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Speaker 4: for our next hour. This is a Weekend Collective and
Speaker 4: now it's time for smart money and of course what
Speaker 4: we're going to discuss this before introduce our guest is well,
Speaker 4: the Reserve Bank cut the oc arbor another fifty basis
Speaker 4: points and the week that's just gone, homeowners and buyers
Speaker 4: like being eagerly watching for the announcement to a lot
Speaker 4: of predictions. Most people actually guessed it was going to
Speaker 4: be fifty points. I guess twenty five, just to be contrary,
Speaker 4: because I thought that the inflationary pressures that were happening
Speaker 4: as the result of the Trump presidency might actually temper predictions.
Speaker 4: Although the Reserve Bank Governor Adrian Or has sort of
Speaker 4: tried to quell expectations of any major cuts following this anyway,
Speaker 4: So what's behind it? But we want your calls as
Speaker 4: well on O E one hundred and eighty ten to eighty.
Speaker 4: And the simple question is, when it comes to the
Speaker 4: ocr what does it actually mean for you? Is it
Speaker 4: something you've been waiting for? And if it does, if
Speaker 4: it is significant, what action do you end up taking
Speaker 4: on the back of that prediction, on that sorry, the
Speaker 4: back of that cut in addition to that, do you
Speaker 4: reckon that's it? Or do you actually think, well, I'm
Speaker 4: asking for your predictions basically, do you think it'll go
Speaker 4: much further? And I don't think it will go down
Speaker 4: much further at all, because they'll probably be worried about
Speaker 4: Actually I don't know. But that's the whole point of
Speaker 4: this hour. We have a chat about the Reserve Bank
Speaker 4: rate cut and implications for it. And joining me he
Speaker 4: is director and fixed income and currency strategist at Harbor
Speaker 4: Asset Management, is Hamish Pepper. Good afternoon, Hi, Tim, How
Speaker 4: are you not too bad? That is quite now? Just
Speaker 4: explain again because I know I've asked this before, because
Speaker 4: you've got a lengthy business card discriver occupation director. That
Speaker 4: means you're a director at Harbor Asset Management, fixed income
Speaker 4: and currency strategist.
Speaker 5: That's right. Yeah, yeah, our interest rates going up or down?
Speaker 5: Is the currency going to strengthen all weekend? That's the
Speaker 5: kind of stuff I'm into.
Speaker 4: And did you bet correctly that fifty basis points cut
Speaker 4: from the Reserve Bank was what was going to happen?
Speaker 4: Or were you more conservative or optimistic?
Speaker 1: Yeah?
Speaker 5: No, we were with the large group that thought fifty
Speaker 5: basis points was the most likely thing. I mean, Adrian
Speaker 5: did Adria and all this is the Reserve Bank of
Speaker 5: New Zealand governor did an unusual thing in November when
Speaker 5: we last heard from them prior to this meeting, and
Speaker 5: said in the press conference, look, my base case is
Speaker 5: another fifty in February. So unless there's anything, you know,
Speaker 5: really meaningful, that's what we're doing. And so with that,
Speaker 5: the market, as well as most economists just sort of
Speaker 5: move to that view.
Speaker 4: He actually had a comment didn't ever crack at the banks,
Speaker 4: saying I expect you to this to be reflected. But
Speaker 4: I wondered if that was a bit unreasonable given that
Speaker 4: he had signaled the cut the banks had sort of
Speaker 4: predicted the cut, and so some of them sort of
Speaker 4: had based maybe some of their interest rates on this
Speaker 4: anticipated announcement, wouldn't they.
Speaker 5: Yeah, that's dead right. I think the market has for
Speaker 5: some time now pretty well anticipated this, this easing cycle,
Speaker 5: this succession of interest rate cuts, and of course that's
Speaker 5: why perhaps you haven't seen mortgage rates move as frequently
Speaker 5: lower or by as much, because of exactly your point
Speaker 5: to the market had anticipated this a fair few months ago,
Speaker 5: and that was when we really started to see, you know,
Speaker 5: some of the larger reductions and mortgage rates was pre Christmas.
Speaker 4: I actually noticed I bank with the A and Z.
Speaker 4: But I noticed when I went to because you can
Speaker 4: on interest stock cut at in Z has a summary
Speaker 4: of all the different interest mortgage rates, and I did
Speaker 4: notice the rate that stuck out to me was that
Speaker 4: A and Z was offering four point nine to nine
Speaker 4: percent for two years, which which does signal, doesn't it
Speaker 4: that they think that there might be a little bit
Speaker 4: more cutting going on and they've priced that into their
Speaker 4: two year rate. What do you think?
Speaker 5: Yeah, I think that's reflective also of what the sort
Speaker 5: of financial markets have in terms of their anticipation, which
Speaker 5: is roughly three more twenty five basis point rate cuts
Speaker 5: this year, So I think I think then that two
Speaker 5: year rate is broadly reflective of that.
Speaker 4: Soy, did you say you're anticipating three twenty five point
Speaker 4: cuts this year? Three more so point seventy five.
Speaker 5: Yeah, that's that's the market. It's it's a touch less
Speaker 5: than that. But you know, if we deal with round numbers,
Speaker 5: that's that's what they're saying. They're pretty convinced about. And
Speaker 5: again with the help of Adrian at this most recent
Speaker 5: press conference, they're pretty pretty convinced about April and May,
Speaker 5: so a twenty five at each of those and then
Speaker 5: the third one probably in August, the muneted policy statement.
