Latest news with #KiwiEconomics
Scoop
a day ago
- Business
- Scoop
May Is Over, The Mayhem Is Not, And Markets Are Muddled
Press Release – Kiwi Economics Tariff volatility continues to dominate financial markets. The RBNZs latest statement alone mentioned the word uncertain, or some or a form of it, 164 times across their 60 or so page statement. Tariff volatility continues to dominate markets and the outlook. We're far from any resolution. And the fragility of the global economy poses significant risk to our recovery here at home. Aware of all the risks, the RBNZ cut the cash rate to 3.25% last week. And despite the uncertain path ahead, there's more cuts coming. That's the key takeaway from the May MPS. Our COTW takes a look at the curious sell off in Kiwi rates following the RBNZ policy decision. Here's our take on current events After a hectic month marked by a whirlwind of trade escalations and de-escalations, the Government's budget release, and last week's RBNZ Monetary Policy Statement, May has officially come to a close. The mayhem, however, is far from over. Tariff volatility continues to dominate financial markets. Whether it's the ongoing legal battle between the Trump administration and the courts over the legality of the 'Liberation Day' tariffs, or the renewed tensions between the US and China – with each side accusing the other of violating their trade truce – or the proverbial (not literal!) shots aimed at the European Union, the economic landscape remains incredibly fragile. There's a lot of noise right now. And it's hard for everyone, including policymakers, to make sense of it all. The RBNZ's latest statement alone mentioned the word uncertain, or some or a form of it, 164 times across their 60 or so page statement. That's about 3 mentions a page… Nevertheless, the RBNZ delivered on expectations and delivered another 25bps cut. The cash rate sits at 3.25%. And there's more cuts coming. That's the key takeaway from the May MPS. Although the path from here is highly uncertain. The OCR track was lowered from a flat lined bottom of 3.10% to a 2.85% trough in March 2026. So now another 25bps cut to 3% is fully baked into the cake. And from there, there's a 60% chance of another 25bps cut to 2.75%. Once again, we would love to have seen a bit more. We're still of the view that a 2.5% cash rate is what the Kiwi economy needs. And an OCR track bottoming anywhere below 2.75% would have signalled what we had hoped to see. But with each MPS, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. But for now, such heightened uncertainty is making it harder for all policymakers to navigate. So, it's not surprising to see the committee err on the side of caution. The fact the RBNZ 'voted' 5-1, with one member opting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a 'pre-set course', and always data dependent. We think there's enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything. All in all, we think there was a bit in the May MPS for everyone, dove or hawk. The RBNZ's forecasts were markedly revised lower. The expected Kiwi economic recovery is forecast to be slower than projected in the February MPS with the RBNZ now forecasting 0.7% growth this year, down from 1%. And greater spare capacity than previously modelled also sees unemployment stay higher for longer. You can't ignore that. And that's the dovish part. The hawkish part lies in the dissenting 5-1 vote and the accompanying hawkish tone in post MPS media conferences. Comments from Hawkesby including the statement that the Committee will have 'no clear bias' heading into the July meeting, injected a dose of uncertainty. And together, these seeds of doubt gave markets something to run with. Rates, particularly in the short end saw a sizeable jolt higher (see our COTW for move on the move in markets). But we think markets, as they so often do, have gotten a bit carried away. Time will tell. Charts of the Week: A less dovish, highly uncertain, RBNZ bias generated a mixed reaction in markets. If you just read the statement, the RBNZ's easing bias was strengthened. The economic forecasts were cut, and another 25bp rate cut was inserted into the OCR track (from a low of 3.1% to 2.85%). The track shows a clear bias to cut to at least 3% and there's a 60% chance of a cut to 2.75%. That's dovish. Because they're still cutting. Our first chart shows with each MPS over the last year, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. The FX market read the statement. The Kiwi currency barely moved. The Kiwi currency reacted exactly as you'd expect. It fell. It rose. And then it fell again. It looked like a heart rate monitor around .5950. There wasn't much change at all. There are bigger issues offshore for currency traders to grapple with. If you listened to the press conference, the RBNZ's top brass were crystal clear in their clouded uncertainty. Heightened uncertainty is making it harder for all policymakers to navigate. So, it's not surprising to see the committee err on the side of caution. The fact the RBNZ 'voted' 5-1, with one member voting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a 'pre-set course', and always data dependent. We think there's enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything. It was the 'vote', the first