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Speaker 1: The information provided in this program is of a general

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Speaker 1: nature and is not intended to be personalized financial advice.

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Speaker 1: We encourage you to seek appropriate advice from a qualified

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Speaker 1: professional to suit your individual circumstances. Interest rates are continuing

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Speaker 1: to be cut. How quickly could it provide economic release?

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Speaker 2: What's clear to me though, is that the New Zealand

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Speaker 2: economy needs lower interest rates. GDP is reasonable and not

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Speaker 2: good on a capital basis. It's terrible, but it's a

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Speaker 2: soft ish landing, so usually they go down very fast.

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Speaker 2: I mean, it's interesting. Of all the meetings that the

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Speaker 2: Arbanza's had since nineteen ninety nine, about two thirds of

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Speaker 2: them they do nothing, so.

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Speaker 3: The rates unchanged.

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Speaker 2: Of the third where they move rates, about sixty percent

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Speaker 2: of the time they hike, and about forty percent of

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Speaker 2: the time they cut, but they hike by smaller amounts.

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Speaker 2: They hike in twenty fives because they're cautious, and when

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Speaker 2: they cut they cut a lot because they're worried.

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Speaker 1: No.

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Speaker 3: Good to see you as always, Thank you medicine. It's

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Speaker 3: nice to be back.

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Speaker 1: Thank you so much for doing this. Rates they're obviously

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Speaker 1: going to continue to be cut. The question is to

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Speaker 1: what degree I guess the answer, if you can explain

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Speaker 1: this part to us, is how weak the economy really is.

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Speaker 3: Yeah.

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Speaker 2: Well, the ibn Z will meet next week and the

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Speaker 2: consensus is that they'll cut again by fifty basis point.

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Speaker 2: They've already cut by seventy five points this year, so

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Speaker 2: that will give us one hundred and twenty five points

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Speaker 2: of easy So that's meaningful. That will put New Zealand's

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Speaker 2: cash road below Australia's for the first time in about

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Speaker 2: three or four years, where it was very briefly below,

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Speaker 2: but actually it's more like an eleven year low, so

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Speaker 2: this is an unusual part of the cycle. The consensus

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Speaker 2: for next week is fifty, but the market thinks as

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Speaker 2: a chance of seventy five, just a small amount of

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Speaker 2: pricing for that, and I think there's a reasonable case

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Speaker 2: for seventy five, which we can talk about if you're interested.

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Speaker 1: Well, we heard from the Treasury Chief Economic Advisor that

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Speaker 1: the recession we're in now is actually worse per capita

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Speaker 1: than the GFC, So the economy's looking pretty terrible. What

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Speaker 1: do you think the reserve band will be weighing up

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Speaker 1: in terms of stats and activity at the moment.

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Speaker 2: Yeah, I mean that's yesterday's speech by Dominic was interesting

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Speaker 2: and that it was considerably more downbeat than the fortnightly

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Speaker 2: Treasury updates that we've been getting, which have actually been

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Speaker 2: talking about a bottom being put in place and signs

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Speaker 2: of a pickup.

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Speaker 3: So that was a little bit of a surprise.

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Speaker 2: But what Dominic is correctly identified is that the tax

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Speaker 2: take is lightly down, particularly the GST number, the psize,

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Speaker 2: the performance of service indexes and the pmis and manufacturing

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Speaker 2: they're really weak. I mean, the PMI I think has

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Speaker 2: been negative for twenty months and the PSI for something

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Speaker 2: like eight months back to back, so we're clearly weak.

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Speaker 2: The rbn said, know this, and that's why they're cutting

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Speaker 2: interest rates. Now how far they go with this is

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Speaker 2: the question. The market is toying with the idea of

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Speaker 2: a seventy five basis point cut. There are good reasons

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Speaker 2: that the RBNZ could consider that, but I think what

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Speaker 2: the RBNZ will do is fifty because they're very keen

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Speaker 2: to portray an image of a central bank that is slowly, carefully,

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Speaker 2: very very pointedly adjusting a cash rate in response to

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Speaker 2: the economic signals that they're getting, and so the picture

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Speaker 2: they're Painting is one of the central bank that's gone

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Speaker 2: inflation under control without wrecking the economy. Unemployment is still

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Speaker 2: below five percent, the exchange rate is calm. GDP is

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Speaker 2: reasonable but not good on a capital basis. It's terrible,

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Speaker 2: but it's a soft ish landing, so they'll continue with that.

