WEBVTT - Phew! Interest rates go south! With KiwiBank's Jarrod Kerr 0:00:05.880 --> 0:00:09.240 Curder and welcome to this short episode of Shared Lunch 0:00:09.520 --> 0:00:13.440 where we look at everyone's favorite subject, interest rates. As 0:00:13.480 --> 0:00:15.760 you may have heard, the Reserve Bank has decided to 0:00:15.840 --> 0:00:18.880 cut the official cash rate, the OCR to five point 0:00:18.920 --> 0:00:22.160 two five percent. Colbrookaho, I'mbrook Roberts, one of the co 0:00:22.239 --> 0:00:25.159 founders and co CEO's at Chares's, and to understand the 0:00:25.160 --> 0:00:28.080 impact of this cut, we're joined by Qubank Chief Economist 0:00:28.200 --> 0:00:31.640 Jared Kerr Cyder, Jared, thanks so much for coming along. I, 0:00:32.479 --> 0:00:34.879 as you probably may know, I used to work at 0:00:34.960 --> 0:00:37.839 Qbubank and I've been thinking of you and maybe the 0:00:37.880 --> 0:00:40.080 Price and Committee, which I used to be a part of, 0:00:40.120 --> 0:00:42.279 where we would get together and talk about what we're 0:00:42.280 --> 0:00:44.320 happening with the OCR and the changes we might make 0:00:44.400 --> 0:00:47.040 for savers and borrowers. 0:00:47.120 --> 0:00:48.880 But also we are. 0:00:48.760 --> 0:00:53.280 Both on the nz EIIR, the New Zealand Economic Research 0:00:53.320 --> 0:00:56.560 Institute sorry shadow board, and we both made the same 0:00:56.600 --> 0:00:58.720 prediction of what we thought would happen with this OCR. 0:00:58.800 --> 0:01:00.720 We both I think, gave it a. 0:01:00.280 --> 0:01:03.080 Sixty percent chance of a cat and funny enough, the 0:01:03.120 --> 0:01:05.160 market did too. They also thought there'd be a sixty 0:01:05.160 --> 0:01:08.400 percent chance of a reduction, and we have seen that 0:01:08.440 --> 0:01:12.840 we've seen the ocr drop by point two five to 0:01:12.880 --> 0:01:15.520 five point two five percent. Could you give us a 0:01:15.520 --> 0:01:18.160 bit of an overview of what's happened in the economic 0:01:18.280 --> 0:01:21.360 environment that's led to this and we're at with inflation today. 0:01:21.640 --> 0:01:25.039 Yeah, thank you for having me on. And it is 0:01:25.080 --> 0:01:28.959 a lot of fun during these periods when you when 0:01:28.959 --> 0:01:32.000 you're involved in pricing committees and the and the likes. 0:01:32.040 --> 0:01:36.039 But you know economically that the country has been in 0:01:36.080 --> 0:01:39.480 a recession since two thousand and twenty two, right, We 0:01:39.520 --> 0:01:42.360 saw that in the Bank's data. We've seen it all 0:01:42.760 --> 0:01:44.520 and all the data out over the last year and 0:01:44.560 --> 0:01:47.760 a half. We will be in a recession for another 0:01:47.760 --> 0:01:51.320 couple of quarters yet, so the inflation outlook. 0:01:52.440 --> 0:01:53.440 Is subdued. 0:01:54.000 --> 0:01:57.240 We expect inflation to be below three percent in the 0:01:57.320 --> 0:02:00.200 quarter that we're in now and back to two percent 0:02:00.600 --> 0:02:05.160 next year. And as of you know, the latest March 0:02:05.280 --> 0:02:08.720 policy statement from the Reserve Bank, they think the same thing. 0:02:09.240 --> 0:02:11.119 Finally, they've seen. 0:02:10.919 --> 0:02:14.560 That coming through in their own forecasts, and that means that, 0:02:15.200 --> 0:02:17.880 you know, a job done from the central banks perspective. 0:02:18.000 --> 0:02:20.519 They've tamed the inflation beast. 