RBNZ pivots to potential lower interest rates

RBNZ's pivot at their most recent meeting points to lower interest rates being closer than initially predicted, says Harbour Asset Management Currency Strategist Hamish Pepper. 

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Episode Transcript

Speaker 1 (00:05):
You're listening to the Weekend Collective podcast from News Talks AB.

Speaker 2 (00:10):
Right now, it is time for smart money and we
want your calls on eight hundred and eighty ten eighty
text nine two. And our guest is director and fixed
income and currency strategist from Harbor Asset Management and his
name is Hamish Pepper. Good Hamish again, good.

Speaker 3 (00:29):
Eton, I'm good, thank you?

Speaker 1 (00:30):
Are you all right? All right? Thanks? So are you
coming to us from Wellington?

Speaker 3 (00:36):
I am? I am.

Speaker 4 (00:37):
I'm looking out from our office onto the harbor and
watching the sunset.

Speaker 2 (00:42):
Not too bad sunset already, Oh my goodness, I've just
looked out. Yes, well, at least you can say it's
but gray here.

Speaker 1 (00:48):
So actually gray, I don't know. I was trying to
turn into a theme with sunsets and things. But the
suns here we go. I've got it, I've got it.

Speaker 2 (00:55):
The sun may be setting on the reserve banks. Harsh
rhetoric when it comes to what's happening with the cash rate.

Speaker 3 (01:05):
Yes, indeed, yes, finally.

Speaker 1 (01:07):
Finally I like that. That's not a bad metaphor. I'm
going to go with that.

Speaker 2 (01:10):
But anyway, so, why has it okay? Why is that
statement true?

Speaker 4 (01:18):
Well, I think we are really seeing the economy hurt now,
and of course that is what they want, because that's
the way in which inflation comes back to a lower
and stable level.

Speaker 3 (01:31):
They want two percent.

Speaker 4 (01:33):
They definitely don't want the numbers that we were seeing
a year or so ago, and with that they can
take the foot off the throat, so to speak, of
the economy and lower interest rates and let us all
breathe again. Really, they're not quite there yet, but we
think they are getting very very close to starting to

(01:55):
reduce interest rates.

Speaker 2 (01:57):
Would you mean they're not quite there yet? What's not
quite there? You mean the Reserve Bank aren't there? Because
I think most of us are there.

Speaker 4 (02:03):
Well, yes, indeed, and many of us probably been there
for months now, looking out the window and hearing stories,
seeing data which suggests that, you know, those high interest
rates have been very very effective in sort of hurting
the economy and taking inflation pressure.

Speaker 3 (02:22):
Out of it. Why are they are so slow, so
to speak?

Speaker 4 (02:28):
I think there's still a residual concern that they might
see inflation rear its head again. Inflation inflation expectations what
people think about in terms of what prices will do.

Speaker 3 (02:43):
So they I think are.

Speaker 4 (02:46):
Trying to balance the observed impact of policy, which is strong.
You know, we're seeing that with the fact that inflation
is not quite back to two percent, and therefore there's
still a risk that perhaps if rate cuts come too soon,
people then think, oh well, perhaps that might mean that

(03:06):
inflation can pick up again, and therefore, you know, the
job's not done.

Speaker 1 (03:11):
Can you can you give.

Speaker 2 (03:13):
Us a description of what of what that what's the
inflation rating is now three point three percent I think,
isn't it?

Speaker 1 (03:20):
And how significant to drop is it?

Speaker 2 (03:22):
And what it means in real terms that we can
understand in terms of tradable and non tradable inflation all that.

Speaker 4 (03:29):
Yeah, I mean, I think we've probably talked a lot
about that tradeable part of inflation of prices that we're
seeing in the economy having normalized. We talked about supply
chains which were heavily disrupted during that COVID time, you know,
basically goods not being able to flow through the world

(03:52):
like they normally do, and with that cause the prices
of those goods to increase. A lot that's now all
come out of the system. You've actually got you know,
tradable inflation. For example, here is running negative on the quarter,
so those prices actually fell on the years. It's pretty
close to flat to nothing. So that's all good, and

(04:14):
that's that's sort of been resolved. What's left is this
sort of stickier what we call non tradable inflation, which
is generated by the domestic economy and particularly generated by
the labor.

Speaker 3 (04:27):
Market in terms of wage growth.

Speaker 4 (04:29):
And that bit is still running quite high on a
quarterly basis. That came in almost one percent on the quarter,
and it's above five percent annually.

Speaker 3 (04:39):
And so that is the bit that's the niggli.

Speaker 4 (04:41):
Little bit here which is probably driving that just hesitation
or residual concern that the rbnz'd have about taking rates
lower too soon or too quickly.

