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

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Speaker 1: nature and it 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.

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Speaker 2: We're about to enter an economic unwinding, with.

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Speaker 1: The market aggressively pricing in multiple rate cuts this year,

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Speaker 1: but it's unlikely to take us back to that cheap

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Speaker 1: money era where interest rates were close to zero.

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Speaker 3: Yeah, that period was the outlier, and people who need

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Speaker 3: to keep that in mind, so when they're thinking about

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Speaker 3: where we can get back to the world's changed significantly.

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Speaker 3: Thank goodness, we don't want to get back to zero.

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Speaker 3: Zero was not a good place to be. Central bankers

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Speaker 3: certainly didn't want to be there because then you end

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Speaker 3: up with all the unconventional policy solutions that of course,

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Speaker 3: we're now trying to unwiend all the issues that we

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Speaker 3: have with that.

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Speaker 1: The US Federal Reserve kept rate steady last week, but

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Speaker 1: is expected to start moving them lower later this year,

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Speaker 1: in line with the downward trend in central banks.

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Speaker 2: Measure of inflation, including here.

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Speaker 1: Annual growth in our consumer price index is at three

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Speaker 1: point three percent, less than half the seven point three

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Speaker 1: percent peak from twenty twenty two.

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Speaker 2: But our economy is ugly.

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Speaker 1: Unemployment is ticking up, while consumer spending and house values

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Speaker 1: are in decline. The services and manufacturing industries are contracting quickly,

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Speaker 1: with the period of pain they've experienced now.

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Speaker 2: Longer than the GFC.

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Speaker 1: That's clearly put us on course for rate cards, and

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Speaker 1: the wholesale interest rate market is massively pricing it in,

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Speaker 1: with the ocr expected to fall from the current five

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Speaker 1: point five percent to three point seventy five percent within

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Speaker 1: a year. The two year swap rate recently hit a

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Speaker 1: two year low, leading some major banks to lower.

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Speaker 2: Their retail rates.

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Speaker 1: That means the market is doing some of the Reserve

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Speaker 1: Bank's unwinding work for it, bringing relief to borrowers, but

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Speaker 1: it also may demand at move soon. Whenever it does,

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Speaker 1: that would mark the end of one of the most

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Speaker 1: rapid and restrictive rate hiking cycles our economy has ever seen.

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Speaker 1: Shaun Keen watches the rates market closer than anyone I know.

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Speaker 1: He expects the Reserve Bank will have to respond to

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Speaker 1: our economy soon.

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Speaker 2: Shawn, good to see you, Thanks so much for having

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Speaker 2: us out. Good to be back.

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Speaker 4: Thanks you, Madison. It's great to be there.

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Speaker 1: It seems like it's consensus now that cuts are coming

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Speaker 1: this year. Is that corrects?

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Speaker 4: Yeah? Absolutely, the market's pricing in pretty aggressively.

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Speaker 1: What is your forecast. I'm assuming you're picking November, and

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Speaker 1: if so, to what degree.

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Speaker 3: Yeah, I mean, I think they'll cut it by November

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Speaker 3: at the latest. All year, I've thought probably fifty basis

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Speaker 3: points in November, because there's a very long gap between

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Speaker 3: the November monetary policy statement and February when they come back.

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Speaker 3: So I thought fifty at the end of the year

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Speaker 3: would be right, and then they come back again in February,

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Speaker 3: probably another fifty the market a little bit earlier now,

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Speaker 3: So the market's fifty to fifty in terms of probabilities

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Speaker 3: for an August rate cut, which is pretty early, and

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Speaker 3: then it's fully priced by October and again in November.

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Speaker 3: So we've got about seventy three basis points of easing

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Speaker 3: by the end of this year.

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Speaker 1: Yeah, you've been pretty early on this on looking at

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Speaker 1: the data and assuming that cuts are going to have

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Speaker 1: to come this year.

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Speaker 2: What did you see that other economists didn't.

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Speaker 3: I think, you know, one of the benefits of my

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Speaker 3: role as I look overseas as well, as looking domestically,

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Speaker 3: and it was apparent to me that not only was

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Speaker 3: the overseas markets overseas economy starting to slow, but that

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Speaker 3: the general picture of interest rates was probably peaking. You know,

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Speaker 3: these things move in cycles, so as we started to

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Speaker 3: turn overseas, I thought it was probably going to happen here.

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Speaker 3: And the analysis of the data here domestically was pretty weak.