Speaker 5: We get then, but then that is it in terms
Speaker 5: of from the financial markets point of view, that that's
Speaker 5: the end of the using cycle, which then means by
Speaker 5: the time we get to that point, you know, that's
Speaker 5: the bottom and interest rates when it comes to things
Speaker 5: like turn deposits and mortgages.
Speaker 4: I know we've talked about this, but I do want
Speaker 4: to back the back the truck up a little bit
Speaker 4: on what we expect. So you've talked about the markets
Speaker 4: and the anticipations, but three more twenty five point cuts,
Speaker 4: but it was only it was less than a year
Speaker 4: ago that Adrian or also said that we're not they
Speaker 4: weren't going to be cutting points until sometime this year,
Speaker 4: and before then we what have we seen pruned off
Speaker 4: since he spoke about it more than one and a
Speaker 4: half percent or something, or.
Speaker 5: In terms of the easing.
Speaker 4: Cycle, he said, we're not going to be easing things
Speaker 4: until next year, and then all of a sudden he
Speaker 4: was cut, cut, cut.
Speaker 5: And then we've had one hundred and seventy five basis points. Yeah,
Speaker 5: seven five percentage points. Yeah, I mean, I think if
Speaker 5: I mean probably you know, with the benefit of hindsight,
Speaker 5: and you know there'll be differing views among the economist
Speaker 5: community in the media. But that may monetary policy statement
Speaker 5: in the middle of last year, where they were contemplating
Speaker 5: perhaps the need to lift interest rates even higher, just
Speaker 5: does now when we look back on it, look really
Speaker 5: quite strange, because what we know now is that was
Speaker 5: actually a point where the economy had taken a really
Speaker 5: really sort of bad turn. We stepped into that quarter
Speaker 5: Q two of last year, we dropped i think a
Speaker 5: full percentage point in terms of output. Then we followed
Speaker 5: that by another one, which was actually a little more
Speaker 5: so that that middle part of last year was a real, real,
Speaker 5: sort of hurtful moment for many businesses. And to think
Speaker 5: that the Central Bank at that point was contemplating even
Speaker 5: more restrictive interest rates, yeah, it looks it does look
Speaker 5: strange now.
Speaker 4: No, there was a reason to asking that was because
Speaker 4: we have the point is a year ago, the predictions
Speaker 4: were totally wrong, right, okay, And I think actually, to
Speaker 4: be honest, a lot of people in the financial markets
Speaker 4: were like, he's going to be cutting before the end.
Speaker 4: They saw that he was probably wrong he was saying.
Speaker 4: But the reason I asked that was because now people
Speaker 4: will if we're talking about this general certainty that they're
Speaker 4: going to be three more cuts of twenty five percent.
Speaker 4: Obviously you're not giving financial advice, But the vibe I
Speaker 4: get is these predictions are safer to rely on than
Speaker 4: ones we might have seen a year ago.
Speaker 5: I mean, I think what's going on is you probably
Speaker 5: have a more normal set of circumstances for the Reserve
Speaker 5: Bank of New Zealand to be dealing with, for forecasters
Speaker 5: to be dealing with. And don't get me wrong, you
Speaker 5: know there's still going to be eras and people are
Speaker 5: still going to get it wrong, but the margin of
Speaker 5: those errors when you're in a more normal environment. And
Speaker 5: what I mean by that is, you know, we're not
Speaker 5: dealing with a big COVID supply shock for example. No,
Speaker 5: that's doing stuff the global supply chains. Right, this is
Speaker 5: just really an economy here in New Zealand that is
Speaker 5: now feeling the effects very much of those higher interest rates.
Speaker 5: And it's then now a matter of okay, how quickly
Speaker 5: can the Central Bank normalize those and perhaps maybe even
Speaker 5: needs to put them at a level which is helpful,
Speaker 5: you know, provides some stimulus to the economy. And I
Speaker 5: think that's where the debate is. Are less about, you know,
Speaker 5: the seventy five basis points, the three twenty five basis
Speaker 5: point cuts, but perhaps more more about is that going
Speaker 5: to be enough given? And there'll be many people listening
Speaker 5: who will be saying wow, you know, like I know
Speaker 5: people or I've experienced myself, you know, ongoing job losses
Speaker 5: or business closures. So you know, it does beg that
Speaker 5: question whether interest rates will get low enough to actually
Speaker 5: provide that help.
Speaker 4: Okay, just one other, because we've got a lot to
Speaker 4: talk about on this What about for people who follow
Speaker 4: international news and we have a we have a change
Speaker 4: of government in the States obviously, and Trump Trump is unpredictable.
Speaker 4: I don't think anyone who can argue with that. We've
Speaker 4: got this uncertainty around what's going to happen with the
Speaker 4: peace process in Ukraine. We've got Chinese frigates, you know,
Speaker 4: behaving in this mischievous way off the coast of Australia.
Speaker 4: How much. What are the sorts of things that would
Speaker 4: throw a spanner in the works. Maybe the most obvious
Speaker 4: thing is the question of tariffs and trade. When it
Speaker 4: comes to interest rates here, cashwits.
Speaker 5: Yeah, I mean that's I think where while we might
Speaker 5: characterize our situation here as being you know, more normal,
Speaker 5: in one that we have perhaps more confidence in predicting,
Speaker 5: we're dealing with this really uncertain global picture for all
Speaker 5: those reasons you mentioned. If we think about just tariffs,
Speaker 5: the main impact for US will be through the way
Speaker 5: that could lower global growth, you know, lower the prospects
Speaker 5: of our trading partners, particularly if it's something where you'll
Speaker 5: see retaliation to the US tariff, so perhaps from China,
Speaker 5: you know, from Europe. All that will do, from our
Speaker 5: point of view, is lower that global growth picture and
Speaker 5: make things a tougher environment for our exporters to go
Speaker 5: and sell their products into. So I think that's the headline,
Speaker 5: which is it's not a particularly positive development on that
Speaker 5: front for US, but I guess.