Speaker 2 (04:54):
Yeah, so one of the things I saw on well,
on Twitter, actually there was a couple of bits to
camera from Nikola Willison, also Christopher Luckson saying, look, we're
getting on top of inflation. I just had it without
I mean, we can get political if you like. Who's
responsible because that looks like the government taking credit for

(05:15):
the drop in inflation. Who actually can take the credit
for inflation coming down?

Speaker 4 (05:21):
I mean, I think it's largely the central bank, the
zero Bank in New Zealand deserve the credit for inflation falling.
Of course, you know the global dynamic of supply chains normalizing. Well,
you know that was about the vaccines and you know
the world being able to operate again, but that's sort
of years old now that that story. You know, I

(05:42):
think the domestic you know, inflation pressures and the fact
that on a forward looking basis they are looking like
they are on that track to normalization too, is because
of how quickly we saw interest rates once they started.
You know, I think the Arbians themselves would say, you know,
in hindsight, they probably should have started sooner in terms

(06:04):
of lifting intrates from the quarter of a percent that
we started.

Speaker 3 (06:08):
At at the bottom.

Speaker 4 (06:10):
But ultimately that you know, once they got going, they
did move in quite big increments. We got to five
and a half percent quite quickly and have been there
now for some time. You know, those are high intra
shrates and they are having a large impact and will
be the main driver that takes out inflation back to

(06:30):
two per I.

Speaker 2 (06:31):
Guess I was asking how much credit the government can
take because the reason that Adrian or the Reserve Bank
had to sort of well, actually actually maybe he was
to blame in the first place. I'm just trying to remember,
because there was a lot of government expenditure, of course,
which this current government has criticized, which was part of
the picture, I guess. But of course the Reserve Bank,

(06:52):
who was it that kept cash.

Speaker 1 (06:53):
So cheap for so long?

Speaker 4 (06:55):
Yeah, I mean, and I think that they admit that that,
you know, like I said there that with hindsight, policy
was too loose for too long in the Central Bank,
they recognized that, I think sooner than perhaps government did,
because on the government side, we kept in place quite
stimulatory policy things things like wage subsidies, for example, but

(07:19):
just generally spending was high through a period where the
economy was actually clearly recovering, so there wasn't the need
for that stimulus from government and that spending from government.
And what it's meant is we've now entered a period
where normally you would think of government being able to
help out an economy when it's struggling like it is,

(07:41):
and it's going to struggle more. But of course they're
very ham strung and limited in terms of what they
can do because of that sort of residual spend and
the impact that that's having on the amount of debt,
for example, that the.

Speaker 1 (07:55):
Government is okay.

Speaker 2 (07:56):
So up, I'm an editor to ask the question again
now that I've got it clear in my mind. So
if the government stimulatory sort of approached, the economy went
on too long, along with the cheap cash from the
Reserve Bank, and.

Speaker 1 (08:09):
So they played a part in us.

Speaker 2 (08:11):
Needing to get on top of it, how much credit
can actually the government. I'm not doing this to be mischievous,
by the way. I'm just quite curious because I was
amused when I saw Nikola Willis and Christopher Luxon's video
and I thought to myself, I'm not sure how much.

Speaker 1 (08:22):
Of this is on you? So how much can they
take credit for I.

Speaker 4 (08:27):
Don't think much at all. And I think also that
you know, really, if you think of government, regardless of
the political party, and just think of the role that
government played through that time, then you know that they
were a key driver of the inflation that then the
central Bank had to respond to and is still still

(08:50):
doing that.

Speaker 1 (08:52):
It's quite fascinating, isn't it.

Speaker 2 (08:53):
I just guess in the end politics, if something's going
well and you are in government, take credit for it
as quick as you can. I mean, then maybe they'll
say that. I don't know what arguments could they mount
for that. Again, I'm probably pushing the point, but it's
just fun to get my own head around it, because
I guess they would say, we've set the tone around
expenditure which has helped get on top of inflation, and

(09:17):
Adrian or subtly has has followed the signals that we've
sent out there.

Speaker 1 (09:20):
Is that an argument they could make?

Speaker 3 (09:22):
Yeah, I mean I think they could.

Speaker 4 (09:25):
You know, it's I find it hard to kind of
fully buy into it. But the argument that they could
put forward is, hey, look, we've got a path now
back towards fiscal balance and indeed fiscal surpluses. We are
doing that through you know, a reduction and spending over
that sort of four or five five year period. But

(09:48):
at the same time they're also introducing tax cuts which
come live the end of the month, and you know,
that's something which ultimately slows your ability to balance.

Speaker 3 (10:02):
And keep it under control.

Speaker 2 (10:03):
So actually, why you mentioned that, I mean, how stimulatory
are they really going to be when? Because there's one
thing when you when you people feel they've got lots
of extra money in their pocket and therefore, you know,
let's go and buy another holiday and spare buy a
new car and all that, But when people are struggling
to make ends, mate, and the people in the middle
feeling it squashed, is that tax cut really as inflationary

(10:25):
as some some you know might have criticized it in
the political hustings.

