July 10, 2024 • 11 mins
The Reserve Bank has softened its language in the July Monetary Policy Review, leaving the cash rate unchanged at 5.5%
It's now saying inflation will make the 1-3% target this year.
Kiwibank economists say it's a move that has increased market confidence in a rate cut later this year.
Chief Economist Jarrod Kerr told Kerre Woodham that we’ve been in a recession for a year and a half, and it’ll take some rate cuts to jolt us out of it.
He said that they are optimistic and have been telling clients that next year will be better than this year, but it will take cuts.
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Speaker 1 (00:06):
You're listening to the Kerrywood and Morning's podcast from News
Talk sa'd B. The Reserve Bank has softened its language
in the July Monetary Policy Review, leaving the cash rate
unchanged at five point five percent. It's now saying inflation
will make the one to three percent target this year,
(00:27):
kind of Kiwibank economist say it's a move that has
increased market confidence in a rate cut later this year.
Kiwibank chief economist Jared Kurr joins me, now, a very
good morning to you.
Speaker 2 (00:41):
Good morning.
Speaker 1 (00:42):
You guys have been bullish all the way through, haven't
you that the inflation target will be met sooner than
expected and that interest rate cuts will fall faster than
the other bank's economists are expecting.
Speaker 2 (00:55):
Yes, we have. Look, we've we've been looking at our data.
I mean, as a bank, we have fantastic data, and
we saw things turning quite sharply at the end of
twenty twenty two, which raised a few flags for us,
and we said, you know, the risk is that the
Reserve Bank does too much. And here we are, We've
(01:15):
been in recession for a year and a half and
we're still in recession. And I think it'll take some
rate cuts to sort of jolt us out of it.
And we've been telling clients, you know, look, next year
should be better than this year, so sort of hang
on for now and things will get better. So we
are optimistic. But it does take rate cuts.
Speaker 1 (01:38):
Yeah, So it takes the rate cuts before your interest
rate cuts ConfL because you know, those who don't have
a financial background might say, what's stopping you lowering your
interest rate? Your interest rates right now if you believe
the economy is going to get better.
Speaker 2 (01:55):
Yeah, that's a fair question. The Reserve Bank sets munty policy,
which is an interest rate, and that interest rate is
kind of the benchmark that all other interest rates are
based off. So they've listed it all the way to
five and a half percent, but you know, five and
a half percent is not where we deal at. That's
(02:15):
not where we fund that we offer you know, term
deposits at six percent, that's our funding rate, and then
we've got mortgage rates and business lending rates above that.
So they really do control the direction of interest rates.
And I think once they start cutting, we'll see all
interest rates fall later later this year.
Speaker 1 (02:38):
And of course there's good news and bad news on that.
You know, the lenders will be happy, but those who
are relying on their term deposits will be like, no,
back we go to twenty one.
Speaker 2 (02:47):
Yeah, that's right. So from a macro sort of whole
of economy perspective, when they lower interest rates, that's stimulatory.
You know, more people have debt, but of course savers
get hurt. So this is fair warning to savers that
we think in shrates are going down, so you know,
(03:08):
maybe they want to take a look at their term
deposit rates. But to anyone who has debt out there,
we're also saying the same thing. Look into shrates are
likely to come off later this year, and most of
our customers seem to agree. We see fixing for sort
of six months to one year at the moment. Kiwi's
normally sort of hang around that two year space, so
(03:32):
you know, people are short enough.
Speaker 1 (03:34):
Funny you should say that I'm about to I'm about
to fix it. We bank mortgage myself. That's exactly what. Yeah,
and it is normally the two years. But now I'm thinking,
do I do six months? Do I do a year?
But when what is the what happens when people borrow money?
Does it depend on where they put the money, because
(03:54):
borrowing money is a good thing. It's not necessarily bad,
is it.
Speaker 2 (03:59):
Yeah, exactly. I mean there's good debt and there's bad debt.
Good debt would be considered debt that's used to purchase
an asset. Obviously a house is what we mostly sort
of focus on bad debts, obviously credit card or something
like that. So the good debt, you're right, if you're
putting it into a house or into a into a business,
(04:22):
you know, machine or a factory or something like that,
then you kind of hoping that that asset is going
to earn earn new money.
Speaker 1 (04:32):
We had a caller and a couple of texts saying
the Triple CFA Amendment Act still massively is going to
restrict kiwis from borrowing money.
Speaker 2 (04:42):
Yes, so the Triple CFA changes certainly have tightened up
bank lending. I would say the move and the interst
rate's going to be the biggest driver as to whether
people want to take on debt and the creation of credit.