Speaker 4: But as a currency strategist, I can ask you this
Speaker 4: as well, how does it? What are the events you
Speaker 4: would be looking for when you as informing your view
Speaker 4: on currencies.
Speaker 5: Yeah, I think that one is one where so in
Speaker 5: a more orderly version of events there which is where
Speaker 5: we have largely this bang about the US wanting to
Speaker 5: impose tariffs and maybe others less so, but that is
Speaker 5: then introducing inflation into their economy and lowering their growth
Speaker 5: because you know the cost of those imported goods is
Speaker 5: going up. You know, that's something which you would say, well,
Speaker 5: we're going to look better. You know, our economy is
Speaker 5: going to look a bit better than one like the
Speaker 5: US where they're doing that, and that would normally be
Speaker 5: something I mean, you could say, well, our currency should
Speaker 5: perhaps appreciate slightly even to the US dollar. Now there's
Speaker 5: a butt coming. You're probably sensing that the butt is
Speaker 5: if it develops into all our trade war, you know,
Speaker 5: a global trade war that is not an environment that
Speaker 5: our currency does well. Then you know, we we need
Speaker 5: the world to be feeling good. We need global investors
Speaker 5: to to feel good about funding us. You know, we
Speaker 5: need the rest of the world's the world's money, and
Speaker 5: if they start to feel uncertain, then that's usually an
Speaker 5: environment we're the key we weaken. So that's that's the
Speaker 5: kind of caveat to that.
Speaker 4: Okay, I got one last question. Then we're going to
Speaker 4: move on, and because we do have a lot to cover.
Speaker 4: But when it comes to the cash rate, what is
Speaker 4: the This is a really this will sound like a
Speaker 4: sort of dumb over a simplified question, but I'm going
Speaker 4: to do it anyway. What generally, so if the cash
Speaker 4: rate now is three point seventy five, what sort of
Speaker 4: what's the difference between a cash rate and what we
Speaker 4: can expect the banks to be offering sort of between
Speaker 4: six months and two or three years. What's their type
Speaker 4: of how do they how many points do we usually
Speaker 4: see as a markup? If I can put it crudely, Yeah,
Speaker 4: it's a good question.
Speaker 5: So what you would want is you say, you say
Speaker 5: someone's thinking about a six month term deposit rate, you know,
Speaker 5: what should I expect you know, that to be for
Speaker 5: a given cash rate setting. The big thing is about,
Speaker 5: obviously what we've just been saying, right, what is the
Speaker 5: expectation for the cash rate moves over that period of time.
Speaker 5: And so at the moment you've got this situation where
Speaker 5: embedded in a six month rate is these three or
Speaker 5: are these three twenty five basis point rate cuts? So
Speaker 5: it's it's not an easy thing to sort of get
Speaker 5: get a measure of. But you know, I think if
Speaker 5: we're talking rough numbers, somewhere in the region of you know,
Speaker 5: one hundred basis points or for deposits a percentage point
Speaker 5: to Yeah, that's right to wear term deposit rates are.
Speaker 4: I don't think that's what about for mortgages?
Speaker 5: Mortgages it's usually a bit more. Yeah, So you're kind
Speaker 5: of with your reference to the four ninety nine. But
Speaker 5: if I look at, say, like that's a two year
Speaker 5: rate for an Z that the one that you mentioned,
Speaker 5: and so if I look at where wholesale rates are
Speaker 5: in the market right now, they're about three sixty. Yeah,
Speaker 5: So you know, you call that one hundred and forty
Speaker 5: basis points one point four percentage points above.
Speaker 4: So if the cash rate with three percent, would would
Speaker 4: people be expecting that they might be able to see
Speaker 4: even better interest rates like four point twenty five four
Speaker 4: point five percent sort of thing.
Speaker 5: I think it depends. I think it depends on It's
Speaker 5: that forward pricing, right, So the market I think has
Speaker 5: got itself to a point of pricing the using cycle
Speaker 5: well in terms of what the vindt is communicated, I
Speaker 5: think you know, what we're seeing from the mortgage rates
Speaker 5: side is broadly reflective of that. Where I think there
Speaker 5: is more room and many many commentators have talked about
Speaker 5: this is that term deposit rate have really lagged in
Speaker 5: terms of the pace with which they've fallen through this
Speaker 5: easing cycle FES.
Speaker 4: So probably why Adrian told every went off.
Speaker 5: Yeah, I mean it's an interesting thing because you know,
Speaker 5: this is banks actually being kind. This is this is
Speaker 5: then giving you a return on your savings which is
Speaker 5: slightly out of line with these other rates we've been
Speaker 5: talking about in terms of wholesale rates and what mortgage
Speaker 5: rates have done. So this I think more is banks
Speaker 5: wanting to make sure they keep these deposits and keep
Speaker 5: these depositors. You know, the people that sit behind them
Speaker 5: because you know, that's a very very important source of
Speaker 5: funding four banks.