Speaker 3 (10:30):
Yeah, I think.

Speaker 4 (10:30):
I think in a weird way, it has almost by accident,
come at a time where the economy really needs it,
so it is actually acting in that way that you
would expect fiscal policy to work. You know that when
there is a downturn in the economy, then you know
the government can step in and soften the blow.

Speaker 3 (10:50):
So it's turned out that way.

Speaker 4 (10:52):
But I don't think anybody thought, including Treasury, that the
economy would be as weak as it is now and
then likely to be weak over the coming year. So
I think it has been fortunate in a way that
these are coming along to provide a bit of a cushion.
But I think when they were first talked about and promised,

(11:15):
I personally thought that was an unusual thing to be
happening when there was so much focus on the amount
of debt that our government had accumulated and would be
accumulating over the coming four or five years that I
thought it was an unusual.

Speaker 2 (11:30):
So well, you I think we've put the politics side
to bed a little bit. But it's just I guess
that's the amusing side of things, seeing people take credit
for different things. I guess at the heart of it is,
I've always I've been developing more and more this suspicion
that you forget tax cuts and all that the person
who has the most control over the welfare of New
Zealanders is the guy who controls the cash rate. And

(11:53):
that's about it. And it says name is ta Mahuta. Wops,
sorry Adrian, or it's dead right.

Speaker 3 (12:00):
It's a blunt tool, you know.

Speaker 4 (12:01):
You'll often hear Adrian talk about it in that way
and many central bank governors. But it's very powerful because
of how broadly the economy is affected.

Speaker 3 (12:15):
And of course we've talked before.

Speaker 4 (12:17):
About those that have debt and are impacted by the
interest rates that they have to pay on that. But
of course there's the other side of it as well,
to which is those that are savers or have the
ability to save, they will respond to those higher interest
rates as well, and they'll be incentivized to save today
and spend tomorrow, and that's something which is a driver

(12:40):
of the economic weakness we're seeing, as well as those
that are struggling to service debt.

Speaker 1 (12:46):
Well, let's get onto this the Reserve Bank and that
pivot of theirs.

Speaker 2 (12:51):
Were you surprise, how would you describe the way that
they've shifted their rhetoric?

Speaker 3 (12:57):
It was, It was a big surprise.

Speaker 4 (12:58):
I think that the timing mainly, I think our view
had been that they were on a path at at
some point they would recognize just how weak things were
out there. But the timing of this was unusual for
a couple of reasons. That the meeting prior had been
one which we describe is very hawkish. That's one where

(13:22):
the rhetoric around sort of inflation risks was prominent. You know,
they'd even contemplated hiking interest rates at that may monetary poz.

Speaker 1 (13:34):
Nobody bought that one though, you know.

Speaker 4 (13:36):
Well, you know they didn't. They didn't, but then they worried.
You know, the fact that that was stated in the
meeting minutes. It's no accident that those things end up there.
So there's a message that they want to want to send.
But so we'd all been conditioned to this sort of
strangely hawkish sort of central bank and then all of
a sudden in this latest meeting, huge change in tone.

(13:59):
You know, no way was there any consideration of hikes.
It was much more balanced. It was reflecting many of
the things that you know, people were experiencing and highlighting.
And it was at a meeting where they didn't produce forecasts.
These are sort of what are called monetary policy reviews.
They're the in between meetings between the big ones where

(14:21):
you've got to set a forecast and you can have
a press conference and you explain what you're doing and
all the rest of it.

Speaker 3 (14:26):
This was one of those interm ones.

Speaker 4 (14:28):
Yet they still had this this quite quite significant change
in tone. And the final thing was that the chief
economist was was actually on holiday. Paul Conway was not
there for the.

Speaker 3 (14:41):
Meetings, so.

Speaker 1 (14:43):
All in all, and what does that mean?

Speaker 3 (14:45):
I just think he needed a break, and good good.

Speaker 2 (14:49):
I wondered if there was some significance someone's not here,
what does it tell us? I mean, that's fascinating see
that because you mentioned it, and I was just wondering
if it's something you go, oh, he's not here, what's
it mean.

Speaker 4 (15:01):
Yeah, no, I just think for many they would have
gone into that meeting and the lead up and thought,
this is not going to be one where we see
a big change in communication and tone. They'll they'll largely
repeat what they said in May. But instead, I think
because of just how quickly the economy is deteriorating, they

(15:23):
did feel the need to shift to a more balanced
stance and and really open the door. Now the door
is well and truly open to them cutting the official
cash right as early as next month.

Speaker 3 (15:38):
Well that was unreasonable.