So our appetite to lend or particularly key banks is
(05:03):
still very high. We're quite aggressive at the moment, So
you know, I think it's more the interest rate that
will drive the demand for credit rather than the triple
CFA inhibiting the supply. I do think things will pick
up next year based on lower interst rates, based on
(05:24):
confidence returning that I think that's key, and then getting
businesses investing again to right now, businesses are concerned, to
put it politely, and I think once they gain confidence,
hopefully next year we'll see them investing more and doing more,
which will lead to more growth.
Speaker 1 (05:44):
Another text was a bit more gloomy as well. The
next six months will see record mortgage sales, bankruptcy and
business closures. The Reserve Bank is about six months too late.
Speaker 2 (05:56):
I'd say they're more than six months late. But anyway,
I agree that we are seeing a lift and in
stress amongst households and businesses. That is by our Benz design,
and that is kind of what they're trying to achieve
to slow things down. But we are not anywhere near
(06:21):
the levels that would concern us. We're coming up a
very low base, very low levels of defaults in this
country compared to just about every other country out there.
Our banking system is incredibly stable and resilient.
Speaker 1 (06:37):
Chimabeley Cubs called the Reserve Bank's policies statistic and key
we Bank is quoted. I don't know who said it,
might have been the subren Delgado said the Reserve Bank
had the economy in a chokehold. Do you think there
needs to be a change in attitude in the Reserve
Bank when it comes to dealing with monetary policy? Have
(06:59):
they been too crude to blunt?
Speaker 2 (07:03):
Look? I think, you know, with the benefit of hinds,
we can say the Reserve Bank did too much during
the COVID period, and that's every central bank in the
world just just quietly did too much. So we ended
up generating more more inflation than we thought. Then they
had to unwind that, they had to get inflation back
(07:26):
down to its mandated one to three percent. And so
I think they've done too much this way as well tightening.
They've held much of policy a little too high, a
little too long. And you know that's with the benefit
of hindsight. Obviously.
Speaker 1 (07:43):
It's interesting you say that because I had a lot
of callers at the time that the Reserve Bank was
just shoving money at everybody, saying this is too much,
this is too much, and we're all going to pay
for it. And I remember them, you know, they were
profits who were not who were not appreciated at the time,
but they were saying, we've got to pay the pipe,
(08:04):
you know, and it's going to hurt.
Speaker 2 (08:07):
Yeah, and they were right, yeah, And at the time
we were we were saying similar things. Don't forget the
Reserve Bank had prepared banks for a negative cash rate,
which we which we fiercely opposed at the time. So
you know, they were they were willing to do whatever
whatever it took to get the economy going again. And
(08:27):
with the benefit hindsight, it was it was too much.
And you know, now, as your text has said, we're
paying the piper, and I think we're going a little
too far the other way. But you know, the Reserve
Bank yesterday did acknowledge the collapse in business confidence. They
had to, and they've moved in the direction of rate cuts,
(08:49):
whereas you know, only a month or so ago in May,
they were they were telling us them more likely to
hype and cut, which you know we we disagreed with this.
Speaker 1 (08:58):
Again, so once the interest rates come down at the
trading banks, and then will we see dancing in the
streets and you know, business is improving and no more
for lease signs on the on the main streets.
Speaker 2 (09:15):
I don't think it'll be that quick. You know, we're
we're we believe they'll start cutting in November, so we're
talking about the end of this year. They'll need to
deliver a few cuts before businesses, I think, start start
feeling it and households start feeling it. It takes time
to work its way through the economy. Unfortunately, there's an
(09:36):
eighteen month lag, so what they're doing today is really
aimed at the end of next year, and it will
take time to filter through. But I think psychologically, knowing
that interst rates are going down will help boost confidence
and that'll be you know, the start of the of
the road to recovery.
Speaker 1 (09:56):
How soon will you cut interest rates after the OCRRAS cut.
Speaker 2 (10:01):
I actually think interest rates might start falling beforehand. So yeah,
wholesale markets factor and rate cuts before they're delivered, so
that those wholesale rates that I mentioned before will start
coming off before they actually cut. We saw mortgage rates
fall a little bit earlier this year when the market
(10:23):
started factoring in rate cuts, so I wouldn't be surprised
if we saw, you know, some small declines, but obviously
we'll be holding off making big, big cuts and interest
rates until we actually see that o CR that that
pash rate cut by the RB.
Speaker 1 (10:42):
So six months or a year, would you take your
theoretically fix a mortgage six months or a year.
Speaker 2 (10:49):
I'm not allowed to offer personal advice, unfortunately, I'm just wondering. Okay,
you know, if we're calling for rate cuts in November,
you can you can sort of figure that one out.
