Speaker 1: Kielder.
Speaker 2: I'm Chelsea Daniels and this is the Front Page, a
Speaker 2: daily podcast.
Speaker 3: Presented by the New Zealand Herald.
Speaker 2: The Reserve Bank is expected to cut the official cash
Speaker 2: rate today, but how deeply it will cut remains to
Speaker 2: be seen. Markets are pricing in the cut as a certainty,
Speaker 2: but the debate is now on how big.
Speaker 4: It will be. So what could it mean for.
Speaker 3: Mortgage holders and the average Kiwi?
Speaker 4: Today on the Front Page ends at Herald Business Editor
Speaker 4: at Large Liam dan Is with us to dive into
Speaker 4: the Reserve Bank's upcoming decision and what's been happening behind
Speaker 4: closed doors.
Speaker 3: So Liam, the economists are split.
Speaker 2: Should the bank act boldly with a fifty point cut
Speaker 2: or play it safe with the twenty five Oh you.
Speaker 5: Want me to guess? Yeah, well, I guess I'd probably
Speaker 5: lean towards front ending it and going fifty basis points
Speaker 5: get it done. That's an optimistic view on inflation that
Speaker 5: we're not going to suddenly see inflation come back to
Speaker 5: worrying levels. We've had this rough patch with food prices
Speaker 5: and electrisity prices and that has pushed inflation up. And
Speaker 5: so the Reserve Bank has this you know, single mandate
Speaker 5: on inflation now, so the coalition government changed that from
Speaker 5: unemployment inflation to just inflation. So when people look at
Speaker 5: the decisions the Reserve Bank are making, and they look
Speaker 5: at how bad retailer is downtown and all that sort
Speaker 5: of stuff, that's really not what's driving them.
Speaker 3: Their core.
Speaker 5: Driver for all of their decision making is keeping inflation
Speaker 5: between one and three percent, and so if it's starting
Speaker 5: to get up towards three, that's a worry for them.
Speaker 5: It is they believe, because the economy is so flat
Speaker 5: that it must be going to start to ease away again.
Speaker 5: But that would be creating pressure on them to only
Speaker 5: cut by twenty five. So I'd like to see them
Speaker 5: cut by fifty. I'd like to see the economy get
Speaker 5: that sort of a little bit of stimulus that it
Speaker 5: needs to get that recovery rolling. But I think it
Speaker 5: really is finely balanced. They could well be more cautious
Speaker 5: about inflation and go with twenty five.
Speaker 3: What are the risks in holding back? Well, the risk in.
Speaker 5: Holding back is that the downturn is just deeper than
Speaker 5: we thought, So you know, if it gets too if
Speaker 5: an economy just loses too much steam, it's very hard
Speaker 5: to get it rolling again, and some people are arguing
Speaker 5: that we're already there. But you know, we saw this
Speaker 5: big fall in GDP growth in the second quarter. So
Speaker 5: we had a couple of quarters the last quarter of
Speaker 5: last year and the first quarter of this year we
Speaker 5: had growth, and we thought, yeah, the recovery is happening.
Speaker 5: That is what's supposed to happen.
Speaker 2: Thrive for twenty five Yeah, yeah, yeah, finally happening.
Speaker 5: Yeah, And it just absolutely fell off a cliff in
Speaker 5: the second quarter. And some people, including the government, have
Speaker 5: pointed to the US tariff policy is sort of spooking
Speaker 5: everyone or hitting our economy. I don't think it has
Speaker 5: hit our economy that hard. It may have hit confidence,
Speaker 5: but our exporters of our primary products, so dairy, meat,
Speaker 5: horticultural products, are doing so well that tariffs haven't really
Speaker 5: touched the sides, So that hasn't hit the economy directly.
Speaker 5: It may have hit confidence, but I think things like
Speaker 5: the property market, the employment market, it's all just combined
Speaker 5: a huge lack of confidence and it's spilled over a
Speaker 5: bit as far as we can see into the third quarter.