Speaker 1 (15:39):
Well that was my next question, because.

Speaker 2 (15:43):
What is what's the next event where they could credibly
make an announcement about a change in the in the
interest rate.

Speaker 4 (15:50):
Yeah, they could do it on the on the fifteenth
of August.

Speaker 3 (15:54):
I think it is roughly they could. They could do
it at that meeting.

Speaker 4 (15:57):
In between times, they will get some labor market data
for the second quarter, which is likely to be really
quite poor, and they have a view that the unemployment
rate will pick up from the current four point three
percent to four point six I mean, it could well
be something more like five percent.

Speaker 3 (16:17):
And I think in that case, that really does.

Speaker 4 (16:21):
I think give them probably enough to seriously contemplate a
rate cut in August that there's not a lot left.
If you believe that, then this will flow into wages.

Speaker 3 (16:34):
It usually does.

Speaker 4 (16:35):
Ride a higher unemployment rate lowers the rate of wage inflation.
Then on a forward looking basis, you could say with
some confidence, you're on your way back to two percent.

Speaker 2 (16:46):
Yeah, wow, okay, look hey that's inflation, by the way,
not the cash rate. Somebody will go, what hey, look,
we'll come back in just a moment. With the Hamish Pepper,
he's director and fixed income and currency strategist that have
asset management and the fascining come just around the whole
rhetoric of the reserve bank and what they're going to do,

(17:08):
as Hamish mentioned, could be the middle of August, their
next opportunity to put it down, what's your money on?

Speaker 1 (17:14):
Because you know what you can better as.

Speaker 2 (17:15):
Much as you like about you know, are we going
to about government policy and all sorts of things, but
another reserve bank are the ones who control so much
of our of our well being and it if you've
got a mortgage or you're a renter, so what's your bet?
Are they going to drop the are they going to
drop the rate sooner?

Speaker 1 (17:29):
Rather than later.

Speaker 2 (17:30):
And it's certainly relevant if you're looking at refixing your
mortgage asking for a friend, no personal and because literally
i am about to refix my mortgage, so I've got
to think about that. I've made up my mind. Don't worry,
but you tell me what your work, what your guess is, Oh,
eight hundred and eighty ten eighty text nine two nine two,
and you can email. I don't worry about emails, calls
and texts. Okay, back in the mine, Welcome back to

(17:52):
the smart money. My guest is Hamish Pepper from Harbor
Asset Management. We're talking about the cash rate and the enthralling.

Speaker 1 (17:58):
It's almost like it's almost like.

Speaker 2 (18:00):
An active theater, isn't it the Reserve Bank that for
such a dry institution, they're quite theatrical at times, aren't they?
Because there's always something to read into the nuance, isn't there?

Speaker 1 (18:09):
Hamish?

Speaker 4 (18:10):
Yeah, I mean there is the I mean, I think
one of the things that's been fantastic recently is the
frequency with which they are speaking to the public and
to you know, financial markets. You know, Paul Conway, the
Chief Economist, recently had a speech where he had that
on the basis of four pieces of research that have

(18:34):
been produced, and you know.

Speaker 3 (18:36):
This is just it's great.

Speaker 4 (18:37):
Yes, it does give us the theater and then you
know we're trying to you know, read the tea leaves
and pick apart every every sentence. But you know, it's
a great thing for all of us to have a
central bank that's working like that, that's doing research that
relates to this economy and then they're speaking about it
and providing you know, a channel through which we can

(18:59):
ask about it and learn about it.

Speaker 3 (19:01):
Yeah, I think that's great.

Speaker 1 (19:02):
Ye is there? Look, it's just reckons, isn't it.

Speaker 2 (19:07):
But do you think there's a little bit of anxiety
at the Reserve Bank given that they made that pivot
that was unexpected? Do you think there's a little bit
of nervousness amongst in their ranks that maybe they've gone
a bit too hard too long?

Speaker 3 (19:20):
I think so.

Speaker 4 (19:21):
Look, I think they will get no credit whatsoever for
taking inflation below two percent, you know, two percents of
the target. And don't get me wrong, you know we're
not there yet, but we are getting close. And monetary
policy operates with long and variable lags. You know, it
can be up to two years before you get the
full impact of where policy settings are today. So yes,

(19:44):
I think you're right. I think that is starting to
come through in the Monetary Policy Committee and the least
regret which was for so long, the least regret being
you know, not getting inflation back to two and leaving
it above and having to you know, take policy even tighter.
That least regret now is changing to one that as
you say, we're a year or two head and we're

(20:05):
looking at an economy that is really just too almost
much weaker than it needed to be. You know that
that's that's the regret.

Speaker 3 (20:15):
I think that's that's starting to emerge.