Speaker 4: Yeah, I keep forgetting I for kept forgetting that. On
Speaker 4: the other side of the scale, there are the savers
Speaker 4: who who we all remember when interest rates were through
Speaker 4: the floor, people were like, I'm not getting anything from
Speaker 4: the money. Basically you're lucky for you get points seventy
Speaker 4: five percent. So I forget that. There's that side of it,
Speaker 4: isn't it. And so that's the banks encouraging them to
Speaker 4: keep their money with them.
Speaker 5: Yeah, that's right. And you know for those savers, you know,
Speaker 5: they've just started to now experience sub five percent term
Speaker 5: deposit rates. I think that's probably been the latest development
Speaker 5: for them. And so I think with that, we for example,
Speaker 5: are experiencing maybe a little bit more inquiry. You know, what,
Speaker 5: what can you do in the case that you're not
Speaker 5: happy with turn deposit rates? And which is what we
Speaker 5: saw obviously in COVID. It was very fast that that
Speaker 5: fall and those those deposit rates, and the real change
Speaker 5: in kind of behavior from from savers was when they
Speaker 5: went through one percent time. I don't know if you
Speaker 5: remember that, but you know, six month term deposit rates
Speaker 5: went through one percent and that was for so many people,
Speaker 5: that was the final straw and they said, look, I've
Speaker 5: just got to find something different.
Speaker 4: Then get into the shares or something. Yeah, hey, well
Speaker 4: just hold the Hamish will be back in this moment.
Speaker 4: We're with Hamish pepperes as a director and fixed income
Speaker 4: currency strategists at Harbor Asset Management, and we're going to
Speaker 4: actually discuss what this means for whether, in fact, where
Speaker 4: the money where the cash rate's gone, is that stimulatory
Speaker 4: for the economy or do we need to cut further
Speaker 4: before we really see something some significant difference there. And
Speaker 4: if you've got any questions for Hamish, give us a call.
Speaker 4: I wait, one hundred eighty ten to eighty. We'd love
Speaker 4: to hear from you. We'll back in just a moment.
Speaker 2: Not taking Marvel singing Sweeden Home Alabama.
Speaker 4: Sum let's right back. We can collective this is smart money.
Speaker 4: My guest is Hamish Pepper. He's fixed income and currency
Speaker 4: strategists strategist at Harbor Asset Management. Just before we got
Speaker 4: to our calls, Hamish, the question that the a lot
Speaker 4: of people would consider is that cut in the ocr
Speaker 4: is it something that is viewed as being of a
Speaker 4: stimulation to the economy of we or is we not there?
Speaker 5: No, we're not yet. So the way we talk about
Speaker 5: it is that there's less sort of restriction being imposed
Speaker 5: on the economy now, but there still is some. So
Speaker 5: that that's part of the reason why the rbn DID
Speaker 5: themselves are communicating in their forecast that they're going to
Speaker 5: keep going, they're going to keep cutting down towards three
Speaker 5: percent later this year.
Speaker 4: So why is three percent seen as being if we
Speaker 4: get there, which we're assuming we hopefully will by the
Speaker 4: end of the year. Why is that scene as being
Speaker 4: stimulatory as opposed to not at the moment?
Speaker 5: Well, it's interesting, actually, in their view, it's not necessarily
Speaker 5: a stimulatory once they get to three. There's a there's
Speaker 5: a big range of what they call neutral, so a
Speaker 5: neutral cash rate or a neutral interest rate. We're basically
Speaker 5: the entrant rate is not doing anything. It's not adding
Speaker 5: to activity, it's not detracting from it's not adding to inflation,
Speaker 5: it's not detracting from it. And there's sort of this
Speaker 5: you know, sort of magical, you know, happy place, but
Speaker 5: really there's huge uncertainty around exactly where that is. And
Speaker 5: so I think what they're doing is saying we're going
Speaker 5: to step reasonably quickly towards that and look at what
Speaker 5: the economy is doing, because that's one of the best
Speaker 5: ways to know, you know, what your policy settings are
Speaker 5: actually are doing. You know, are they you know, becoming
Speaker 5: stimilitary And it might be the case that they get
Speaker 5: to three and they start to see a real turnaround
Speaker 5: an activity and there you know, it answers a question
Speaker 5: for them, But it also could be that they need to.
Speaker 4: Do more, Yeah, because I guess you know, they get
Speaker 4: the number of what you can borrow and the cash rate,
Speaker 4: and then you look at other factors that of course
Speaker 4: set the stimulat trees, such as attracting overseas investment. And
Speaker 4: I mean it's interesting the balance, isn't it as to
Speaker 4: what the magic sort of the sweet spot is.
Speaker 5: Yeah, totally. And I think the thing that's holding them back.
Speaker 5: A question we often get and maybe there's some people
Speaker 5: listening who have this this question in their head, is
Speaker 5: if they know that three percent is where they're heading,
Speaker 5: why not just get there today? You know? And Adrian
Speaker 5: has been that kind of governor in the past to
Speaker 5: you know, basically if his economics department or the Manata
Speaker 5: Police committee are telling him something, then he'll just do it.
Speaker 5: But the niggly bit is that inflation from the domestic standpoint,
Speaker 5: you know, that sort of non tradeable stuff is still
Speaker 5: a little high.
Speaker 4: Is there anything in once but and twice shy because
Speaker 4: he has been sort of a bit more gung home
Speaker 4: with things and he kept it too high. And so
Speaker 4: does do you think it's affected him? Just wanting to
Speaker 4: be easy as she goes with you know, let's just
Speaker 4: turn the turn the tiller slowly.
Speaker 5: I mean it's possible. I mean, it is possible. I
Speaker 5: think there's a committee which is.