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Speaker 3: You know, what kept the RBNZ where they were was inflation,

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Speaker 3: and the inflation number is there mandate, that's what they

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Speaker 3: focus on, but the underlying activity levels and the economy

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Speaker 3: were really.

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Speaker 1: Weak, completely out of the picture.

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Speaker 2: No, how likely is that do you think, Well, the.

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Speaker 4: Market's fifty to fifty. I think it's too early.

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Speaker 3: I think it's very hard for any central bang to

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Speaker 3: go from talking about hiking rates at the last monetary

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Speaker 3: policy statement in May, which is what they did, to

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Speaker 3: suddenly cutting in August without some sort of big global event.

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Speaker 3: So I think what you're going to see is a

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Speaker 3: change in tone, a sharp change in tone and forecast.

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Speaker 3: But I think they'll leave the OCO where it is.

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Speaker 1: You mentioned inflation, and we know that CPI is paramount.

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Speaker 1: The headline figure is going in the direction that the

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Speaker 1: RBNZ wance and expected it too. That's good news effectively,

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Speaker 1: but can we trust them.

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Speaker 3: Yeah, the I mean all that data as subject to revision.

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Speaker 3: As you know, medisin better than me at different times

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Speaker 3: in different cycles. Inflation's affected by different things. So we've

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Speaker 3: got a number of different metrics for our inflation. So

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Speaker 3: we have headline inflation, we have core that the RBNS

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Speaker 3: that look at, and then we've got the two subcomponents

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Speaker 3: of tradable and non tradable. Now the inflation rate is falling,

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Speaker 3: so we're at three point three percent, which is great.

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Speaker 3: The rbnz's target rate is to get it back to

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Speaker 3: two percent, the midpoint of their target band to one to.

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Speaker 4: Three, so they're a little bit higher.

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Speaker 3: The projection suggests that we're going to be back inside

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Speaker 3: the one to three percent banned by the end of

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Speaker 3: this year, which is great. But the rbnz's focus has

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Speaker 3: been on getting back to two and two is a

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Speaker 3: long way from three point three.

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Speaker 4: Now.

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Speaker 3: To get to two, we've got to have both tradable

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Speaker 3: inflation and non tradable inflation falling. Tradable inflation is driven

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Speaker 3: by global factors largely outside of our control, so things

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Speaker 3: like our international prices that feed through to New Zealand.

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Speaker 3: That's down at zero point three percent. It's already about

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Speaker 3: as low as it can go. Non tradable, which is

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Speaker 3: domestically domestic factors, that's at five point four and the

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Speaker 3: rbnz's reluctance to ease or to give softer guidance has

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Speaker 3: been because of the stickiness of non tradable inflation.

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Speaker 4: So they need that to come down.

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Speaker 1: So it's not just a matter of getting within that

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Speaker 1: target range, it's a matter of staying there too.

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Speaker 3: Absolutely so, I mean, Adrian has been very clear and

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Speaker 3: the NPC have been very clear that it's not just

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Speaker 3: about getting to two and then bouncing off it. It's

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Speaker 3: about getting to two and staying there. So and that

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Speaker 3: again is part of that hawkish message. So they gave

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Speaker 3: last May, but that.

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Speaker 1: Headline inflation figure with a three in front of it,

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Speaker 1: you know, everyone's kind of screaming from the rooftops that

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Speaker 1: that's awesome news. Not the Reserve Bank quite yet, but

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Speaker 1: that official cash rate has a five in front of it,

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Speaker 1: So that spread that discrepancy kind of demands that they

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Speaker 1: have to cut anyway.

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Speaker 3: Yeah, I think you know, one of the reasons I

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Speaker 3: believe that the monetary policy is achieving traction is that

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Speaker 3: the spread is so wide between not only current inflation,

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Speaker 3: but the project and inflation rate. So if you look

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Speaker 3: at the rbnz's last set of projections in May, by

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Speaker 3: Q three of next year, they've got the OCR unchanged

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Speaker 3: at five and a half, but inflation is down at

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Speaker 3: two point two. So you've got this enormous three hundred

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Speaker 3: odd basis point spread between the two.

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Speaker 4: Normally you would expect it to.

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Speaker 3: Be around one hundred and sixty basis points, around about

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Speaker 3: half of what it is, and I think it's going

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Speaker 3: to get back there. So my expectation is that the

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Speaker 3: rbns AT will lower their projections for the OCR, so

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Speaker 3: they set around about one hundred and fifty to one

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Speaker 3: hundred and sixty basis points above where they think inflation is.

