Mark Smith: ASB Senior Economist on the drop in inflation and potential interest rate cuts

Rate cuts could arrive early as next month, banks are predicting. 

Inflation fell to a 3-year low yesterday, reaching 3.3% in the June Quarter. 

Although that falls outside of the Reserve Bank’s target band of 1-3%, banks have reacted positively to the move. 

ANZ have cut their three year home loans rates to 6.35% and the two year rates to 6.49%. 

ASB Senior Economist Mark Smith told Ryan Bridge they’re predicting two rate cuts before Christmas: a 25 bps cut in October, and another in November. 

He said that factors such as pricing pressures, external inflation, and pressures in the housing market are beginning to ease, which the Reserve Bank can use as a positive sign that inflation will remain low once rates are cut. 

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Episode Transcript

Speaker 1 (00:00):
Bridge our banks, some of our banks, I should say,
predicting rate cuts as soon as next month, following inflation
dipping to a three year low, reaching three point three
percent in the Gyne quarter. That still falls outside the
reserve banks target band of one to three percent. As
we know, A and Z's already reacted positively to the move.
They've count their three year home loan rates to six

(00:21):
point three five percent and the two year rate to
six point four nine percent. Joining me now is ASB
Senior economist Mark Smith, Mark, good morning to you, Thanks
for being with me.

Speaker 2 (00:31):
Good morning.

Speaker 1 (00:32):
Right, you're predicting two cuts before Christmas? Have I got
that right?

Speaker 2 (00:36):
Yeah, that's correct. The twenty five basis point cut in
October and then another twenty five basis point cut in November.

Speaker 1 (00:43):
Why won't we need to wait for the quarter three
data for you to make that prediction.

Speaker 2 (00:50):
It really comes down to a number of things impacting
the inflation process. One, yes, pres event really needs to
be sure that inflation is going to be below percent
poor cutting, but they also need to see other things
to be confident as well that it will stay there
once they do cut. Now, to us, it's a number
of factors one. Ready, the economy is very soft and

(01:13):
pricing pressures are certainly calling. We've seen that in the
inflation data. Essentially domestic inflation is calling. External inflation is
eventually non existence. So we've had the COVID prehium and
that's significantly unwinding in terms of the domestic inflation components.
Pressures in the housing market are calling, and it expected

(01:35):
to call further. And some of those surfaces components are
certainly calling as well, and they're more linked to the
labor markets. And it's really the major source of where
we see inflation calling from here.

Speaker 1 (01:46):
What would be worse for the Reserve bank? Would it
be prolonged pain like we're seeing now or what happened
in Australia where inflation bounce back up.

Speaker 2 (01:58):
Yeah, probably more of the latter, I think from the
reserve banks point of view, it's really it's like the
regrets analysis. So really what you want to make sure
is when you do start to ease policy, you have
to be completely sure that inflation will settle below three percent. Now,
the RBA probably took their far off to break a

(02:18):
little bit too early after the RBNZ. It's really that
regret and then on the other side of the coin,
you don't want to drive the economy completely into the
ground until you start to ease policy. So it's really
a trade off between those two things. Now in tournaments
of the rbn's view, we think the view of the
risks are certainly shifting. For for what was certainly the

(02:40):
risk is we want to make sure inflation is going
to settle it below three percent. I think we're very
confident of that now and the Reserve Bank increasingly confident
that as well. But we're also mindful of the significant
damage that you can can cause if you leave the
OC high for too long.

Speaker 1 (02:57):
Yeah, you don't want to screw the poachy quickly before
we go how long before we feel richer? If you
know what I mean, Because I mean it's one thing
to cut rates and it's and it's you know, you're
predicted two cuts by Christmas, But when will we actually
feel like we're not so hard up?

Speaker 2 (03:17):
The thing is a lot of the slowdown is policy induced,
but there are other factors going on as well. Now
it's going to be quite a while before that happens,
and that's really the care reason why we think the
Reserve that will start to cut the ocr and that's
to provide a little bit of interest readily to people
out there. We know a lot of households are struggling,
but a lot of businesses are struggling as well. A

(03:39):
corporate profitability, it's the lowest it's been as a share
of incomes in the least thirty years. So they need
to really provide some relief, not only to tellsholds, but
to businesses as well.

Speaker 1 (03:50):
Mark, thanks very much for your time. That's Mark Smith,
the ASB senior economists. After yesterday's in FAC data, still
not in the band of one to three percent where
it needs to be three point three percent for the
June quarter. But Mark says, without even knowing what quarter
three says, they are picking a rate cut. A two
rate cuts, I should say by Christmas, one in October

(04:11):
and one in November. For more from News Talks B,
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