Speaker 2 (20:17):
I would argue that there have been a lot of
people commentators who have argued that for a while, and
that seems the last people to realize that was a
reserve bank is that harsh.

Speaker 4 (20:28):
I think there is always going to be. And financial
markets are the same. You know that that cohort that
are kind of trying to get ahead of things, you know,
and caught in calling for in this case interest rates
to fall prior to you know, to them actually doing so.

Speaker 3 (20:48):
But I think you're right. I think overall the.

Speaker 4 (20:52):
RBNZ have found themselves, particularly recently, a little isolated in
their view of of of how things are going to
play out. I mean, just for example, the last set
of forecasts we had from them, it didn't have the
cash rate falling until the second half of next year,
and you know, thinking about that today, it's that's just

(21:14):
it is quite an extreme view. And so, yeah, but
I think what's probably happening is there's been a revision
of that, and when we see the forecast again updated
next month, I think that implied start of the easing,
I mean, could be as early as that meeting, but
it's definitely going to be a lot lot sooner than
what was in those.

Speaker 2 (21:34):
Yeah, and their options are to drop it by what
At the moment, it's five point five, isn't it that
they might They might even just drop it point two five.
I don't imagine they're going to drop half off, are they?

Speaker 4 (21:46):
I guess it depends on just how urgent the need is.
I think that the thing.

Speaker 3 (21:52):
That could support large moves.

Speaker 4 (21:54):
And I think, you know, I kind of agree that
the first move is likely to be perhaps a cautious one,
you know, to start start slowly and then accelerate, if
you know, you keep getting the evidence that you know,
rates should be lower. But the negel for them is
just how far above a neutral cash rate they are.
They would say themselves that they're basically double what they

(22:17):
think is a long term term neutral rates. So they
say long term neutrals about two point seventy five. We're
at five and a half. And so what it means
is that whenever you're above neutral, you're still having a
downward impact on the economy. So if all the evidence
comes through that inflation is going to be quickly back
at two, you've got a labor market that's you know,

(22:40):
seeing rapid increases in unemployment and activity in the economy
is basically recessionary, then you want to you want to
get to that neutral level really quite quickly, and in fact,
you might even want to take it below that and
start providing some stimulus.

Speaker 2 (22:56):
Yeah, I mean, it's all wreckord I've got. I mean,
I'm no expert on these things. I do wonder whether
you know, you mentioned that they might do it gently
and then accelerate. I sometimes wonder whether they might have
been better to go hard and then not so aggressive
on the acceleration. But that's just you know, hindsight. It's
a wonderful thing, isn't it. Hey, we've got a quick
question here, and it ties into what the markets are doing,
because we've had conversations with actually from some of your

(23:20):
colleagues about recently. I think about bond markets, but somebody
just asked me on the text my term deposit matures soon.

Speaker 1 (23:28):
Now.

Speaker 2 (23:29):
I know you're not going to give specific advice, but
you could give some thoughts on this. Would it be
wise to reinvest for a longer term, like five years
instead of that one year that I usually go for,
And let's assume that Ruth wants to keep her money
saved in the savings for a long period of time.

Speaker 1 (23:44):
I would have My non.

Speaker 2 (23:46):
Specific advice would be if the bond markets are quite
good right now, why wouldn't you have.

Speaker 1 (23:50):
A crack at that? Or give us your thoughts, Amish,
what do you reckon?

Speaker 4 (23:54):
Yeah?

Speaker 3 (23:54):
I think the.

Speaker 4 (23:56):
Choice between term deposits and something like a bond or
a fund that invests in bonds. One of the key
different is to consider is liquidity. So you know we
will have talked about this before, and you will have
talked to others about it that you know, term deposits
it's pretty strict in terms of your ability to access

(24:17):
that money through the life of or the term of
that deposit.

Speaker 3 (24:21):
You know, it's it's essentially locked.

Speaker 4 (24:24):
Away, whereas if you buy a bond or invest in
a bond fund, you normally will have daily liquidity, so
you'll be able to sell that if you want to.

Speaker 3 (24:35):
And then have your money back within a couple of days.

Speaker 4 (24:40):
So that's the first thing to consider. Am I getting
when I go and say, as you know, sort of
thought about if you wanted to go into a say
even a two or a three year term deposit just
for example. You know, am I getting compensated for not
having access to that money for that period of time?
You know, it's too whatever a bond fund might be
offering me or an individual bond, so liquidity is going

(25:02):
to be I would actually say that's probably the the
biggest consideration, you know, is to think about to think
about that. And then there's the one about Okay, does
that interest rate over that period of time, you know,
look appealing given whatever my view of the world is,
and if your view of the world is that the
RB and Z are quickly going to be taking you know,

(25:24):
the cash rate to half of what it currently is,
which would be much more than what markets have priced.
Then you know that's going to push you into thinking
about doing something like that, because if you're right that
the RB and Z say quickly does half the cash rate,
those term deposit rates.