Speaker 4: Sounds like you think it's not really realistic though possible.
Speaker 5: But yeah, I think it's more the committee speaking honestly.
Speaker 5: I think you've got a range of voices there and
Speaker 5: it's working well because it's highlighting, you know, the risks
Speaker 5: that you run if you do just you know, cut
Speaker 5: one hundred and fifty bass toward get to three percent.
Speaker 4: Yeah, get a bit of emotionalist area and everyone suddenly
Speaker 4: cashing into the getting into the property market or something
Speaker 4: and pushing it, pushing it in the way we don't
Speaker 4: want to see it going.
Speaker 5: Well, it's a scenario exactly.
Speaker 4: It's take some calls.
Speaker 6: Shane, Hello, oh hi there, I just had a question
Speaker 6: for Hamish, you know, to do with the investors. You know,
Speaker 6: we talked about, you know, the interest rates for the investors,
Speaker 6: for the savers you know, to benefit and it's important
Speaker 6: for the banks to retain them. My question was more
Speaker 6: to do with the banks boring from overseas.
Speaker 7: I mean, I believe the New Zealand banks are in
Speaker 7: pretty good good shape health wise and you know, for
Speaker 7: profitability wise. So they must be getting some sort of
Speaker 7: a discount because of the credit worthiness when they bought
Speaker 7: from overseas, and so the cost of money or from
Speaker 7: overseas would be cheaper. And would there be any truth
Speaker 7: to that?
Speaker 4: Thank you, thanks Shan.
Speaker 5: Yeah, I mean, yeah, it's a good question. So it's
Speaker 5: important to note broadly that while deposits usually from retail
Speaker 5: and households, is the majority of the way that banks
Speaker 5: fund themselves here in New Zealand, the residual which is
Speaker 5: called it, roughly a third comes from wholesale markets. And yeah,
Speaker 5: as you point out, those wholesale markets that banks can
Speaker 5: access are here in New Zealand. And so you know,
Speaker 5: the funds that we manage, the fixed income funds. We
Speaker 5: will buy bank bonds that are issued here in this market,
Speaker 5: but of course, yeah, they can issue overseas as well,
Speaker 5: and they have good support from those overseas investors and
Speaker 5: the likes of the US and in Europe, and that
Speaker 5: is something that does keep their overall cost of funding
Speaker 5: down because also, as the caller mentioned, our banks are
Speaker 5: in really really good shape, well capitalized, and there's yeah,
Speaker 5: the default risk is relatively low. So yeah, it's an
Speaker 5: important mix, that mix of funding which then allows them
Speaker 5: to yeah, obviously ex end loans to us here in
Speaker 5: New Zealand.
Speaker 4: I get this question a bit about does I must
Speaker 4: just as a sort of non sequity question really, but
Speaker 4: it's around currencies and uncertainty of cash rates and dollars
Speaker 4: and all that sort of thing. How does the gold
Speaker 4: Does gold reserves around the word world play any role
Speaker 4: in currencies because the gold standard was abandoned decades ago,
Speaker 4: wasn't it?
Speaker 5: Yes? And I would say no is the short answer.
Speaker 5: The interesting thing with gold more recently has been perhaps
Speaker 5: a re emergence of concern about inflation, particularly in the US.
Speaker 5: You've probably followed that that story, and maybe many people
Speaker 5: listening have as well. That we were at a point
Speaker 5: where we just felt that inflation was very much solved
Speaker 5: in the US and that the US Federal Reserve would
Speaker 5: be able to keep cutting similar to what we've done here,
Speaker 5: but probably just prior to Christmas that all started to
Speaker 5: look a little shaky at the inflation progress back towards
Speaker 5: two percent, they had the same target as we do stalled,
Speaker 5: and we had the Trump obviously the Trump presidency confirmed
Speaker 5: with the election, and so there you saw some of
Speaker 5: these alternative assets, I suppose you can think of them.
Speaker 5: Bitcoin is another one where people were looking for things
Speaker 5: that can store value. They don't give you an income,
Speaker 5: but they can store value being being sought after. So
Speaker 5: I think gold is more in that camp of an
Speaker 5: alternative asset. It doesn't give me any income, but it
Speaker 5: might give me the ability at times to protect my capital.
Speaker 4: Yeah, I mean, Gold's not your bag, is it in
Speaker 4: terms of tracking the value of that. But people often
Speaker 4: go on about our gold's the best place to put
Speaker 4: your money in things, And I think what I understand
Speaker 4: is that actually it is one of the slowest growth
Speaker 4: sort of assets. Long too, are you better to be
Speaker 4: in the share market or have someone managing your money
Speaker 4: and choosing the right funds rather than stick it in gold.
Speaker 5: Yeah, I find I find two things with gold difficult. One,
Speaker 5: I don't have a good framework for thinking about how
Speaker 5: to determine its price, so that that's a tough thing.
Speaker 5: And part of that. The second thing is part of
Speaker 5: it relates to that, the fact it doesn't provide an income.
Speaker 5: You know, for most of the assets that we deal
Speaker 5: with and think about, you've got an income stream that
Speaker 5: you can think of when it comes to valuing the
Speaker 5: ownership of the asset, and so gold gold doesn't have that.
Speaker 5: So I often just put it in the too hard
Speaker 5: basket in my head and am thankful that I'm not
Speaker 5: a gold analyst.
Speaker 4: Yeah. Just on the inflation, where are we at with
Speaker 4: inflation now?