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Speaker 3: And if you think inflation is going to be two

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Speaker 3: by the middle of next year, well that puts the

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Speaker 3: cash rate somewhere around three and a half two hundred

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Speaker 3: points below where we are today.

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Speaker 1: And did other spreed that you have been quite vocal

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Speaker 1: on calling out is coming to those oc our projections

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Speaker 1: and what the Reserve Bank has stated on paper versus

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Speaker 1: what the market is actually priced in very big sea

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Speaker 1: gap there. Explain that to me, How did the market

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Speaker 1: price something so differently.

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Speaker 2: To what the rb itself did.

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Speaker 3: Yeah, I mean, I think one of the challenges that

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Speaker 3: the RBNS has had is that the May Monetary Policy

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Speaker 3: statement was surprisingly hawkesh for an economy that was in recession.

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Speaker 3: I mean, four of the last seven quarters have been

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Speaker 3: negative growth. Six of the last six quarters we've had

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Speaker 3: negative per capita growth, and the market is looking at

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Speaker 3: this and saying, this economy is slowing very fast. It

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Speaker 3: started to building easings and then the RBNZ came out

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Speaker 3: with the monetary policy statement that talked about hiking interest

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Speaker 3: rates and it's slightly raised at SOCR path. Now, there

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Speaker 3: were various reasons for that, including a reassessment of the

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Speaker 3: amount of spare capacity that we have in the economy,

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Speaker 3: but I think those concerns are gone now. Even though

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Speaker 3: that was only in May, it's pretty clear now that

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Speaker 3: we're slowing really fast. So the most recent BNZ pmis

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Speaker 3: and PSI's the PSI, the Performance of Service index that

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Speaker 3: just printed at forty, which is the lowest that's ever

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Speaker 3: been outside of the COVID period. So domestic activity is

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Speaker 3: extraordinarily weak. So the market's been looking at the activity levels,

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Speaker 3: and it's been assuming that the RBNZ will get the

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Speaker 3: inflation traction that it expects.

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Speaker 1: Is it unfair or of fear to say, then, based

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Speaker 1: off that assissement, that the Reserve Bank has kind of

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Speaker 1: been blinded or blind to the ugliness of the economy

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Speaker 1: that people on the market like yourself have clearly seen

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Speaker 1: for a while.

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Speaker 4: No, I wouldn't be that harsh on them.

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Speaker 3: I think, you know, they've got one mandate specifically, which

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Speaker 3: is inflation. They're adjacent to that. They've got to achieve

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Speaker 3: their objective without causing undue volatility in a bunch of

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Speaker 3: other variables, including output, interest rates, in the exchange rate,

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Speaker 3: so they can't be blind to what's going on elsewhere

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Speaker 3: in the economy, and that includes unemployment. Unemployments at four

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Speaker 3: point three, the RBNS think it will be five by

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Speaker 3: the end of the year. I suspect that might move

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Speaker 3: a little bit higher than that, and we might actually push,

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Speaker 3: you know, quite quickly in next year up towards five

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Speaker 3: and a half. Now, historically our twenty five year average

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Speaker 3: is five point two. So right now, unemployment is still

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Speaker 3: pretty low. So if you like this room for unemployment

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Speaker 3: to go up without it being an outlawer. But the

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Speaker 3: bank's focus has to be on inflation because that's what

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Speaker 3: their mandate requires. The question is is being in the

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Speaker 3: band sufficient or do they need to be at two

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Speaker 3: percent For a long time they talked about two percent

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Speaker 3: the market of things being in the band is satisfactory.

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Speaker 1: I did want to ask you about how a lot

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Speaker 1: of that other data, economic data, intersex into Central Bank

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Speaker 1: thinking as well. You've already mentioned labor market statistics and

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Speaker 1: what's happening with employment.

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Speaker 2: How much weight do they place on all of the

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Speaker 2: other things, including asset prices as well.

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Speaker 3: Yeah, I mean everything obviously folds in ultimately to what

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Speaker 3: the rbns that are looking at, and that's concentrated in

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Speaker 3: one number, which is the inflation number. So it all

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Speaker 3: has an impact and it's a necessary part of what

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Speaker 3: the Reserve Band does that they monitor all acset price

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Speaker 3: changes across the economy. Now, some of them are more

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Speaker 3: immediate and their impacts, some of them are more long term.

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Speaker 3: The big one in New Zealand's obviously house house prices

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Speaker 3: are the key asset for most households. And Adrian to

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Speaker 3: his credit when he took over his RBNS at governor

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Speaker 3: talked about the fact that as a country we can't

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Speaker 3: get rich selling houses to one another.