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Speaker 2: The idea of a seventy five a thing is harder

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Speaker 2: because it suggests perhaps that there's a little bit of panic,

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Speaker 2: and I think they're very keen to avoid that.

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Speaker 1: If they're being timid, then what does that suggest to

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Speaker 1: you about where this ends, about where the cycle finds

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Speaker 1: a floor. What is that rate to look like? I mean,

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Speaker 1: I've heard from Christian Hawksby that it's around three percent.

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Speaker 1: Would you say the stats kind of sueduesce that that's

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Speaker 1: about right.

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Speaker 3: Yeah.

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Speaker 2: It's the RBNS that has talked about the long term

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Speaker 2: neutral and the short term neutral interest rates, So I

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Speaker 2: think Christian was talking about short term neutral there. The

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Speaker 2: long term neutral is around two point seventy five, so

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Speaker 2: somewhere between two point seventy five and three and a

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Speaker 2: half is kind of neutral in the short term. Now,

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Speaker 2: whether we need to be below neutral at the moment

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Speaker 2: or act neutral is the discussion, you'll see some economic

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Speaker 2: competators suggesting already that the pickup is starting to come

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Speaker 2: through for next year. We've got a great dairy price,

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Speaker 2: We've got really good kiwi fruit earnings.

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Speaker 3: The meat industry is doing very well.

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Speaker 2: At the same time, the property sector is really soft

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Speaker 2: and business is soft because government is contracting. So you've

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Speaker 2: got some divergent forces. And this again is what will

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Speaker 2: be feeding into the RBNS. It's thinking. So when they

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Speaker 2: look at this, they won't be looking at one side

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Speaker 2: or the other. They've got to take the ad and

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Speaker 2: the aggregate says interest rates lower, probably towards three and

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Speaker 2: a half.

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Speaker 1: On the point of producers, though, if you ask them,

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Speaker 1: if you ask farmers and anyone in that secret they

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Speaker 1: would say, yeah, but ten bucks isn't the old ten bucks.

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Speaker 3: Their costs are still enormal. Absolutely, So it's even though.

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Speaker 1: Those figures look like that, it's not exactly the same

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Speaker 1: as previous cycles, is it.

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Speaker 3: I think that's exactly right, Madison. It's not the same.

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Speaker 2: So whatever ten bucks today is, it's probably more like

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Speaker 2: six bucks, you know, ten years ago because of cost adjustment.

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Speaker 2: But the reality is it's not seven bucks, which is

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Speaker 2: where we were worried it would be because of the

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Speaker 2: slowdown in the Chinese economy, and there's optimism that we

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Speaker 2: could hang around these levels. If China continues to stimulate,

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Speaker 2: that will be helpful, because it's unlikely China will stimulate

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Speaker 2: the way they've stimulated in the past. They're not going

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Speaker 2: to be building more airports, more bridges, more roads that

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Speaker 2: consume iron ore film or coal cocon coal. They'll be

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Speaker 2: putting stimulus, we hope, into the services side of the economy,

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Speaker 2: and that will mean consumption and that's good for New

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Speaker 2: Zealand well.

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Speaker 1: On stimulus here domestically, if we continue to get cuts,

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Speaker 1: whether it's fifty seventy five anywhere around that, when does

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Speaker 1: that actually flow through to the economy. When does that

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Speaker 1: actually transmit and provide economic relief.

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Speaker 2: I think it's already coming into the economy, but it's

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Speaker 2: hitting different parts of the economy at different at different pace.