Speaker 5: Oh, we're all at a headline level. We're pretty much
Speaker 5: at target. We're two point two percent in headline, which
Speaker 5: of course is what the RBNZ target.
Speaker 4: So what does that mean in headline?
Speaker 5: Oh, headline is includes everything. And the reason I'm saying
Speaker 5: that is just going back to that discussion we were
Speaker 5: having a few moments ago that within this overall you know,
Speaker 5: consumer price basket, the basket of goods that's supposed to
Speaker 5: represent what everybody you know buys. Of course that's an
Speaker 5: impossible thing to do. But if within that basket you've
Speaker 5: got things that will be imported for which we've seen,
Speaker 5: you know, actually outright deflation, the prices of those things
Speaker 5: overall have been falling after that huge impact from COVID,
Speaker 5: you know what, which.
Speaker 4: Means that we must be domestically generating a bit I
Speaker 4: guess are we?
Speaker 5: Exactly four and a half percent on an annual basis
Speaker 5: was the last reading for that domestically driven inflation. And
Speaker 5: so while you bring all of that together and you
Speaker 5: get two point two percent, which might as well be
Speaker 5: you know, two, and therefore job done. The RBNZ look
Speaker 5: a little deeper as they should and say, well, hold on,
Speaker 5: the stuff that we can control and policy has an
Speaker 5: influence on doesn't look to be quite back to where
Speaker 5: we like it. And that's the reason why I think
Speaker 5: the biggest reason why we are seeing this gradual approach
Speaker 5: towards that neutral three percent level rather than anything quicker.
Speaker 4: I've got one more question before we get the break
Speaker 4: on that, would we always be aiming to get out domestically,
Speaker 4: you know, the inflation that we've got control over the
Speaker 4: domestically generated inflation, would that number or that goal always
Speaker 4: be the same regardless of what inflation we're actually importing.
Speaker 5: Really good question. Yeah, it's a really good question. I think.
Speaker 5: I think instead of there being too much of a
Speaker 5: focus on where that the tradeable inflation may or may
Speaker 5: not be, I think because they know that that can
Speaker 5: move quickly, right, you know, the exchange rate has a
Speaker 5: huge influence on it, and the exchange rate can move
Speaker 5: a lot, you know, in a day, a week, a month,
Speaker 5: you know, So I think what the focus is naturally
Speaker 5: going to be is more on the domestically driven inflation.
Speaker 5: But the wrinkle there now which hasn't been there so
Speaker 5: much in the past, is that within this part of
Speaker 5: the basket you've got a whole bunch of stuff that
Speaker 5: monetary policy and interest rates just can't have much impact on.
Speaker 5: And that's the stuff we've talked about before. You know,
Speaker 5: local authority rates, council rates, insurance for example, which are
Speaker 5: quite big weights in the basket. But you know, moneture
Speaker 5: policy at the moment is that that's not having an
Speaker 5: impact on those Those are going up for these big
Speaker 5: structural reasons, you know, global reinsurance costs as we have
Speaker 5: all these natural disasters and so on, and then this
Speaker 5: huge infrastructure need that counsels have which is forcing rates
Speaker 5: up by you know, double digits each year. So that
Speaker 5: that's an interesting, I think question going forward. Will the
Speaker 5: RBNZ look through some of those things and be happy
Speaker 5: to continue the using cycle knowing that they can't control
Speaker 5: that stuff or not? You know's kind an ongoing.
Speaker 4: Question, right Look, we're going to take a moment. We're
Speaker 4: going to come back and see and explore what does
Speaker 4: this actually mean for mortgage rates? And I guess on
Speaker 4: everyone's mind if you're someone who's thinking about buying, you're
Speaker 4: thinking about investing in the property market, what does that
Speaker 4: actually mean for the property market? And with these falling
Speaker 4: interest rates? Are we going to explore that a little
Speaker 4: bit more with Hamish Pepper in just a moment. This
Speaker 4: is smart Money. We'd love your cause you've got any
Speaker 4: questions for Hamish, then jump on the blower eight hundred
Speaker 4: eighty eighty. It's twenty one to six. Yes's welcome back
Speaker 4: to smart Money on the Weekend Collective. My guest is
Speaker 4: Hamish Pepper is a fixed income and currency strategist at
Speaker 4: Harbor asset management. I finally meant to get that out
Speaker 4: because the's quite a few syllables on that job description there.
Speaker 4: But Hamish, I actually I did. I did make it.
Speaker 4: Let's say I misspoke when I was talking about gold
Speaker 4: not being that flash. I was comparing it to if
Speaker 4: you just what had happened with us stop with the
Speaker 4: stock market, basically, because of course, if you did buy
Speaker 4: gold twenty years ago and sat on it, you'd still
Speaker 4: be better than having it in the bank, isn't that right?
Speaker 5: Yes, I mean, well, I suppose it depends exactly what
Speaker 5: you were being paid by your bank to have your
Speaker 5: money there. But you know that sounds about right.
Speaker 4: Yeah, yeah, Now, I just got picked up on a
Speaker 4: few texts as somebody saying it was too gold was
Speaker 4: seven hundred and eighty and two thousand and six and
Speaker 4: now it's twenty eight hundred, which is still not a
Speaker 4: bad rate. I think that if you'd stuck your shares
Speaker 4: and there, I think there was various funds that massively
Speaker 4: outperformed that. Though haven't there been over the last decade
Speaker 4: or so.
Speaker 5: It's a good question. Yeah, I'm just pulling up the
Speaker 5: chart in front of me now, yeah, so yeah, what
Speaker 5: are we We Yeah, we're pretty much more than doubled
Speaker 5: and in ten years. Yeah, let me get back to
Speaker 5: your PEPs.