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Speaker 1: We're trying, though, aren't we.

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Speaker 3: We tried for a long time, and when we had

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Speaker 3: foreign people coming in and buying houses office, sometimes you

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Speaker 3: do get an appreciation in terms of your evaluation because

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Speaker 3: you sold it to a new entrant. But generally, in

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Speaker 3: a closed circuit economy closed economy, if I sell to

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Speaker 3: you and you sell to somebody else, there's been no

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Speaker 3: appreciable change in value.

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Speaker 4: They've been very.

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Speaker 3: Clear that getting house price appreciation under control was one

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Speaker 3: of the objectives of tighter policy, and they've done that.

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Speaker 3: And again, Adrian, Toio his credit, was probably the most

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Speaker 3: honest central banker in the world in saying we need

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Speaker 3: a recession. I mean, my goodness, Jo Powell couldn't say

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Speaker 3: that in the United States, and there's no way that

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Speaker 3: wouldn't There's no way that Michelle Bullet could say that

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Speaker 3: in Australia. But Adrian said it here and most people

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Speaker 3: agreed inflation was too high. Now, part of getting inflation

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Speaker 3: under control is getting house price growth under control, and

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Speaker 3: they've achieved that with a very rapid appreciation in the

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Speaker 3: OCR which is fed through to mortgage rates. Because in

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Speaker 3: New Zealand we had a very high percentage of fixed

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Speaker 3: rate mortgages. It took monetary policy the best part of

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Speaker 3: two and a half years to really get traction, and

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Speaker 3: so at the first half of this year the RBNZ

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Speaker 3: were pretty clear that they were waiting for that large

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Speaker 3: mortgage refinancing role to take place and that they wanted

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Speaker 3: to keep rates where they were.

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Speaker 4: That's largely happened now, which is a good thing from here.

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Speaker 3: I think as interest rates starts to come off, you know,

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Speaker 3: people talk about is it time to get back into

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Speaker 3: housing again? Is it going to take off? I don't

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Speaker 3: think it will in the same way that has in

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Speaker 3: the past. And there's a few different things that have changed.

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Speaker 3: Principally the RBNS. It's macro prudential tools have changed. So

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Speaker 3: they've had LBRs for a while now, so loans of

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Speaker 3: value ratios. That's an efficient and effective tool. But with

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Speaker 3: an LVR, as house prices appreciate, your ability to borrow

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Speaker 3: increases as well, you can leverage against the asset. The

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Speaker 3: new tool they have is debt to income ratios and

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Speaker 3: debt to income ratios have a degree of power that's

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Speaker 3: multiples of the LVR. So your house price can go

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Speaker 3: wherever you like, but unless your income increases, you cannot

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Speaker 3: borrow more. And they've got the approval to use that.

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Speaker 3: They haven't used it yet, but that will give them

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Speaker 3: a lot of confidence that if the market starts to move.

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Speaker 4: They can rein it.

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Speaker 3: In the other one is our external position has changed

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Speaker 3: in that we're not as welcoming with foreign money. So

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Speaker 3: in estra're in New Zealand or an Australian or a Singaporean,

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Speaker 3: you can't buy in most property in New Zealand. And

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Speaker 3: you compare that with Australia where their house prices are

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Speaker 3: obviously appreciating significantly. But sus us that's the impact of

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Speaker 3: foreign buyers now. Different people have got different views about

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Speaker 3: whether that's a good or bad thing, but the reality

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Speaker 3: is they can't come in right now, so our house

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Speaker 3: prices are pretty flat.

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Speaker 2: That's the rules.

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Speaker 1: This all speaks to how restrictive the economy and the

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Speaker 1: rains on it are going to remain even if and

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Speaker 1: when interest rates reduce.

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Speaker 2: Right, what kind of a flaw do.

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Speaker 1: You think the Reserve Bank will allow this cycle to

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Speaker 1: end at noting that we're certainly kind of not in

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Speaker 1: a reflective phase yet because we're still kind of in

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Speaker 1: it at the moment. But I think it's fair to

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Speaker 1: say that it's not going to be back to that

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Speaker 1: zero interest rate asset price inflation era.

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Speaker 2: That we once had, right.

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Speaker 4: I don't think so.