Speaker 5: So while the third quarter might be a bit better,
Speaker 5: there's some signs of life and card spending and people
Speaker 5: getting out and shopping a bit more, it still is
Speaker 5: pretty gloomy and businesses are pretty down or that you know,
Speaker 5: they were right that third quarter, So that will weigh
Speaker 5: on the Reserve Bank too. Even though you know it's
Speaker 5: mandate is inflation, it still considers the wider economy as
Speaker 5: part of that and if anything, how flat and down
Speaker 5: that is, should give them some confidence that inflation won't
Speaker 5: stay and be persistent. Because when an economy is performing
Speaker 5: so badly that they say that, the economists will say
Speaker 5: excess there's excess capacity in the economy, which means that
Speaker 5: it's just not running at full steam. So that is
Speaker 5: kind of disinflationary or deflationary. So it should be putting
Speaker 5: downward pressure on pricing. And so hopefully once we're through
Speaker 5: the you know, the peak of the food price spikes
Speaker 5: we've seen and power prices coming off with more rain
Speaker 5: and things, you know, we'll see inflation either way.
Speaker 2: What impact could a bigger cut, so maybe like a
Speaker 2: point five have for the ordinary mortgage holder for examples,
Speaker 2: and will banks actually pass that on?
Speaker 5: Well, the banks have passed on a little bit and
Speaker 5: ahead of this latest OCR announcement. If it's a fifty
Speaker 5: basis point cut, that just gives them a bit more
Speaker 5: leeway to cut a bit further. Now how far they go,
Speaker 5: it's there's a lot of market conditions involved and competition
Speaker 5: and all that sort of stuff. But what happens is
Speaker 5: with the you know, the interest rates setting, they look
Speaker 5: at what the OCR is predicted to do. The market
Speaker 5: places all these bets about future prices for debt, and
Speaker 5: that kind of can set the parameters for what the
Speaker 5: banks can and can't afford to do with regards to
Speaker 5: cuts or hikes, and so what's priced in is often
Speaker 5: well ahead of the Reserve Bank actually moving itself. So
Speaker 5: if the Reserve Bank just as twenty five basis points,
Speaker 5: probably it's all priced in. If it does fifty, there
Speaker 5: might be a little bit more room to move and
Speaker 5: you might see rates come down. But also important will
Speaker 5: be what the Reserve Bank says about.
Speaker 2: The path ahead.
Speaker 5: Now, there's not much coming with the announcement today. It's
Speaker 5: just a monetary policy review, which just means it's a
Speaker 5: shorter statement. It doesn't have all the forecasts, but the
Speaker 5: tone will matter, and if there's an indication that they
Speaker 5: still see more concern around the slowing economy than they
Speaker 5: do around inflation. That might encourage the banks to pass
Speaker 5: on a bit more in terms of rate cuts for
Speaker 5: the average person.
Speaker 2: How much can you read into the tone of those statements?
Speaker 3: What are you looking out for?
Speaker 5: Well, you can read a lot and I I don't
Speaker 5: know whether it comes to passing it is all true
Speaker 5: and everything, but we do read a lot into it
Speaker 5: because often you've got a one if you've got like
Speaker 5: a sort of a one page statement, you know, it's
Speaker 5: a very finite number of words, and so people are
Speaker 5: looking through to find any change in key words, you know,
Speaker 5: sort of they might sort of see it move from
Speaker 5: for the for some time to for the foreseeable future
Speaker 5: or something as subtle as that, and see that that
Speaker 5: is a change in tone. So, yeah, every word is
Speaker 5: poured over to get a sense of how the Reserve
Speaker 5: Bank is feeling. And it's a weird sort of game,
Speaker 5: Like you wonder, why don't they just come out and
Speaker 5: tell us exactly what they're feeling every time? And I'd
Speaker 5: like to think they could do that a bit more,
Speaker 5: but they also, you know, they're also very keen to
Speaker 5: emphasize that this is only a point in time, and
Speaker 5: their view can change anytime. So if the market's collapsed
Speaker 5: next week, you know everything's changed. So does the.