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Speaker 2: So in one of the rbnsa's most recent releases, they

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Speaker 2: talked about the mortgage rate. The average mortgage rate, so

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Speaker 2: this is the rate that the average mortgageholder in New

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Speaker 2: Zealand feels is at four point six percent. It's just

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Speaker 2: peaking now, even though they've been cutting for some months,

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Speaker 2: and they've cut by seventy five points. The actual rate

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Speaker 2: that the housing sector is feeling has been going up,

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Speaker 2: and that's because of mortgage rollovers, so it takes time

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Speaker 2: for this to come through. Now, the rbn's EDS assessment

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Speaker 2: is at about I think half of all mortgages will

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Speaker 2: refix in the next six months and about seventy five

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Speaker 2: percent in the next nine months. So as they refix,

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Speaker 2: they should refix at lower rates, so that will start

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Speaker 2: over some of that stimulus.

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Speaker 1: But the lower rates they'll fix out won't be as

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Speaker 1: low as.

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Speaker 2: The official cash brod may go and aggregate because the

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Speaker 2: pool of mortgages will still grow and we've still got

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Speaker 2: new people buying houses. The numbers should come down, so

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Speaker 2: you will get some stimulus through that. But of course,

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Speaker 2: if the rbns that are aggressive, which I think is

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Speaker 2: a case from them being, they'll bring that number down

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Speaker 2: much more quickly.

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Speaker 1: If we sum that up, then that's just that whatever

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Speaker 1: a cut we get pre Christmas won't be felt and

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Speaker 1: full until what next Christmas.

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Speaker 3: Shot for the housing sector, it'll take a while.

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Speaker 1: What about other sectors, what about consumption and that sort

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Speaker 1: of thing. Is that more immediate.

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Speaker 3: Yeah, I think there are.

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Speaker 2: I mean, certainly for the currency, you would expect there'd

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Speaker 2: be some adjustment. I mean I mentioned that if we

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Speaker 2: do cut interest rates by fifty points, next week will

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Speaker 2: be below Australia. That's the first time in a long

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Speaker 2: while that's happened. You would expect us to weaken against

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Speaker 2: the US dollar as well, and especially if the Fed

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Speaker 2: start to slow their easings and perhaps hold under Donald Trump.

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Speaker 2: In that environment, our export earning should increase. You know,

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Speaker 2: we obviously don't know what's going to happen with the tariffs,

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Speaker 2: but there is some hope that we get some more

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Speaker 2: currency advantage, so different parts of the economy will will

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Speaker 2: react in a different way.

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Speaker 1: I wanted to talk to you about what Donald trump

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Speaker 1: result means for the US economy because this is the

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Speaker 1: first time I've seen you since since that happened. What

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Speaker 1: does it mean specifically for our economy if there are tariffs,

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Speaker 1: and what does it just mean for trade because we

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Speaker 1: play in that space. We're so reliant on exports and

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Speaker 1: imports in this country. Is the concern that this could

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Speaker 1: result in more fragmentation or is it ultimately positive to

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Speaker 1: have a strong US economy for the world.

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Speaker 2: I think there's no doubt that a strong US economy

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Speaker 2: is a positive. It's absolutely a positive because of the

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Speaker 2: level of consumption. But the reality is the US economy

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Speaker 2: is actually quite a closed economy. You know, it buys

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Speaker 2: themselves from itself. It's not as open as we are Australia,

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Speaker 2: or even as China in many ways because of China's

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Speaker 2: a large external trade balance. But it is a positive

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Speaker 2: for US. I mean, the challenge are all the same.

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Speaker 2: So I talk to a number of different central banks

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Speaker 2: and the challenge they all have is that they just

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Speaker 2: don't know. So trying to forecast anything beyond January twentieth,

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Speaker 2: next year, when Trump is inaugurated is really difficult because

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Speaker 2: you know, I think the issue with Trump is trying

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Speaker 2: to decipher what he's going to do versus what he says.