Speaker 3 (25:42):
Are going to fall.

Speaker 4 (25:43):
And we've already seen some reduction in term deposit and
mortgage rates since that pivot by the RB.

Speaker 2 (25:50):
I guess I was wondering because it was it seemed
that just a few weeks ago, the conversations around bonds
and everything was making them look making an un sexy
product look like it wasn't such a bad idea. And
you wonder if the interest rate drops quickly, how quickly
that's sort of idea falls out of favor.

Speaker 1 (26:06):
I don't know, Yeah, I think that that's.

Speaker 3 (26:08):
A good point.

Speaker 4 (26:09):
You know, generally, what will happen is that as the
interest rates fall, you'll be if you're invested in a bond,
that those are good times. You know you've got in
when that interest rate is high, so you get to
enjoy that sort of income. And then as interest rates drop,
you get a capital gain because the value of that

(26:31):
security goes up. And so there's a moment where you know,
bonds just do really well because of both of those
those channels working. But then when we get to the bottom,
you know, let's just choose. Let's let's use the two
percent we talked about two percent. Say we get all
the way to two percent on inflation yep, yep, sorry, no,

(26:51):
on the on the cash ra.

Speaker 1 (26:52):
Cash rate blummy.

Speaker 3 (26:54):
Yeah, So let's say we.

Speaker 4 (26:55):
Get there, then we would have a very different conversation
about bonds because we would be thinking, right, I'm only
getting something like maybe two or three percent in yield,
what's the prospect of capital gain, which would mean, you know,
you have to be thinking about yields falling from there.
That's a different conversation. I mean, that's the kind of

(27:16):
conversation we were having about bonds. You know, when the official
cash rate was zero point two five percent, you know,
they were not a favored sset class.

Speaker 1 (27:26):
Yeah. I tell you what.

Speaker 2 (27:27):
We're going to take a call when we get back,
and you can give us a call anytime if you
want to disagree with what what Hamish was saying. I
have your reckons as well. Wait if you agree, we
love people who agree as well. I weight one hundred
eighty ten eighty text nine two nine two. It's twenty
two minutes. I get that right, Yeah, it's twenty two
minutes to six. And welcome back to the Weekend Collective.

(28:02):
This is smart Money with Hamish Pepper from Harbor Asset Management.
He as a director there and fixed income and currency strategist.
Fascinating discussion just around the rb NS. And it's approached
the cash rate because it might sound at times, the
issue of the cash rate might sound a little bit
sort of dry at times, but actually the consequences for
us are a big deal. If some and I know

(28:23):
people have got some looking to refix their mortgages, have
got hefty mortgages, and you know the question man or
what the reserve banks doing as big stuff.

Speaker 1 (28:30):
Anyway, let's take some calls. Glenn, Hello, good evening.

Speaker 5 (28:35):
Actually, what are you going at point five in August?

Speaker 3 (28:39):
What the hell?

Speaker 1 (28:40):
No, I don't think we said point five?

Speaker 2 (28:42):
Did we say point five in August? Did you say
did Hamish say point five in August? Where you go, Hamish?

Speaker 4 (28:48):
I think I think Tim offered up the possibility, but
then I think the conclusion was perhaps that's too large,
But yeah, I.

Speaker 5 (29:00):
Doubt mate, Glenn.

Speaker 1 (29:02):
I'm not.

Speaker 2 (29:03):
I'm not the economist or a heart of ex income strategist.
I'm just a guy just throwing some figures out for
fun to hook you in to give us a call
and well done, welcome.

Speaker 4 (29:14):
Yeah, No, I think I think, Glenn, you know, ultimately
I agree. I think it would be such a huge
turn from you know, just the previous managery policy statement
in May, the one we were talking about where they
were thinking about pikes to in August be cutting by fifty.

Speaker 3 (29:30):
I agree. I think that that is too much.

Speaker 4 (29:33):
It's not a zero in terms of probability, but it's
it's probably not the very very.

Speaker 2 (29:38):
Hey, Glenn, guess what I'm going to go with it,
because you know, when you expect the Warriors to win
and they lose, and when you expect to lose and
they win, we're not expecting a cut in the grate.
So I'm going to go point twenty five on August fourteenth,
or whatever it is.

Speaker 5 (29:51):
What you've got, I think what you've got the of
one something or has done nothing.

Speaker 1 (29:57):
So I didn't quite catch that say that again.

Speaker 5 (29:59):
The worries of have actually heard a coach who's done
some good stuff, Adrian or he has done nothing. Here's
the worst event governor in my life. He is horrendous.

Speaker 2 (30:11):
Why is that from your point of view that he's
the absolute worst?

