The Country 22/07/24: Ben Picton talks to Jamie Mackay

We track down Rabobank's Sydney-based Senior Macro Strategist on a speaking tour of the South Island where, amongst other things, he's addressing the timing of a likely cut in our OCR rate.  We also look at what a Trump Presidency could mean for global trade and the world economy.

 

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Episode Transcript

Speaker 1 (00:00):
He is a Sydney based senior macro strategist for Rabobank
and that's just a fancy word for economists. His name's
Ben Pickton. It was great to meet him in person
at field Day's. Ben, you're in God's own farming province today,
just outside of him for Cargo, on a speaking tour about,
amongst other things, the OCR and interest rates. What's the

(00:20):
message you're going to give cash strapped farmers read their
mortgage good.

Speaker 2 (00:25):
Jamie, Yeah, it's good back in New Zealand and particularly
on the South Island. Yeah, we're really talking to farmers
about what we think is going on with the OCR.
We recently updated our forecast on the OCR and we
pushed back the date of their first expected cut from
August to the October meeting. But we're still thinking two

(00:45):
cuts from the RBNZ this year. So there's some positive
news coming, we think in terms of interest rates.

Speaker 1 (00:53):
So when we talk about two cuts, we're talking October
and then I think the final OCR review date is
something like November the twenty seventh. Okay, that's good. That
gets us down to what five percent? You're talking about
a terminal rate, i e. Where it's going to end
up and finish of four point twenty five percent at

(01:14):
the end of twenty twenty five. Is that as low
as it's going to go.

Speaker 2 (01:19):
Yeah, well, that's our best guess at the moment, Jamie.
We have a few things in the back of our
mind when we're trying to I just make an estimation
of where we think it might finish up. One is
we do think about the long run averages. We also
have to factor in where we think US interest rates
are going to going to end up, because New Zealand

(01:41):
can't depart too far from what happens in the United States,
and especially not for extended periods of time, otherwise you
start seeing the differentials really showing up in the currency,
and we don't really want a much weaker you, a
much weaker kiw dollar otherwise you start to import inflation again.
So that's kind of in the back of our heads.

(02:02):
And the other thing too, is that we know that
the RB and Z they have a single mandate. Now.
Their one job is price stability i e. Inflation and
everything else is really secondary to that. So we think
that going to err on the side of making sure
that inflation is under control.

Speaker 1 (02:20):
So if we can get down to four point twenty
five percent by the quarter four next year. Where would
that put like a floating farming rate, because I'm assuming
a housing rate off the back of that, a residential
rate might be I don't know, five and a half
six percent or something somewhere in between five and six.
Where does that put a farming rate.

Speaker 2 (02:43):
Yeah, farming rate is typically a little bit higher because
the cost of capital for banks on those sorts of
loans is a bit higher. So typically the spread between
the OCR and the actual rate to the borrower is
a bit higher than what it is for something like
a residential mortgage. It really depends on the length of
the loan and a few other factors, but sort of

(03:05):
general rule of thumb is maybe two and a half
percentage points above where the actual OCI is somewhere in
that vicinity as a very rough rule of thumb.

Speaker 1 (03:15):
Okay, been picked in senior macro strategists. This is where
you earn your chops as an economist. Unscripted question, what
does the probable election of Donald Trump mean for a
free trade around the world and be the world economy?

Speaker 2 (03:32):
Yeah, that's a good one, Jamie. We actually took the
unusual step in February of this year, we adopted a
view on the US election, which is something we don't
normally do. Usually we just remain agnostic and we assume
that the current policy settings will endure into the future.
But obviously that's not going to be the case this

(03:53):
time around, because you've got a very binary choice between
the status quo and something that looks nothing like the
status quo. So we adopted the view back in February
that the most likely outcome is a Trump win, and
we start to see things like universal tariffs, maybe a
little bit more politicization of the central bank, trade war

(04:15):
with China, and all of these things do point to
a bit of a further breakdown in globalization, more costs
in international trade, more frictions, more rigidities, and we think
that that's inflationary in the United States, and for that reason,
we don't think that US rates will get any lower
than about four and a half percent. And then we

(04:37):
start to see second round effects as other countries may
be put in place retaliatory tariffs and it injects a
bit more inflation into the world economy. So there's a
lot to unpack there, Jamie. But overall, I think the
short message is it's negative for world trade and probably
positive for inflation.

Speaker 1 (04:55):
So if New Zealand farmers had to vote, I'd have
to vote for Karmela. It looks like anyhow, we'll cross
that bridge when we get to it. Being picked an
out of Rabobank normally based in Sydney. Rug up, warm
and enjoy your day in South London.

Speaker 2 (05:09):
Thanks, Jerry will be