Speaker 4: I can't remember. I just remembered in a conversation somebody saying, well, okay,
Speaker 4: gold is all very well, but if you've stuck it
Speaker 4: in this fund over the same period of time, you'd
Speaker 4: be about you'd be two, two or three times better off.
Speaker 4: I can't I think it was something like that. Anyway, Look,
Speaker 4: let's take some calls. Jim, Hello, Hi there, hire you go.
Speaker 8: Did you give my question?
Speaker 7: No?
Speaker 8: I said, what proportion of New Zealand banks is owned
Speaker 8: by overseas interests?
Speaker 4: Oh?
Speaker 5: Okay, if you mean if you count Australia as being
Speaker 5: an overseas interest, it would be indeed, most of them. Yeah,
Speaker 5: that's the big four taken out as they're all Australian banks,
Speaker 5: and then you're left with the likes of obviously Qui Bank, Cadani,
Speaker 5: Savon's Bank.
Speaker 4: Is that because you're concerned, Jim with the profits going overseas?
Speaker 8: Yeah, And the second part of the question was what
Speaker 8: portion of the profits goes overseas well?
Speaker 5: Based on the ownership, it would be I would say,
Speaker 5: without without knowing before, but I'd say it would be
Speaker 5: the majority.
Speaker 8: Yeah, there's something really wrong with their banking system, isn't there.
Speaker 4: Well, I guess the problem is why we don't have
Speaker 4: more New Zealand banks Hamish. I guess I don't know
Speaker 4: that that's the thing. We've got plenty of competition, one
Speaker 4: would argue, because we've got quite a few banks. It's
Speaker 4: not like we've just got two. What do you what
Speaker 4: do you? What's your response Hamus to that?
Speaker 5: Yeah, I mean, I think this has been a kind
Speaker 5: of feature of the discussion for some time now. I
Speaker 5: think I think when Kiwibank came along, there were hopes
Speaker 5: there that perhaps with more capital provided from the government,
Speaker 5: that Kiwi Bank could be a real competitor to the
Speaker 5: Aussie banks, and unfortunately that just hasn't quite played out.
Speaker 5: So yeah, I mean, I think we're left probably with
Speaker 5: a situation where, you know, the profits that are being
Speaker 5: earned are commonly under scrutiny and for many, you know, commentators,
Speaker 5: they feel that they are too high because of a
Speaker 5: lack of competition. But from a system point of view,
Speaker 5: the banking system here works very very well in terms
Speaker 5: of the way it can provide lending to those that
Speaker 5: needed and then obviously take deposits from those that have saving.
Speaker 5: So yeah, I think, you know, we should be not
Speaker 5: grateful is probably for the right word. But you know,
Speaker 5: there are countries in the world where banking systems don't
Speaker 5: operate so well, and for example, countries where you are
Speaker 5: for to borrow in foreign currency, which is not something
Speaker 5: that we have to consider. And so what that can
Speaker 5: mean is that you can have, say, for example, a
Speaker 5: mortgage which is denominated in a different currency, and therefore
Speaker 5: if your currency weakends against that one, then all of
Speaker 5: a sudden, your mortgage becomes a whole lot larger. And
Speaker 5: so yeah, there, Yes, there are some perhaps issues in
Speaker 5: terms of a lack of local ownership of banks here
Speaker 5: in New Zealand, but there are some real benefits to
Speaker 5: the current structure that we have, and that's it. That
Speaker 5: is a really big one.
Speaker 4: Yeah, I mean, that's probably something we can spend a
Speaker 4: whole hour on just talking about the nature of ownership
Speaker 4: of our banks. I did a quick Google set. You
Speaker 4: can tell me how wrong I was on this. By
Speaker 4: the way, Hamish that back in nineteen ninety the price
Speaker 4: of God was four hundred bucks basically, and now it's
Speaker 4: three thousand bucks, I think, whereas if you'd stuck your
Speaker 4: money in the Dow Jones industrial average in nineteen ninety
Speaker 4: to thousand, six hundred dollars turned into today around forty
Speaker 4: three thousand. So that's that's you know, that's right.
Speaker 5: A similar answer. Yeah, yeah, so you're almost something like
Speaker 5: twenty times your money, yeah, in those global equities.
Speaker 4: Or twenty times in money versus eight or nine times
Speaker 4: in money. Yeah. Okay, good. I'm glad I wasn't completely
Speaker 4: wrong on that, because I don't like saying things and
Speaker 4: then people call him out and going, Tim, you don't
Speaker 4: know what you're talking about, which possibly is true. But anyway,
Speaker 4: I kind.
Speaker 5: Of like that we did that all real time.
Speaker 4: That was Oh yeah, look I've got the got the
Speaker 4: old fact checking Google search. It serves me well in
Speaker 4: the we small hours on talkback. Hey, look, we've sort
Speaker 4: of don't have a lot of time to explore this.