Speaker 2: Language depend on who's in charge? Though, like a director
Speaker 2: in a movie, you can kind of gauge or the
Speaker 2: ambiguous endings on who's directed a piece or something.
Speaker 5: Yeah, probably a little bit. I mean who's in charge
Speaker 5: as on the Reserve Bank governor has mattered less and
Speaker 5: less in the past few years because we have a
Speaker 5: committee struck sure, and the decision is made by the
Speaker 5: Reserve Bank's Monetary Policy Committee and they only get the
Speaker 5: Reserve Bank Governor involved to vote if it's sort of
Speaker 5: a completely slit decision, if it's a tie. But the
Speaker 5: Reserve Bank governor does tend to set some of the
Speaker 5: culture and the tone. And I'm sure a strong Reserve
Speaker 5: Bank governor like Adrian or was would have influence in
Speaker 5: the meeting and also yeah, in the way that the
Speaker 5: bank communicates, so that that is pretty key. And I
Speaker 5: don't know that we've seen a huge difference in that
Speaker 5: written language. I mean, Adrian Orr and Christian hawksby pretty
Speaker 5: different personalities, not a massive shift in language in the
Speaker 5: in the written takes. But yeah, I think over time
Speaker 5: that that is where the Reserve Bank governor does.
Speaker 3: Influence things the bank is seen.
Speaker 2: Obviously a wave of executive exits.
Speaker 3: Tell me about ores leaving payout.
Speaker 5: Yeah, well, we found out earlier this week that Adrian
Speaker 5: Orr got a restraint of trade payout for about four
Speaker 5: hundred and sixteen thousand dollars, taking his annual pay for
Speaker 5: what was paid for the nine months he was there
Speaker 5: up above a million. Yeah, it was an interesting one.
Speaker 5: It had people scratching their heads a bit because you know,
Speaker 5: there isn't any other Reserve bank governor role in New Zealand.
Speaker 5: Doesn't sort of seem like it would impinge upon the
Speaker 5: Reserve Bank if he was to take a role elsewhere.
Speaker 5: I sort of wondered whether you know that included as
Speaker 5: encompassed a non disclosure agreement as and to not talk
Speaker 5: about it until he had got through that period. I
Speaker 5: don't know how they do that. I mean, it's all
Speaker 5: how the contract's written. My experience with those sort of
Speaker 5: contracts and restraintive trades as they're usually written into a
Speaker 5: contract in advance, and you don't get paid for him
Speaker 5: sticking to it or not. It's there in the contract
Speaker 5: at the beginning.
Speaker 3: Perhaps it might be in the next contract.
Speaker 5: Well, yeah, some interesting questions there for the Reserve Bank,
Speaker 5: which probably won't get answered because you hear the politicians
Speaker 5: and all the you know, everyone says, oh, it's a
Speaker 5: employment matter, so therefore no one's going to talk about it.
Speaker 5: But yeah, it did raise a few eyebrows.
Speaker 1: There are three main areas of responsibility for the Reserve Bank.
Speaker 1: The first is price stability, and we will stay laser
Speaker 1: focused on delivering on low and stable inflation. The second
Speaker 1: is prudential supervision of the financial system that promotes financial
Speaker 1: stability and that is important for healthy and growing economy.
Speaker 1: And third, but not least, it's a safe and efficient
Speaker 1: payments system and that includes issues of notes and coins.
Speaker 1: So a key component to build trust and credibility for
Speaker 1: the Reserve Bank is transparency and openness.
Speaker 2: When is Anna Bremen meant to step into the row
Speaker 2: a new Swedish Reserve Bank governor and starts in December one, so.
Speaker 5: She will probably be inheriting a sort of a clean
Speaker 5: slate in terms of monetary policy. Certainly the staff turnover
Speaker 5: means that there'll be a lot of has been a
Speaker 5: lot of change, but also the current forecasts are that
Speaker 5: we get either our twenty five or fifty basis points
Speaker 5: with this October cut, and then probably another one in November,
Speaker 5: and then after that the Reserve Bank in theory would
Speaker 5: have rates down as low as they need them, economy
Speaker 5: would start moving again and it would be a more
Speaker 5: stable period for the new governor coming in, and so
Speaker 5: there might be a period of do nothing, do nothing,
Speaker 5: do nothing. That'd be ideal, hopefully, hopefully that if things
Speaker 5: go to plan, that's what we'd be hoping for.
