizens depart in the June year, so just down
Speaker 3: from in the year to May that was about sixty
Speaker 3: thousand so is certainly the case that a lot of
Speaker 3: Kiwis are leaving the country mostly or about half, probably
Speaker 3: over half are leaving for Australia. But we're still getting
Speaker 3: in a net gain. So generally a net gain and
Speaker 3: migration would add economic activity and potentially add to inflation
Speaker 3: all that sort of stuff. But those numbers are coming off,
Speaker 3: so I think the reserve banks anticipating that they'll keep
Speaker 3: coming off for a while. I hope we see that
Speaker 3: number of Kiwis departing continue to decline as well. But
Speaker 3: overall we're not going to get as many net migrants
Speaker 3: in to boost the economy. So that's another reason that
Speaker 3: they may be are fairly confident that they'll they'll get
Speaker 3: some more slowing in the economy.
Speaker 1: And you mentioned briefly unemployment, but how is it looking,
Speaker 1: particularly when it comes to youth.
Speaker 3: Yeah, I've done some work looking at youth add mule
Speaker 3: re unemployment. I mean, look, the unemployment rate has risen
Speaker 3: to four point six percent, and that doesn't sound that bad.
Speaker 3: It's still historically a lot lower than the average. You know,
Speaker 3: anything below five is considered pretty good.
Speaker 2: Now that four point six percent is actually slightly lower
Speaker 2: than forecast than many expected, but it is going to
Speaker 2: keep going up. It's going to go above five percent
Speaker 2: in the next few months, and that is thousands more
Speaker 2: people out of work and a number more business is closing.
Speaker 2: We're already seeing those liquidations piling up.
Speaker 3: The thing is when we look at the number of
Speaker 3: those freshly unemployed people, that's thirty three thousand more jobless
Speaker 3: people in the past year. In the fifteen to nineteen
Speaker 3: age group, the unemployment rate is now twenty percent, up
Speaker 3: from fifteen percent. That's pretty high, and if you look
Speaker 3: at MARI unemployment it's even worse. It's about thirty percent
Speaker 3: for the fifteen to nineteen year old age group. These
Speaker 3: are people who are not in other training as well.
Speaker 3: They have to tick the box to be qualified as unemployed.
Speaker 3: But overall, you can see that unemployment really hits certain groups,
Speaker 3: like we know MARI are overrepresented, and it hits young
Speaker 3: people hard. So I guess my concern is that we
Speaker 3: want to get through this quickly and we want to
Speaker 3: stop at peaking at a high level, because if it
Speaker 3: stays high for a long period of time, you sort
Speaker 3: of create a culture of unemployment, which I think we
Speaker 3: still suffer from in this country, and I think we
Speaker 3: suffer from it from the various points in time when
Speaker 3: we've pushed unemployment really high to beat inflation, going right
Speaker 3: back to say, the early eighties, and then again in
Speaker 3: the early nineties, and then with the GFC, we've seen
Speaker 3: high unemployment rates and much higher unemployment rates for Maori
Speaker 3: and for youth unemployment.
Speaker 1: And what about electronic transaction data that's out as well. Hey,
Speaker 1: what are the headline points there?
Speaker 3: Yeah, we got some fresh data today on electronic card transactions,
Speaker 3: which is just spending. It like, how much is getting
Speaker 3: spent with cash these days? Not much, so really that's down,
Speaker 3: So retail spending is down. That will reassure the Reserve
Speaker 3: Bank after making this move. We also saw some food
Speaker 3: price data and some sort of general pricing data around
Speaker 3: petrol and rents, and that was up slightly for the year,
Speaker 3: not much, but it was largely driven by a bit
Speaker 3: of a spike in the cost of eating out, which
Speaker 3: suggests that the hospitality people are passing those costs through.
Speaker 3: But reassuringly, you know, fruit, veggies, meat still coming down.
Speaker 3: Those prices are still falling, so that's positive sort of
Speaker 3: coming back to earth cause I guess you know, when
Speaker 3: it comes down to it, it is very tough in
Speaker 3: that hospitality sector because people have got a choice, They
Speaker 3: don't have a choice about eating, and so the basic
Speaker 3: items are coming back down. Inevitably, the ability of those
Speaker 3: fast food places restaurants to pass on costs will hit
Speaker 3: a wall, and I expect we'll see that fall too.
Speaker 1: So with all that in mind, are things looking good?
Speaker 1: You wrote in a piece about the OCA that people
Speaker 1: were celebrating like it was ve Day. Are those celebrations
Speaker 1: deserved or should we actually be heating or was warning?
Speaker 3: Yeah? I think the warning and the reality of the
Speaker 3: economy will sink back in. I mean, you know, we
Speaker 3: had the press conference from the Prime Minister and the
Speaker 3: Finance minister. We had the retail banks moving the mortgage
Speaker 3: rates and a lot of commentary that was very excited
Speaker 3: about that cut. And that's okay, I think, I mean,
Speaker 3: I think we should celebrate the fact that we've kind
Speaker 3: of got through this cycle. I mean, it's been a horrible,
Speaker 3: horrible time and it's taken a long time, and it's
Speaker 3: all all to do with it all goes right back
Speaker 3: to COVID, the pandemic. You know, what was done to
Speaker 3: try and stop the economy collapsing. Then we look with
Speaker 3: hindsight and say, look, maybe too much was done whatever,
Speaker 3: but its spiked inflation around the world. New Zealand doesn't
Speaker 3: have that much capacity for stimulus in its economy unfortunately,
Speaker 3: so we copped a bad lot of inflation. And the
Speaker 3: fact that it's all coming back to earth it's a
Speaker 3: victory for monetary policy generally, whether you think the Reserve
Speaker 3: Bank's got it exactly right or not, these tools we use,
Speaker 3: blunt as they are, have pulled inflation back into line.
Speaker 3: It's worked. I feel very happy about that. I know
Speaker 3: we've got a long way to go, and I think
Speaker 3: the reality of the economy will sink back in, but
Speaker 3: you know, there's still battles to be fought, and there
Speaker 3: always will be in economics. But really, unless there's a
Speaker 3: major reversal of the trend or oil prices spiked badly
Speaker 3: or something like that, it looks like it is kind
Speaker 3: of the wind that we were looking for in the
Speaker 3: war on inflation.
Speaker 1: Thanks for joining us, Liam. That's it for this episode
Speaker 1: of the Front Page. You can read more about today's
Speaker 1: stories and extensive news coverage at enziherld dot co dot NZ.
Speaker 1: The Front Page is produced by Ethan Sills and sound
Speaker 1: engineer Patti Fox. I'm Chelsea Daniels. Subscribe to the Front
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Speaker 1: tune in on Monday for another look behind the headlines.