Speaker 1 (10:59):
I think I think so, Jared, thank you so much
for your time. Jared Kirky, we Bank chief Economist. For
more from Kerry Would Mornings. Listen live to news Talks
at B from nine am weekdays, or follow the podcast
on iHeartRadio
You're listening to the Kerrywood and Morning's podcast from News
Talk sa'd B. The Reserve Bank has softened its language
in the July Monetary Policy Review, leaving the cash rate
unchanged at five point five percent. It's now saying inflation
will make the one to three percent target this year,
(00:27):
kind of Kiwibank economist say it's a move that has
increased market confidence in a rate cut later this year.
Kiwibank chief economist Jared Kurr joins me, now, a very
good morning to you.
Speaker 2 (00:41):
Good morning.
Speaker 1 (00:42):
You guys have been bullish all the way through, haven't
you that the inflation target will be met sooner than
expected and that interest rate cuts will fall faster than
the other bank's economists are expecting.
Speaker 2 (00:55):
Yes, we have. Look, we've we've been looking at our data.
I mean, as a bank, we have fantastic data, and
we saw things turning quite sharply at the end of
twenty twenty two, which raised a few flags for us,
and we said, you know, the risk is that the
Reserve Bank does too much. And here we are, We've
(01:15):
been in recession for a year and a half and
we're still in recession. And I think it'll take some
rate cuts to sort of jolt us out of it.
And we've been telling clients, you know, look, next year
should be better than this year, so sort of hang
on for now and things will get better. So we
are optimistic. But it does take rate cuts.
Speaker 1 (01:38):
Yeah, So it takes the rate cuts before your interest
rate cuts ConfL because you know, those who don't have
a financial background might say, what's stopping you lowering your
interest rate? Your interest rates right now if you believe
the economy is going to get better.
Speaker 2 (01:55):
Yeah, that's a fair question. The Reserve Bank sets munty policy,
which is an interest rate, and that interest rate is
kind of the benchmark that all other interest rates are
based off. So they've listed it all the way to
five and a half percent, but you know, five and
a half percent is not where we deal at. That's
(02:15):
not where we fund that we offer you know, term
deposits at six percent, that's our funding rate, and then
we've got mortgage rates and business lending rates above that.
So they really do control the direction of interest rates.
And I think once they start cutting, we'll see all
interest rates fall later later this year.
Speaker 1 (02:38):
And of course there's good news and bad news on that.
You know, the lenders will be happy, but those who
are relying on their term deposits will be like, no,
back we go to twenty one.
Speaker 2 (02:47):
Yeah, that's right. So from a macro sort of whole
of economy perspective, when they lower interest rates, that's stimulatory.
You know, more people have debt, but of course savers
get hurt. So this is fair warning to savers that
we think in shrates are going down, so you know,
(03:08):
maybe they want to take a look at their term
deposit rates. But to anyone who has debt out there,
we're also saying the same thing. Look into shrates are
likely to come off later this year, and most of
our customers seem to agree. We see fixing for sort
of six months to one year at the moment. Kiwi's
normally sort of hang around that two year space, so
(03:32):
you know, people are short enough.
Speaker 1 (03:34):
Funny you should say that I'm about to I'm about
to fix it. We bank mortgage myself. That's exactly what. Yeah,
and it is normally the two years. But now I'm thinking,
do I do six months? Do I do a year?
But when what is the what happens when people borrow money?
Does it depend on where they put the money, because
(03:54):
borrowing money is a good thing. It's not necessarily bad,
is it.
Speaker 2 (03:59):
Yeah, exactly. I mean there's good debt and there's bad debt.
Good debt would be considered debt that's used to purchase
an asset. Obviously a house is what we mostly sort
of focus on bad debts, obviously credit card or something
like that. So the good debt, you're right, if you're
putting it into a house or into a into a business,
(04:22):
you know, machine or a factory or something like that,
then you kind of hoping that that asset is going
to earn earn new money.
Speaker 1 (04:32):
We had a caller and a couple of texts saying
the Triple CFA Amendment Act still massively is going to
restrict kiwis from borrowing money.
Speaker 2 (04:42):
Yes, so the Triple CFA changes certainly have tightened up
bank lending. I would say the move and the interst
rate's going to be the biggest driver as to whether
people want to take on debt and the creation of credit.
So our appetite to lend or particularly key banks is
(05:03):
still very high. We're quite aggressive at the moment, So
you know, I think it's more the interest rate that
will drive the demand for credit rather than the triple
CFA inhibiting the supply. I do think things will pick
up next year based on lower interst rates, based on
(05:24):
confidence returning that I think that's key, and then getting
businesses investing again to right now, businesses are concerned, to
put it politely, and I think once they gain confidence,
hopefully next year we'll see them investing more and doing more,
which will lead to more growth.