Speaker 2: What's going to be her main mandate when she comes in, Well,
Speaker 2: she's already talked, you know, her mandate is inflation.
Speaker 5: So again monetary Policy Committee is deciding which way the
Speaker 5: rate goes. The single mandate is to keep inflation in
Speaker 5: the band. But in her short speech, you know, when
Speaker 5: she was introduced to the public last month, she did
Speaker 5: hit a few key marks that probably land pretty well
Speaker 5: with people who've been critical of the bank and with
Speaker 5: the finance minister. She talked about transparency, which is a
Speaker 5: big deal at the Swedish Reserve Bank. They have a
Speaker 5: policy of publishing all the minutes from their Monetary policy
Speaker 5: committee meetings and letting people know which way everyone voted,
Speaker 5: which we don't do. She talked about, you know, clear
Speaker 5: communication around forecasting, around modeling different scenarios and explaining that
Speaker 5: to the public. Now, you know, to be fair, the
Speaker 5: Reserve Bank has done some modeling. They've also they had
Speaker 5: a bit of an issue with how they're forecasting was
Speaker 5: being interpreted, and they've sort of proactively addressed that. They've
Speaker 5: the chief economist there, Paul Conway's written quite a bit
Speaker 5: about how we should view Reserve Bank forecasts. But still
Speaker 5: I think you know, that focus on you know, communication,
Speaker 5: transparency will be welcome. But she also emphasized very much
Speaker 5: that you know, we've all learned if we didn't know beforehand,
Speaker 5: inflation really really sucks. What we've been through since COVID
Speaker 5: has reminded us of that, and she will stay very,
Speaker 5: very focused on keeping inflation in the right place.
Speaker 2: So as we know, New Zealand's GDP is down, business
Speaker 2: sentiment remains fragile at best. If the mood of the
Speaker 2: boardroom is anything to go by, and the future is
Speaker 2: of course uncertain, how much faith do you have in
Speaker 2: the Bank's ability to steer us back to that growth period.
Speaker 5: Well, I still believe in monetary policy doing the job.
Speaker 5: So in the end, we saw it in COVID, if
Speaker 5: you drop interest rates low enough, you're effectively putting more
Speaker 5: cash into the economy because people aren't having to pay
Speaker 5: those rates to those mortgage rates, so you know, more
Speaker 5: dollars in their pockets, and eventually that gets the economy going. Now,
Speaker 5: it can also overstimulate an economy and create inflation, but
Speaker 5: I think it will work. It's just it is taking
Speaker 5: a lot longer than we are used to to transmit.
Speaker 5: And there's probably a couple of ways of looking at it.
Speaker 5: One is that the economy has just been worse than
Speaker 5: we've expected all the way along, and people when they
Speaker 5: do get a bit of money back from their mortgage,
Speaker 5: that the savings on their mortgage, they're saving that or
Speaker 5: putting it on the mortgage because they're worried about their
Speaker 5: employment or their business. They just want to be secure,
Speaker 5: so they're not going out and spending. And the other
Speaker 5: one is this sort of idea that more people than
Speaker 5: usual are trying to game the thing. So we've had
Speaker 5: higher numbers of people on floating interest rates or very
Speaker 5: short term fixed rates because nobody wants to lock in
Speaker 5: for a long time and actually which would realize the
Speaker 5: savings that the Reserve Bank's trying to give us. But
Speaker 5: people don't want to do that until they sort of
Speaker 5: get to the bottom of the cycle and everybody wants
Speaker 5: to lock in at a lower rate, maybe the end
Speaker 5: of this year, or you know, when we get to
Speaker 5: the low end of this interest rates cycle. Which is
Speaker 5: a nice idea, but it's actually working against what the
Speaker 5: Reserve Bank's trying to achieve. It's keeping people on higher
Speaker 5: rates for longer because they're not taking the lowest available rate.