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Speaker 2: And one of the wisest things I think I've read

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Speaker 2: about Trump is to take him seriously, but don't take

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Speaker 2: him literally. And what he's serious about is tariff's. You know,

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Speaker 2: whether he's serious about sixty percent tariffs on China and

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Speaker 2: ten to twenty on the rest of the world, well,

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Speaker 2: we're not sure. Pretty serious about tariff so there's an

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Speaker 2: assumption that there will be tariffs imposed on China. Now

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Speaker 2: how that plays out depends on what China does. If

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Speaker 2: China responds in a way that allows the tariffs to

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Speaker 2: be relatively low, they agree to buy more US goods,

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Speaker 2: they import more things from the United States, and they

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Speaker 2: take more goods and the trade surplus diminishes. That's okay,

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Speaker 2: everything will go very calm. If the Chinese respond with

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Speaker 2: their own tariffs on the United States and there's a

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Speaker 2: standard off, then we've got an issue because both sides

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Speaker 2: have then got to replace that market. So what do

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Speaker 2: the Chinese do with all the surplus goods that they've

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Speaker 2: been selling to the US. If they start to dump

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Speaker 2: those everywhere else in the world, that will be deflationary.

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Speaker 2: And then you're going to get countries outside of the

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Speaker 2: US who will complain because it's hurting their domestic industries,

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Speaker 2: and then they will put in tariffs. So you could

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Speaker 2: see that spiraling quite quickly. So that's one risk that

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Speaker 2: they've got. So that's deflationary risk.

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Speaker 3: On the upside.

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Speaker 2: The inflationary risk is tariffs cost more, and if you

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Speaker 2: close economies, you remove comparative advantage, you remove competition, you

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Speaker 2: drive up prices, which is effectively what we saw during COVID.

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Speaker 2: The economy became closed and so the cost of everything

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Speaker 2: went up, especially labor.

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Speaker 1: What did Ray Dalio call them a corporate rid entering

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Speaker 1: into a hostile takeo it?

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Speaker 3: So I take him seriously? Bottom line?

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Speaker 2: Yeah, I think we should take him seriously. And I

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Speaker 2: don't think everything I've read says that he didn't expect

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Speaker 2: to win last time, or he expects and what he

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Speaker 2: expect deed to win this time.

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Speaker 3: So he's going to be much better prepared.

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Speaker 1: You mentioned that central banks have no idea what to

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Speaker 1: make of all of this, because either way inflation, real,

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Speaker 1: deflationary the very very different impacts on the economy. How

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Speaker 1: do you think that that could impact their short term

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Speaker 1: decisions like the one from the Reserve Bank we're about

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Speaker 1: to get perhaps also with the RBA, you mentioned that

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Speaker 1: you think that the Reserve Bank of New Zealand is

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Speaker 1: going to be more cautious. Is that also playing on

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Speaker 1: their mind? Is that a reason why they're going to

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Speaker 1: be slower in their.

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Speaker 3: Approach to cut? No?

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Speaker 2: I think I mean the decision next week and the

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Speaker 2: immediate decisions for all central banks will not include anything

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Speaker 2: to do with the potential Trump tarriffs or Trump two

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Speaker 2: point zero or Trump forty seven, whatever you want to

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Speaker 2: call him, because they just don't know. The Central Bank

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Speaker 2: always will say when we see the policy and we

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Speaker 2: can analyze the policy, we can model the policy, then

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Speaker 2: we will incorporate it.

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Speaker 3: Right now, it's not something they can model, so they'll

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Speaker 3: simply ignore it. Now.

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Speaker 2: That doesn't mean they won't be talking about it around

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Speaker 2: the table. I'm sure Donald Trump's name is one of

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Speaker 2: the most frequently used in the discussion that they're having,

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Speaker 2: but it's not something they can put into the forecast yet.

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Speaker 1: So if you could forecast twenty twenty five at all

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Speaker 1: for US sean, obviously a lot of unknowns, but what

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Speaker 1: a rate's going to look like? What are the sort

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Speaker 1: of biggest watch outs for our economy and also for

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Speaker 1: the world right now?

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Speaker 2: Yeah, I mean, I don't know that I can forecast

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Speaker 2: much past about the middle of the year because we

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Speaker 2: just don't know what the United States is going to

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Speaker 2: do with tariff and how China is going to respond. So,

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Speaker 2: you know, I read lots of forecasts where people have

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Speaker 2: this dominant view about interest rates are going up, are

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Speaker 2: going down, and I say, what, maybe I'm just not sure.

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Speaker 1: You know.