0:02:20.600 --> 0:02:23.840 It's dropped from seven point three percent and it'll be 0:02:23.960 --> 0:02:27.840 back to two percent pretty quickly. That's great news for 0:02:27.919 --> 0:02:32.120 the central Bank and it's boosted their confidence and they've 0:02:32.160 --> 0:02:33.560 started cutting interest rates. 0:02:33.760 --> 0:02:36.519 Yeah, and so we saw their first round of cuts. 0:02:36.560 --> 0:02:38.919 Now this is I think the first since March twenty twenty, 0:02:39.080 --> 0:02:43.360 if I recall correctly, it has felt a lot tougher 0:02:43.400 --> 0:02:48.000 here in Alto for households and businesses. Do you see 0:02:48.280 --> 0:02:50.200 that this will make much of a change. Is it's 0:02:50.200 --> 0:02:52.160 just a start, as you mentioned, might see it go 0:02:52.240 --> 0:02:56.360 down further over the next more reductions come ahead. But 0:02:57.120 --> 0:02:59.080 do you think this will start correcting that slowdown? 0:02:59.400 --> 0:03:00.960 Definitely? Absolutely. 0:03:02.240 --> 0:03:06.079 Households and businesses are doing it tough, and they've been 0:03:06.080 --> 0:03:09.000 doing it tough for a long time, and they've been 0:03:09.040 --> 0:03:15.240 waiting patiently for rate cuts to come, and they've come 0:03:15.280 --> 0:03:20.480 a little earlier than most people and even businesses had expected. 0:03:20.560 --> 0:03:24.120 So that's good news. But it's not just about the timing. 0:03:24.240 --> 0:03:27.000 It's about the magnitude. So you know how many rate 0:03:27.000 --> 0:03:29.600 cuts are we going to get? And what we've been 0:03:29.639 --> 0:03:33.720 telling our customers, businesses and households alike is that there's 0:03:33.720 --> 0:03:36.360 going to be quite a few rate cuts coming. We're 0:03:36.400 --> 0:03:38.440 expecting a cash rate to fall from five and a 0:03:38.520 --> 0:03:41.800 half to two and a half. So with that in mind, 0:03:42.000 --> 0:03:46.080 you know, businesses are now thinking well into next year. 0:03:46.320 --> 0:03:49.880 The economy is going to improve, twenty twenty five is 0:03:49.880 --> 0:03:51.960 going to be a much better year than twenty four, 0:03:52.400 --> 0:03:56.200 and let's forget about twenty three. Let's start positioning for 0:03:56.280 --> 0:04:00.720 some growth, and hopefully they'll start thinking to themselves, let's 0:04:00.720 --> 0:04:06.040 start positioning for some investment and expansion. And households will 0:04:06.040 --> 0:04:08.960 similarly be thinking, my budget's going to get a lot better, 0:04:09.920 --> 0:04:11.840 the pressure is going to be a lot better, and 0:04:11.880 --> 0:04:15.080 you know, hopefully I'll be spending a bit more next year. 0:04:15.160 --> 0:04:16.960 So big changes are coming. 0:04:18.279 --> 0:04:19.640 So that is it they're saying. 0:04:19.680 --> 0:04:21.840 Staying alive to twenty twenty five, you know it's going 0:04:21.880 --> 0:04:23.720 to be there might be. There might be some more 0:04:23.720 --> 0:04:27.440 continuous drops we might see this year, which will relieve 0:04:27.480 --> 0:04:30.560 some pressure for those with lending, whether it be businesses 0:04:30.680 --> 0:04:34.120 or or home loans of the lake, but you. 0:04:34.080 --> 0:04:36.279 Will start to see recovery over time. 0:04:36.880 --> 0:04:39.640 What you know, with people with mortgages, what should they 0:04:39.640 --> 0:04:40.799 be thinking about at the moment. 0:04:42.520 --> 0:04:44.159 I think they've been thinking the right thing. 