Speaker 2: When it comes to the economy correcting itself, you would
Speaker 2: have been reporting around two thousand and eight, right, I
Speaker 2: mean how long did the economy and GDP take to
Speaker 2: correct itself after.
Speaker 5: That, Well, it was a bit of a slow train
Speaker 5: wreck the GFC, so it was pretty horrible through two
Speaker 5: thousand and eight, two and nine. I think the government
Speaker 5: books were hit pretty hard because we will we have
Speaker 5: to remember we had an earthquake in twenty eleven, so
Speaker 5: the government books are terrible from that period. But the
Speaker 5: economy itself bounced back quite quickly. We didn't apart from
Speaker 5: the obvious thing of the finance companies that all went over,
Speaker 5: which was very specific. The broader economy wasn't hit so
Speaker 5: badly like our sheer market bounced back reasonably well. We
Speaker 5: did have after the GFC a long period of relatively
Speaker 5: relatively low growth, but it was also really low inflation,
Speaker 5: so it was you know, we were talking about deflation
Speaker 5: and so yet a period where while things weren't booming
Speaker 5: for quite a while, prices weren't going much up much either,
Speaker 5: so things were stable and that was that's important, And
Speaker 5: I think that's kind of what's been lacking for people
Speaker 5: through this period since COVID is just the volatility is
Speaker 5: really plays havoc with your you know, psychology around the economy,
Speaker 5: and that goes to the confidence. And I think there's
Speaker 5: just a lack of confidence in the future at the moment,
Speaker 5: and we need a period of stability.
Speaker 3: Yeah, because that's what I was thinking.
Speaker 2: How long can the government perhaps blame COVID for economic
Speaker 2: woes now in twenty twenty five, Well, I.
Speaker 5: Mean there's there's two ways, two parts to it. So
Speaker 5: if they're talking about the big picture government finances, they
Speaker 5: could they still can be blaming COVID, you know, or
Speaker 5: they can blame the last government. You can take your pick.
Speaker 5: Either they had to do it or they didn't. But
Speaker 5: the government accounts blew out during COVID one way or
Speaker 5: the other, and that's going to take a long time,
Speaker 5: many many years to correct. But then if you focus
Speaker 5: in on the current economic cycle, that's a bit different
Speaker 5: to the big macro stuff. So you know they're linked
Speaker 5: because this government has felt a need to address some
Speaker 5: of that macro stuff at a rate and it believes
Speaker 5: that's the right thing to do. But that is also
Speaker 5: meant it's not it's not actually cutting spending overall, but
Speaker 5: it's not maintaining the increases and spending. It's trying to
Speaker 5: cut back here and there to pay down debt and
Speaker 5: get us into surplus by a certain date. Those are
Speaker 5: political decisions and they've had an impact on the on
Speaker 5: the shorter term economic cycle because you haven't had government
Speaker 5: fiscal stimulus pushing the economy along. So yeah, I don't
Speaker 5: think you can look back much longer at the current
Speaker 5: economic cycle unless you tie it to that that and
Speaker 5: you believe that you know that we must address There
Speaker 5: are a lot of people who believe that that that
Speaker 5: we're in sort of a crisis around the government's levels
Speaker 5: of debt and you know, the deficit and all that
Speaker 5: sort of stuff, and there are other people who are
Speaker 5: more relaxed about it. So yeah, those are political decisions
Speaker 5: I think for joining US.
Speaker 3: Liam cheers.
Speaker 5: All right.
Speaker 2: That's it for this episode of the Front Page. You
Speaker 2: can read more about today's stories and extensive news coverage
Speaker 2: at enzidherld dot co dot nz. The Front Page is
Speaker 2: produced by Jane Ye and Richard Martin, who is also
Speaker 2: our editor.
Speaker 3: I'm Chelsea Daniels.
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Speaker 2: behind the headlines.