Speaker 5 (30:16):
He has just printed and kept low for too long.
He watched what was happening overseas, didn't first sort to
think about New Zealand as an export context. It just
just followed the herd with overseas well. He didn't, for
any of his own interpretation on it, any of the
New Zealand's how our economy works is completely different area
than out of the economy works has followed the crowd.

Speaker 2 (30:37):
It was, Glenn, Is there any psychology that the fact
that maybe because he went too long, too low for
too long, that he's going to compensate by going on
the quicker side with making an adjustment.

Speaker 5 (30:51):
No, No, because he can't. He can't raise and then
we get all the rates come through, and we have
another a drought or a flood or whatever, and all
of a sudden he looks in its three point two
and he's got a cat again. Like that, credibility is
completely at the window best different. So he won't do

(31:12):
anything until November at the earliest. And to be honest,
I wouldn't be surprised what you don't generally cap for
Christmas because people feel goodly on Christmas and Christmas is
usually inflationary.

Speaker 1 (31:23):
So what would he do?

Speaker 2 (31:24):
What could he do from here on in that might
impress you? Okay, Glenn, call again, mate, that was that's fantastic.
Love you love your takes on that stuff.

Speaker 1 (31:40):
Yeah. I don't have any comment, Hamers.

Speaker 4 (31:43):
No, not no, no.

Speaker 3 (31:47):
No, no.

Speaker 4 (31:48):
I mean I think look, part of what Glenn is
saying is has been acknowledged by the ben Z themselves
in terms of you know that that period through COVID
where you know, and he picked up on not just
rates being low, the official cash rate being at a
quarter of a percent, but the fact that there was
quantitative easing going on through that period in terms of,
you know, an injection of money into into the financial

(32:13):
system and all of that did did go on too long,
and it was part of the reason why inflation picked
up as much as it did. And I think the
Omens did have you know, they've admitted that, which is good.
I think, you know, so I would say that you
know that that's one thing.

Speaker 2 (32:30):
That Yeah, no, I've just been mischievous trying to drag
you into having a having a cracket avera. It's just
all part of the sport now. But speaking about people
who are thinking here all the time, the markets themselves,
so because there are those who are thinking, well, it
sounds like they're going to drop the interest rate and
that people are hoping for a big change and what's

(32:50):
on offer have but to some extent, what are the
observations from you on how much those changes might already
be being priced in by lenders?

Speaker 4 (32:59):
And yeah, so I mean, if we build off you know,
kind of that conversation with Glenn, I mean he was
skeptical about whether they would cut this year at all.
The financial markets have a very different view. They think
there will be at least two twenty five basis point
rate cuts by the November meeting, and in fact there's

(33:21):
about a fifty percent chance of a further one before
the end of the year.

Speaker 3 (33:27):
So that's where financial markets are.

Speaker 4 (33:29):
And then they continue on next year in terms of
an assumption that their easing cycle continues. And it's with
that that we've now started to see the banks come
through with lower mortgage rates. Admittedly, you know, starting sort
of somewhat slowly in terms of you know, the speed
with which they were changing them, but also that the
increments you know, perhaps for a lot of people out

(33:50):
there aren't going to really change the change the kind
of cash flow. But I think this is how it
will play out. You know, we've had sort of cuts
to mortgage rates in the region of sort of ten
to thirty basis points point one two point three o
a percent. As I suppose the confirmation comes through through
the course of this year and inter nex that the

(34:12):
RBNZ are indeed easing and cutting interest rates and the
economy is indeed, you know, justifying that in terms of
being weak and inflation falling, then you would expect to
see a continuation of those those declines.

Speaker 2 (34:25):
What about in terms of bond markets and things like that, Well,
how does that all respond to it?

Speaker 1 (34:30):
And the and the term deposits.

Speaker 4 (34:32):
Yeah, so, I mean exactly like we were kind of
describing at the moment. You know, if you look at
term deposits out to five years, you know, you've basically
got your shorter.

Speaker 3 (34:41):
Term ones something like you know, six or twelve months.

Speaker 4 (34:44):
Still the best part of six percent, and then they
come off down to around five percent over over that
that five years. And so you know, as we go
through a possible easing cycle which halves the ocr you know,
let's let's call it to seventy five as where we
get to you know, those term deposit rates have a

(35:05):
lot of room you know, to four. So for example,
you know, when you got to the bottom in terms
of you know, the cash rate sitting.

Speaker 3 (35:13):
At two point seventy five percent, you know.

Speaker 4 (35:15):
You're probably really looking at say six or twelve month
term deposit rates that were sort of that three to
three and a half, so a lot lower than.

Speaker 3 (35:22):
What we have today.

Speaker 2 (35:24):
Hey, just on the motivating factors that are going to
influence the Reserve Bank on whether.