0:04:46.240 --> 0:04:49.520 You know, most most people have gone for a six 0:04:49.600 --> 0:04:53.880 month rate, so they have been well aware that the 0:04:53.920 --> 0:04:57.839 next moves down, not up, and they've been fixing for 0:04:57.880 --> 0:05:00.239 a very short period of time, sort of six month 0:05:00.600 --> 0:05:03.000 and no more than a year. So I think it's 0:05:03.240 --> 0:05:09.479 it's over seventy percent of mortgage mortgage holders have have 0:05:09.720 --> 0:05:12.360 rates fixed for less than a year. 0:05:12.960 --> 0:05:15.799 That's great because it means they don't have to wait. 0:05:15.720 --> 0:05:18.920 Very long to get those rate cuts that are coming 0:05:18.960 --> 0:05:23.120 through now, and that's important. And it's good news from 0:05:23.120 --> 0:05:25.719 the Central banks perspective as well, because normally it takes 0:05:25.720 --> 0:05:29.039 about eighteen months. You know, kiwis tend to sort of 0:05:29.080 --> 0:05:31.640 love a two year rate, but because of all this 0:05:31.839 --> 0:05:34.680 talk about rate cuts, they've gone to six months, which 0:05:34.760 --> 0:05:37.400 means those rate cuts are going to feed through to 0:05:37.520 --> 0:05:39.160 households and businesses faster. 0:05:39.720 --> 0:05:40.760 This is good news. 0:05:41.600 --> 0:05:44.200 Yeah, and then what about for house prices? 0:05:44.240 --> 0:05:46.800 What do you see will happen into house prices here 0:05:46.800 --> 0:05:49.200 and now as rates start to reduce. 0:05:50.440 --> 0:05:53.960 So interest rates are one of the biggest influences on 0:05:54.800 --> 0:06:00.200 house prices. We saw rapid rate cuts during COVID and 0:06:00.240 --> 0:06:03.080 that led to house prices taking off and they rose, 0:06:03.200 --> 0:06:06.440 you know, forty five percent and eighteen months, which was just. 0:06:08.279 --> 0:06:09.119 Unsustainable. 0:06:09.360 --> 0:06:12.279 And then the Central Bank started hiking quite aggressively to 0:06:12.360 --> 0:06:15.240 reverse that, and we've seen house prices full, you know, 0:06:15.320 --> 0:06:19.720 around twenty percent in parts. Now they're cutting rates again, 0:06:20.320 --> 0:06:23.919 so they will cut the cash rates we as we 0:06:24.000 --> 0:06:28.640 mentioned before, and that'll start feeding through into the housing market. 0:06:29.040 --> 0:06:31.520 Looking at the fundamentals of the housing market, there's a 0:06:31.520 --> 0:06:35.839 massive shortage and that shortage is getting worse. We're not 0:06:35.880 --> 0:06:39.680 building enough homes here to keep up with the surge 0:06:39.680 --> 0:06:43.040 and migration that we've had, so that shortage is getting worse. 0:06:44.400 --> 0:06:48.479 Investors have been sidelined, they've been targeted, they've been hunted 0:06:49.040 --> 0:06:54.839 by policymakers with changes to bright line tests and intratroductibility 0:06:55.000 --> 0:07:00.560 and you know other bits and pieces that's reversing. And 0:07:00.600 --> 0:07:04.440 with interest rates being cut, and with rental yields improving, 0:07:04.560 --> 0:07:08.440 so rents arising as house prices are going down, all 0:07:08.480 --> 0:07:11.680 of these things point to investors coming back into the 0:07:11.720 --> 0:07:16.000 market as all this plays out. You know, we're expecting 0:07:16.040 --> 0:07:19.760 house prices to rise by at least five to seven 0:07:19.800 --> 0:07:23.000 percent next year, which you know might not sound like 0:07:23.080 --> 0:07:25.920 a lot, but it's a big improvement from what we've 0:07:25.920 --> 0:07:27.640 seen over the last couple of years. 