Sticky Inflation Means Mortgage Rate Cuts a Way off Yet

NZ’s latest inflation result is in, what this means for borrowers

Great news this week: New Zealand’s inflation rate is coming off the boil. Stats NZ released figures showing inflation had fallen to six percent annually, the lowest annual figure in over two years. That also might mean interest rates have reached their peak.

But, there is some bad to go with the good:

• The cost of living is still increasing. The annual increase was still higher than most commentators thought it would be.
• An annual increase of six percent is still way above the target inflation band of two-to-three percent.
• New Zealand prices are rising faster than most other countries we usually compare ourselves with: the United States is at three percent, Canada is on 2.8, and even Australia is at 5.6 percent.
• Diving a little deeper, research shows 70% of our inflation is caused by domestic reasons. This refutes the common suggestion that our inflation is caused by “…inflationary pressures caused by global events.” In other words, nearly three quarters of the reason for our inflation isn’t some external issue – such as the war in Ukraine– our cost of living is home-grown due to the state of the New Zealand economy.
• A separate survey of small businesses said “…there is a continuing ‘Cost of doing business crisis’ with over 85% of businesses expecting that the cost of doing business will be ‘Much More or Somewhat More’ expensive over the next 6 months. This is an increase of nearly 7% compared to March 2023 and a 12.5% increase from January 2023.”
• For borrowers, this all means interest rates won’t fall back to 2-3 percent anytime soon!

Domestic Price Pressures

What the Professionals Said

Kiwibank economists said the updated data on inflation was good news overall. “The world war on inflation is being won, albeit slowly.”

But KiwiBank also drew attention to the worrying sign that so much of the inflation is of our own country’s making: “When we slice and dice the data... we see some markedly mixed moves. Prices have risen pretty much across the board. The percentage of goods in the basket recording increases, rose. Food and housing prices recorded the largest gains. And they hurt the most households. Construction-related costs eased to 7.8% year-on-year – still hot – down from 11% – near boiling. Construction costs will continue to decline, sharply, as the housing market cools. Transport related prices helped, falling 2% over the quarter.”

ASB senior economist Kim Mundy said core inflation measures, which eliminate more volatile components, were little changed at around six percent and in some cases had edged higher, which would make the Reserve Bank (RBNZ) nervous.

“The broadening in price increases, and less discounting than expected, is at odds to what we had expected given the softening demand backdrop and indications from recent survey measures.”

Rising food prices are the biggest contributor to the annual inflation rate. Vegetable prices lifted 23.3 percent in the 12 months to June 2023, while prices for ready-to-eat food increased 9.8 percent, and milk, cheese, and eggs rose 13.8 percent. This is a genuine shame as we are a food-producing nation, and of course anyone trying to cut back and avoid the cost-of-living crisis won’t last long without eating!

ANZ’s Opinion

ANZ senior economist Miles Workman said the inflation risks were firmly to the upside.

"We maintain our forecast that the RBNZ is not in fact done hiking yet, with a 25 basis point hike penciled in for November."

Transport

Transport-related cost increases are likely to hit many of us soon, which wasn’t encompassed by this release of data:  

• The 25 cent-per-litre cut in fuel tax has now ended.
• Half-price public transport is coming to an end.
• The temporary cut in road user charges (“RUC”, for diesel vehicles) were reversed on 1 July.

Like food, transportation is one of the biggest expenses most households face – so the increases above will be reflected in the next lot of data collated by Stats NZ in three months’ time.

Reserve Bank

Last week, the RBNZ said in its latest statement that it did not expect inflation back in its target band until late 2024, and the 5.5 percent official cash rate would need to stay high for an extended period. That means the cost of borrowing will stay high for any household or business that needs lending.

Grim

As if all this wasn’t enough, somehow New Zealand is the only country in our region that is in a recession. That makes it no surprise that crime is so prevalent (violent crime is up 40 percent on pre-Covid rates by some measurements, while a ram raid occurs about every 10 hours nationwide), job security is looking shaky, and many small and mid-sized businesses are at risk of going under. Even the most well-established businesses are often struggling, and redundancies are becoming more commonplace: American multinational 3M recently confirmed NZ job cuts, and even NZ Post has announced layoffs.

Last week, the RBNZ said in its latest statement that it did not expect inflation back in its target band until late 2024, and the 5.5 percent official cash rate would need to stay high for an extended period.

The Opportunity

Meanwhile the housing market is showing signs of stabilising. As so many of us borrow to buy a home, it makes sense the housing market is linked to interest rate moves.

Interest rates – and thus the interest paid by those repaying a mortgage or funding a business – are hopefully at-or-near peak.

Another glimmer of hope is the AI tools rolling out across a range of applications, which do present a large upside potential to economic growth and productivity levels.

While there is likely to be more pain in store for the average Kiwi household, against such a backdrop, the next 12 months or so could present the opportunity of a lifetime for those who are prepared to make bold moves and advance forward into the uncertainly. What that means practically might differ for everyone, though it could include major investment changes, career decisions, starting a business or side hustle, life choices, or something else. It’s an uncertain and exciting time, and when we look back on this period in another five or 10 years, it’ll be the ones who acted now that will reap the rewards.

Learn more:

• Who wins in a recession?
• Why winners’ win
• The best 10 office jobs in a recession
• How to invest in a downturn
• Why the rich get richer and the poor get poorer
• Wealth-building checklist
• 10 signs you will be financially successful
• The proven way to become wealthy

The Bottom Line: Sticky Inflation

Especially when it comes to predictions about the future, they are wrong more often than they’re right. However, nobody really knows!

At this point, the experts believe inflation will steady itself within a year or so, then reduce to more usual levels. Likewise, interest rates are expected to go sideways over months to come, then gradually fall thereafter. Only time will show if these predictions are correct.

Whatever happens, anyone with a good mindset and the gumption to act decisively within the next 12 months will nearly certainly look back in years to come on such decisions with pride.  

It’d be our pleasure to help you work through any of the topics mentioned above, so get in touch to book a complimentary initial consultation.