Speaker 1 (35:28):
They make a shift in the cash rate.

Speaker 2 (35:31):
You know, we have business surveys that tell a story.
What are what are your what are your informed formal observations,
but also your casual ones as well, just from your
neck of the woods.

Speaker 4 (35:42):
The business surveys are just atrocious. We're talking about levels
and business surveys that we haven't seen sometimes since these
surveys have started, and most often it's the weakest sentiment
since the global financial crisis.

Speaker 3 (36:04):
So one a classic.

Speaker 4 (36:06):
One which has been sort of highlighted recently is where
you've got businesses from the manufacturing and the services sector
asked about what's going on. You put those two things
together into sort of a composite measure. You know, that
thing not only looks as weak as the global financial crisis,

(36:27):
if not slightly weaker, but it looks so so different
to almost any other country in the world. Most other
countries still have an economy that is expanding, that is growing.
We most likely, as we stand today in you know,
we're now in Q three, aren't we the third quarter
of the year, we are most likely going backwards. So

(36:49):
we are we are very very different to what's going
on overseas, and we are very very weak. And that's
that's the signals we're getting from from those surveys.

Speaker 2 (36:57):
And how much more of a problem is that because
we are not a big economy either in terms of
our size, does that mean we feel these fluctuals and
these bad bits and news even worse in terms of
our ability to recover.

Speaker 4 (37:09):
Yeah, well, I mean one of the most interesting things
recently is but you know, we are we're a small,
open economy. We're heavily reliant on the health of the
rest of the world. And luckily, you know, those economies
that I was describing are still okay, China much less so,
and that's having a sort of its own negative impact.
But you know, if you think about, you know, sort

(37:30):
of what is going on in terms of people's psyche.
The migration data recently have been so interesting, So our
net migration.

Speaker 1 (37:41):
Arrivals less departures.

Speaker 4 (37:43):
You know, it was really high, right, it's now fallen
to basically zero nothing. And it hasn't been because people
have stopped arriving. People have continued to arrive at roughly
the rates that we saw.

Speaker 1 (37:55):
You know what it is.

Speaker 2 (37:56):
It's worse than that, isn't it, Because we're all buggering off.

Speaker 3 (37:59):
Ye at a rapid rate, a rapid rate.

Speaker 4 (38:02):
And I think to me that speaks to just how
weak we are compared to our trading partners, compared to
places that Kiwis can go to relatively easy, easily, like
Australia for example.

Speaker 2 (38:15):
Gosh, oh wow, gosh, it's fascinating. In fact, you know,
it's just some of the apocryphal stories like I went
on holiday and yes, I'm lucky enough that we we
love to go skiing, but we we didn't go Queenstown
except for a couple of days. But when I was
in Queenstown, I thought, boy, this place is a lot
quieter than I recall, and it just you know that
that's obviously borne out by the by the sort of

(38:35):
things you're talking about.

Speaker 1 (38:36):
Fascinating conversation, Amish. Thank you so much, mate.

Speaker 3 (38:39):
No worries at all.

Speaker 2 (38:40):
Pleasure to And if people want to check out your
work and look at your funds or your research, that's
harbor Asset dot co dot NZ.

Speaker 3 (38:47):
Yep, that's the one. Yeah, hopefully all the information you
need is on there.

Speaker 1 (38:50):
Good on you. Hey, really enjoyed our chat this afternoon.
Thanks so much, buddy.

Speaker 3 (38:53):
Cheers done, every good one.

Speaker 2 (38:54):
Yep, we'll be back in just a moment to wrap up.
It's eight minutes to six news Talks. He'd be, yes,
welcome back to the show. Well, that actually wraps up

(39:16):
the smart money and the show for the weekend. But
I'm grateful for the time and how much Pepper spent
with us from harbor Asset Management. And as I say,
you can go and check out harbor Asset dot cod
it said, there's a lot of information there, a research
and commentary and as well about the funds that you
can invest in. As well, and look, I guess it's
anyone's bet. We've had quite a few texts on what's
going to happen, but somebody says, I predict Adrian won't

(39:37):
come until Elian next Year's too stubborn and does what
he wants. No, he wants to be seen as being
hard on inflation. I don't know, Jake, who knows, But anyway,
I'll tell you no specific financial advice, but I'm fixing
short refixed the mortgage. But of course you make your
own minds up on that. Thanks to my producer, Tyra Roberts,

(39:57):
and I thank you all for your your feedback and
your your texts and your calls during during the last
few hours. Sunday at six is next. I'll look forward
to your company again next weekend.

Speaker 1 (40:08):
Enjoy your evening and catch us soon.

Speaker 3 (40:36):
For more from the Weekend Collective.

Speaker 1 (40:38):
Listen live to News Talks it Be weekends from three pm,
or follow the podcast on iHeartRadio.