0:07:28.840 --> 0:07:32.680 So may see house prices increase for savers, you know, 0:07:32.720 --> 0:07:35.240 they're likely going to get less of an interest rate 0:07:35.280 --> 0:07:37.840 on the savings accounts or term deposits that will be 0:07:37.840 --> 0:07:40.800 coming up. What we typically see on chess when there 0:07:40.840 --> 0:07:43.720 are lower interest rates is that people do start to 0:07:43.760 --> 0:07:47.360 move into different risk are assets like investing, where they 0:07:47.400 --> 0:07:49.960 may believe that they'll get a you know, the higher 0:07:50.000 --> 0:07:52.600 return than. 0:07:51.680 --> 0:07:52.679 Lower savings accounts. 0:07:52.680 --> 0:07:55.040 Will be interesting to see that play out over that 0:07:55.520 --> 0:07:56.680 over the next year too. 0:07:58.600 --> 0:07:59.840 Anything you want to add to that. 0:08:00.080 --> 0:08:02.160 Oh, it's just going to say, that's exactly what muniture 0:08:02.200 --> 0:08:06.400 policy is designed to do. So what you're talking about 0:08:06.480 --> 0:08:10.160 is exactly what the Reserve Bank relies on. So you know, 0:08:10.240 --> 0:08:14.720 cutting that cash right lower and lower, you know, reduces 0:08:15.120 --> 0:08:18.320 the returns that you get on your simple savings products 0:08:18.840 --> 0:08:21.920 like a term deposit or having your money in a shares, 0:08:21.960 --> 0:08:26.640 these savings account and it forces people out the risk 0:08:26.640 --> 0:08:31.440 spectrum to look for high yield elsewhere. So that's exactly 0:08:31.480 --> 0:08:34.400 what's supposed to happen, and that'll be exactly what they 0:08:34.600 --> 0:08:37.880 will rely on happening over the next couple of years. 0:08:39.480 --> 0:08:42.040 Now, I know you're a very busy man, a very 0:08:42.040 --> 0:08:44.560 busy economist on a busy day here and now as 0:08:44.640 --> 0:08:47.400 you are, so just leave with one final question, which 0:08:47.440 --> 0:08:49.760 is just could you just give us the key takeaways 0:08:49.760 --> 0:08:53.599 of them monetary policy statement that was made today and 0:08:54.280 --> 0:08:55.920 so that people can go what are the key things 0:08:55.920 --> 0:08:58.479 that people to take away from the statement that was made. 0:08:59.000 --> 0:09:02.280 I think the key thing is that the inflation beast 0:09:02.600 --> 0:09:05.920 that we've been trying to tame in recent years has 0:09:06.000 --> 0:09:10.600 been tamed. Inflation is going back to two percent. We're 0:09:10.640 --> 0:09:14.240 all more confident in that, which means that the central 0:09:14.280 --> 0:09:18.319 banks job is done. So they've lifted interest rates to 0:09:18.559 --> 0:09:22.360 very restrictive levels. They're now going to take that restrictive 0:09:22.360 --> 0:09:24.520 interest rate and they're going to put it back to 0:09:24.600 --> 0:09:29.360 more of a goldilocks rate where it's neither hurting nor 0:09:29.480 --> 0:09:33.480 exciting people. So that's the big move, is that interest 0:09:33.559 --> 0:09:36.320 rates are falling, and they're falling fast. 0:09:37.440 --> 0:09:37.680 Nice. 0:09:37.720 --> 0:09:39.560 Hey, Well, thanks so much for your time today, Jared 0:09:39.640 --> 0:09:41.840 really really appreciate it, and I'll let you get back to 0:09:41.920 --> 0:09:45.600 all the other busy conversations I'm sure you've got lined up. 0:09:45.559 --> 0:09:48.520 Today, pleasure. Thank you for having me. 0:09:48.480 --> 0:09:50.040 On, Thanks heaps for tuning in. 0:09:50.640 --> 0:09:53.319 You can watch a short episode on YouTube or listen 0:09:53.360 --> 0:09:54.960 in wherever you get your podcasts. 0:09:55.200 --> 0:09:59.920 Kakitano investing involves risk. You might lose the money you start. 0:10:00.640 --> 0:10:04.440 We recommend talking to a licensed financial advisor. We also 0:10:04.480 --> 0:10:08.360 recommend reading product disclosure documents before deciding to invest.