Speaker 4: In fact, I'll tell you what, We'll take a break
Speaker 4: and we'll come back Hamish and we'll just have a
Speaker 4: chat about you know, the impact on mortgage rates continuing
Speaker 4: to fall and while we think is going to happen
Speaker 4: to the housing market. So we'll talk about that in
Speaker 4: just a moment with Hamish Pepper. He's a current see
Speaker 4: and fixed income strategist at Harborrastic Management. This is news talk,
Speaker 4: said b. It's just gone twelve minutes to say, let's
Speaker 4: welcome back to the weekend collective. Smart man. And I
Speaker 4: wonder how many people listening to that what that song
Speaker 4: would realize. It's actually from an old musical called Fiddler
Speaker 4: on the Roof, but it's been you put a funky
Speaker 4: beat to it and the way you go anyway, Hamish
Speaker 4: Pepper from Harbor Rasset Management. Actually, just because I'll just
Speaker 4: get your quick reaction to this text and then we'll
Speaker 4: see if we can squeeze something about the housing market.
Speaker 4: It says high time. I get a bit tired of
Speaker 4: the bleating about overseas ownership with the banks. We sold
Speaker 4: them to the foreign banks. It's our own fault. People
Speaker 4: chose not to invest themselves and just need to stop
Speaker 4: going on about it. From Anthony, there is something about
Speaker 4: that text that kind of appeals to me. You know,
Speaker 4: we complain all the time, but what are we doing
Speaker 4: about it? Nothing?
Speaker 5: Yeah, I think there's probably a broader point that comes
Speaker 5: out of that too. Where what we're dealing with here
Speaker 5: in New Zealand is, you know, there's decades of obsession
Speaker 5: with housing has been you know, the number one asset
Speaker 5: you know, to invest in. Has meant that we've we've
Speaker 5: got pretty shallow capital markets, you know, so our share
Speaker 5: market and our bomb market's getting deeper, but generally that's
Speaker 5: the price we've paid for that obsession has meant that, Yeah,
Speaker 5: there's there's just not a lot of capital out there
Speaker 5: for businesses to fund themselves with.
Speaker 4: Well, let's touch quickly. I know we've left it quite
Speaker 4: late our run on this one. But the housing market,
Speaker 4: because look at that does feel it just intuitively that
Speaker 4: you know, we're not going to see any sort of
Speaker 4: rushing to sort of people buy multiple properties with these
Speaker 4: these cuts, that we've got other issues at play when
Speaker 4: it comes to the market, haven't we.
Speaker 5: Yeah, it's been really interesting how perhaps disappointing the reaction
Speaker 5: from the housing market has been to these cuts and
Speaker 5: mortga trade. Not disappointing of course, if you're a new
Speaker 5: home buyer thinking of getting into the market, you know,
Speaker 5: this has been probably quite a pleasant surprise. It appears
Speaker 5: what's going on is that this massive drop in our
Speaker 5: population growth is generally it's been people leaving, which has
Speaker 5: driven it more than the lower arrivals. But you know,
Speaker 5: that's having quite a big impact on housing, and it
Speaker 5: happens with quite a lag, so it will continue to
Speaker 5: have that downward force on the property market. And of
Speaker 5: course we mentioned earlier about the fact that we are
Speaker 5: still seeing job losses in the economy and so unemployment
Speaker 5: in the unemployment rate is something which matters a lot
Speaker 5: for the housing market. So interest rates are fighting against
Speaker 5: those downward forces and will probably continue to do so
Speaker 5: for another couple of quarters at least.
Speaker 4: And of course when people think them traits are getting
Speaker 4: lower and they think, well good, there might be small
Speaker 4: bars in the market. Then of course more people put
Speaker 4: their properties on the market, I hoping it's going to move,
Speaker 4: and then there's more supply. So the old kensy and
Speaker 4: economics kicks in, doesn't it supplies matching the demand.
Speaker 5: Well, and that's been the most interesting thing. We probably
Speaker 5: all got, maybe initially a bit excited about what this
Speaker 5: meant that sales were picking up, But then we started
Speaker 5: to look at what the prices were for those sales,
Speaker 5: and you know, they weren't particularly impressive. So this is
Speaker 5: the housing market that feels quite static. It's got those
Speaker 5: opposing forces and probably we'll feel that way for for
Speaker 5: a little while while longer.
Speaker 4: Yeah, Hey, ho, much time, fliers, mate, We've got we've
Speaker 4: got to wrap it up there, just quickly. We've got
Speaker 4: about a minute to go. What's so, what's what are
Speaker 4: you focusing on in your in your role at the moment.
Speaker 4: What are the sort of things when you hit the
Speaker 4: desk tomorrow, what are you going to be looking for
Speaker 4: in terms of what's what's driving your week?
Speaker 5: Well, I think number one is this US economy term.
Speaker 5: I mean, we we touched on the Trump factor, but
Speaker 5: there's also another bit going on there, which is it
Speaker 5: finally might be slowing down to being this unbelievable sort
Speaker 5: of exception. You know, this ongoing resilience that we're seeing
Speaker 5: out of the US. It looks like maybe there's a
Speaker 5: few cracks appearing, and that has huge implications for global markets.
Speaker 5: We touched on equities, their share prices, but also for bombs.
Speaker 5: You know, they've got a heap of room there for
Speaker 5: interest rates to fall, and if that starts to be
Speaker 5: something that markets anticipate, we will inherit some of that,
Speaker 5: so there'll be number one job excellent tomorrow morning.
Speaker 4: Good no rest for the wicked. Hey, great to have
Speaker 4: you on the show, Homush really appreciate it. And if
Speaker 4: people want to check out the work you guys do
Speaker 4: harbor asset dot coutter at inn z.
Speaker 5: Right, that's the one. Thanks very much, Tim.
Speaker 4: Okay, and thanks for your company everyone. Thanks a great show.
Speaker 4: Thanks my producer, Tyra Roberts. We'll look forward to your
Speaker 4: company again, same time next weekend and Sunday It's six
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