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Speaker 3: The period was the outlier, and people need to keep

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Speaker 3: that in mind so when they're thinking about where we

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Speaker 3: can get back to the world's changed significantly, Thank goodness,

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Speaker 3: we don't want to get back to zero. Zero was

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Speaker 3: not a good place to be in Central bankers certainly

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Speaker 3: didn't want to be there because then you end up

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Speaker 3: with all the unconventional policy solutions that of course went

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Speaker 3: now trying to unwind all the issues.

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Speaker 4: That we have with that.

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Speaker 3: So the rbnz it's latest assessment of the long term

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Speaker 3: neutral interest rate is two and three quarter percent two

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Speaker 3: point seventy five. Shorter term, I think it's probably three

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Speaker 3: to three in a quarter. So in this cycle we

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Speaker 3: probably get down to about three to three and a quarter,

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Speaker 3: but there's some risk that it could end up higher

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Speaker 3: than that because as the world changes and it is

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Speaker 3: changing and you know, we don't know what's going to

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Speaker 3: happen with future trade agreements and the US view of

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Speaker 3: how it wants to trade with the world. The efficiencies

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Speaker 3: that we get from trading internationally, they diminish as borders close.

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Speaker 3: So a big part of the deflation that we've all

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Speaker 3: enjoyed over the past forty years been the opening up

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Speaker 3: of global markets, the ability to arbitrage away costs. If

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Speaker 3: it's cheaper to produce something in Malaysia than in Melbourne,

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Speaker 3: you do it in Malaysia. If it's cheaper to make

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Speaker 3: something in Europe rather than in New Zealand, you do

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Speaker 3: it in Europe. You can do that when markets are

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Speaker 3: open and you've got free movement of goods, services, in labor.

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Speaker 3: As borders close, as trade restrictions are put in place,

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Speaker 3: you don't have that same ability, and domestic prices rise

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Speaker 3: and on shoring, which is what the Americans are doing

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Speaker 3: and the Australians are doing now as well with some

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Speaker 3: things that will raise domestic prices.

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Speaker 2: Interesting.

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Speaker 1: So this unwinding, this easing, it's not like any other

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Speaker 1: time before because the world is different.

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Speaker 3: During politically, some different dynamics. What we've had over the

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Speaker 3: past forty years was different from anything we saw before.

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Speaker 3: We brought the world's second biggest economy into the global market.

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Speaker 3: It wasn't the second bigst economy at the time, but

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Speaker 3: it is now China. We brought it into the global market,

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Speaker 3: and it created massive deflation globally. Will as borders start

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Speaker 3: to close. Trade borders start to close, that goes into

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Speaker 3: reverse to some extent, not to the whole extent, but

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Speaker 3: to some extent.

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Speaker 1: Looking at our system, it survived relatively well. We jecked

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Speaker 1: up rates at a pace kind of unseen before really,

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Speaker 1: and also keep them at a height for a length

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Speaker 1: of time that's surprised pretty much everybody in the market,

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Speaker 1: most economists and banks certainly. What do you think we've

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Speaker 1: learned about monetary policy and the way in which it

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Speaker 1: can be used.

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Speaker 4: That's a great question.

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Speaker 3: I think the learning is one be active when you

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Speaker 3: need to be active. So the Reserve Bank Act did

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Speaker 3: in New Zealand quicker than most central banks around the world.

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Speaker 4: In my view, they were still too slow.

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Speaker 3: I would have liked them to have been more active,

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Speaker 3: more quickly on the way down.

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Speaker 4: Now they're going to have the same challenge.

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Speaker 3: So the market is obviously running well ahead of them

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Speaker 3: because one of the markets sees is that the economy

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Speaker 3: is heading a wall. Unemployment is going to go up

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Speaker 3: very quickly, Inflation is going to come down very quickly.

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Speaker 3: The longer the RBNZ takes to unwind the hikes to

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Speaker 3: get back down for about three and a half, the

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Speaker 3: longer it takes, probably the lower they'll have to go,

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Speaker 3: so the cycle will be extended. So faster movement is

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Speaker 3: probably better because the transmission mechanism seems to be much

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Speaker 3: quicker than it used to be. You know, Central manks

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Speaker 3: still talk about monetary policy taking fifteen months or so to.

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Speaker 4: Have an impact.

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Speaker 3: You know, my strong impression of it now is it's

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Speaker 3: probably close to six to nine months because market pricing

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Speaker 3: does the work for you.

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Speaker 1: A lot to watch, worrying wade about Shorty as always,

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Speaker 1: Thank you so much your time.

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Speaker 4: I appreciate it all right, thank you,