Speaker 1 (05:44):
Another text was a bit more gloomy as well. The
next six months will see record mortgage sales, bankruptcy and
business closures. The Reserve Bank is about six months too late.
Speaker 2 (05:56):
I'd say they're more than six months late. But anyway,
I agree that we are seeing a lift and in
stress amongst households and businesses. That is by our Benz design,
and that is kind of what they're trying to achieve
to slow things down. But we are not anywhere near
(06:21):
the levels that would concern us. We're coming up a
very low base, very low levels of defaults in this
country compared to just about every other country out there.
Our banking system is incredibly stable and resilient.
Speaker 1 (06:37):
Chimabeley Cubs called the Reserve Bank's policies statistic and key
we Bank is quoted. I don't know who said it,
might have been the subren Delgado said the Reserve Bank
had the economy in a chokehold. Do you think there
needs to be a change in attitude in the Reserve
Bank when it comes to dealing with monetary policy? Have
(06:59):
they been too crude to blunt?
Speaker 2 (07:03):
Look? I think, you know, with the benefit of hinds,
we can say the Reserve Bank did too much during
the COVID period, and that's every central bank in the
world just just quietly did too much. So we ended
up generating more more inflation than we thought. Then they
had to unwind that, they had to get inflation back
(07:26):
down to its mandated one to three percent. And so
I think they've done too much this way as well tightening.
They've held much of policy a little too high, a
little too long. And you know that's with the benefit
of hindsight. Obviously.
Speaker 1 (07:43):
It's interesting you say that because I had a lot
of callers at the time that the Reserve Bank was
just shoving money at everybody, saying this is too much,
this is too much, and we're all going to pay
for it. And I remember them, you know, they were
profits who were not who were not appreciated at the time,
but they were saying, we've got to pay the pipe,
(08:04):
you know, and it's going to hurt.
Speaker 2 (08:07):
Yeah, and they were right, yeah, And at the time
we were we were saying similar things. Don't forget the
Reserve Bank had prepared banks for a negative cash rate,
which we which we fiercely opposed at the time. So
you know, they were they were willing to do whatever
whatever it took to get the economy going again. And
(08:27):
with the benefit hindsight, it was it was too much.
And you know, now, as your text has said, we're
paying the piper, and I think we're going a little
too far the other way. But you know, the Reserve
Bank yesterday did acknowledge the collapse in business confidence. They
had to, and they've moved in the direction of rate cuts,
(08:49):
whereas you know, only a month or so ago in May,
they were they were telling us them more likely to
hype and cut, which you know we we disagreed with this.
Speaker 1 (08:58):
Again, so once the interest rates come down at the
trading banks, and then will we see dancing in the
streets and you know, business is improving and no more
for lease signs on the on the main streets.
Speaker 2 (09:15):
I don't think it'll be that quick. You know, we're
we're we believe they'll start cutting in November, so we're
talking about the end of this year. They'll need to
deliver a few cuts before businesses, I think, start start
feeling it and households start feeling it. It takes time
to work its way through the economy. Unfortunately, there's an
(09:36):
eighteen month lag, so what they're doing today is really
aimed at the end of next year, and it will
take time to filter through. But I think psychologically, knowing
that interst rates are going down will help boost confidence
and that'll be you know, the start of the of
the road to recovery.
Speaker 1 (09:56):
How soon will you cut interest rates after the OCRRAS cut.
Speaker 2 (10:01):
I actually think interest rates might start falling beforehand. So yeah,
wholesale markets factor and rate cuts before they're delivered, so
that those wholesale rates that I mentioned before will start
coming off before they actually cut. We saw mortgage rates
fall a little bit earlier this year when the market
(10:23):
started factoring in rate cuts, so I wouldn't be surprised
if we saw, you know, some small declines, but obviously
we'll be holding off making big, big cuts and interest
rates until we actually see that o CR that that
pash rate cut by the RB.
Speaker 1 (10:42):
So six months or a year, would you take your
theoretically fix a mortgage six months or a year.
Speaker 2 (10:49):
I'm not allowed to offer personal advice, unfortunately, I'm just wondering. Okay,
you know, if we're calling for rate cuts in November,
you can you can sort of figure that one out.
Speaker 1 (10:59):
I think I think so, Jared, thank you so much
for your time. Jared Kirky, we Bank chief Economist. For
more from Kerry Would Mornings. Listen live to news Talks
at B from nine am weekdays, or follow the podcast
on iHeartRadio
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