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Speaker 2: What's clear to me though, is that the New Zealand

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Speaker 2: economy needs lower interest rates. So we're definitely going to

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Speaker 2: have a lower cash rate going forward. The question is

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Speaker 2: how quickly we get there. Now, for us next week,

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Speaker 2: it's probably fifty, it's probably a fifty point cut, but

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Speaker 2: there's real merit in my viewing going seventy five to

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Speaker 2: get ahead of this. You know, you mentioned Dominic stephens

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Speaker 2: speech yesterday. Dominic outline what we all know, which is

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Speaker 2: at the economy is very very weak.

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Speaker 3: That's the first thing.

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Speaker 2: The second thing is that this is and this is

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Speaker 2: perhaps the most important factor, is the calendar.

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Speaker 3: This is the last meeting of the year. There's eighty four.

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Speaker 2: Days until the next meeting in February. Now, any other

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Speaker 2: time of the year we'd have a meeting every six weeks,

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Speaker 2: so this is effectively two meetings. And if it was

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Speaker 2: any other time of the year, what we'd expect from

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Speaker 2: the Central Bank is that they would cut fifty at

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Speaker 2: one meeting and then probably fifty at the next one. Well,

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Speaker 2: they've got a two fo here, so expecting seventy five

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Speaker 2: is not unreasonable. In my view, But they have to

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Speaker 2: explain that, I think pretty clearly to people now. They

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Speaker 2: don't normally go seventy five. They've done it twice, so

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Speaker 2: you get that story in history. So since nineteen ninety nine,

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Speaker 2: when the OCI was first introduced, they've only ever moved

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Speaker 2: the cash rat by seventy five basis points twice was

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Speaker 2: that up or down bone moved it now and once

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Speaker 2: going into COVID, and then they moved it up once

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Speaker 2: by seventy five coming out of COVID as infleation started

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Speaker 2: to rise quite quickly. They've moved three times by more

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Speaker 2: than seventy five during the GFC when they cut aggressively,

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Speaker 2: once by one hundred and twice by one hundred and fifty.

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Speaker 2: So usually they go down very fast. I mean, it's interesting.

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Speaker 2: Of all the meetings that the ibnz it's had since

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Speaker 2: nineteen ninety nine, about two thirds of them they do nothing,

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Speaker 2: so the rate's unchanged. Of the third where they move raids,

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Speaker 2: about sixty percent of the time they hike, and about

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Speaker 2: forty percent of the time they cut, but they hike

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Speaker 2: by smaller amounts. They hike in twenty fives because they're

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Speaker 2: cautious and when they cut, they cut a lot because

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Speaker 2: they're worried. So it's always on the downside where you

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Speaker 2: get the bigger moves. And also, interestingly, if you take

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Speaker 2: the whole history of the ocr we started off at

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Speaker 2: four and a half percent, We're at four seventy five today.

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Speaker 2: We'll probably be at four and a quarter next week.

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Speaker 2: The long term average is four percent. They've hiked thirteen

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Speaker 2: percent cumulatively, and they've cut twelve point.

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Speaker 3: Seventy five percent. We're back when we started about where

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Speaker 3: we started.

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Speaker 1: None of us really matters, just back at the starting point.

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Speaker 2: If you left New Zealand's twenty five years ago and

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Speaker 2: came back today, you go, oh, this looks pretty familiar.

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Speaker 1: And we know that Adrian or is an opposed to

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Speaker 1: a shock factor pre Christmas.

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Speaker 3: I remember he did a.

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Speaker 1: Fifty hike a couple of years ago. Because there is

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Speaker 1: that wait to come, We'll stay tuned absolutely.

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Speaker 3: I mean it's always interesting.

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Speaker 1: Well, thank you so much for explaining it incredibly well

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Speaker 1: to us, not only this year, but in previous years

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Speaker 1: as well. You're actually the most frequent contributor to the show.

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Speaker 3: You've been on three.

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Speaker 1: Times this year, and you are always giving me ideas

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Speaker 1: behind the scenes as well, and I appreciate your knowledge always.

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Speaker 3: Thank you so much, thank you