time in two years, that got interest rate traders (re)thinking. That seed of doubt caused a bit of a jolt, especially short end interest rates. The pivotal 2-year swap rate rose 10bps, from 3.16% to 3.26% (now 3.32%), as the implied terminal cash rate lifted from 2.85% to 2.95% (now 3%). See the second chart. It's not a big move… but it was one Governor Christian Hawkesby pushed back on. The telling comment from Hawkesby, when asked about the market reaction, was his reference to the new OCR track matching market pricing prior to the announcement. The RBNZ's OCR track matched market pricing of 2.85%. So they would not have expected much reaction at all. We believe we are seeing some profit taking in wholesale rates markets. Hedge funds would have placed some bets that the RBNZ may have come out a lot more dovish. We think the market will settle down, and end up moving back down to 2.85%, in time (and depending on what happens in offshore markets). And then, we expect another move by markets and the RBNZ down to 2.5%. Content Sourced from Original url
Scoop
7 days ago
- Business
- Scoop
The RBNZ Has Seen Enough To Cut More, But Not Enough To Do Enough
Press Release – Kiwi Economics The weakness in the economy is clear and demands more attention and less restriction. With all the risks offshore, think Trumpian tariffs, and the pain still felt onshore, theres a good argument to be made for taking policy into stimulatory territory. Another RBNZ meeting, another rate cut, and another forecast cut. Today's 25bps move to 3.25% is the sixth straight cut, and takes total easing to 225bps. And there's more coming. Although the path is highly uncertain. Policy is much closer to neutral now, but it is still not stimulatory. The RBNZ has lowered the forecast OCR track 25bps, from 3.1% to 2.85%, implying a good chance of another two rate cuts to 2.75%. It's another step in the right direction… and we continue to call for a move to 2.5%. The RBNZ has seen enough to cut again, and again, but not enough to do enough, in our view. We expect to see the OCR tracked lowered again in August towards 2.5%. The weakness in the economy is clear and demands more attention and less restriction. With all the risks offshore, think Trumpian tariffs, and the pain still felt onshore, there's a good argument to be made for taking policy into stimulatory territory. The RBNZ cut 25bps today. The cash rate sits at 3.25%. Were we surprised? Nope. Did we want more? Yes. There's no doubt that the Kiwi economy needs support. The risks to the growth outlook are tilted to the downside. As was revealed last week, the Govt's hands are tied (self-inflicted). So, we look to the RBNZ. In the current environment, with a future clouded by the tariff trade war, there's more for the central bank to do to support the recovery. Rightly so, the RBNZ is signalling more rate cuts. That's the key takeaway from the May MPS. The OCR track was lowered from a flat lined bottom of 3.10% to a 2.85% bottom in March 2026. So now another 25bps cut to 3% is fully baked into the cake. And from there, there's a 60% chance of another 25bps cut to 2.75%. Once again, we would love to have seen a bit more. We're still of the view that a 2.5% cash rate is what the Kiwi economy needs. And an OCR track bottoming anywhere below 2.75% would have signalled what we had hoped to see. But with each MPS, the terminal OCR has moved closer to our 2.5% view. Give them time, and they just might get there. But for now, such heightened uncertainty is making it harder for all policymakers to navigate. So, it's not surprising to see the committee err on the side of caution. The fact the RBNZ 'voted' 5-1, with one member voting for a pause to assess, throws some doubt on the timing of the next move, but not the direction. They are not on a 'pre-set course', and always data dependent. We think there's enough for them to cut again in July, but they may wait until August to cut again. It depends… on what? Everything. That seed of doubt caused a bit of a jolt in financial markets, especially short end interest rates. The pivotal 2-year swap rate rose 10bps, from 3.16% to 3.26%. It's not a big move… but it was one Governor Christian Hawkesby pushed back on. The telling comment from Hawkesby, when asked about the market reaction, was his reference to the new OCR track matching market pricing prior to the announcement. The RBNZ's OCR track matched market pricing of 2.85%. So they would not have expected much reaction at all. Again, we want to reinforce the key message of today's meeting is that the RBNZ is signalling more cuts.
Scoop
23-05-2025
- Business
- Scoop
25 And Not Done. The RBNZ Has More Work To Do. More Cuts Are Required.
Press Release – Kiwi Economics The weakness in the economy is clear and demands more attention and less restriction. With all the risks offshore, think Trumpian tariffs, and the pain still felt onshore, theres a good argument to be made for taking policy into stimulatory territory … Next week's decision, with updated forecasts, is important. There's no doubt that the Kiwi economy needs support. There's no doubt the RBNZ should be aiming to stimulate, not restrict, the economy. It's just an argument around how much support is needed. The RBNZ has signalled a 25bp cut to 3.25% next week. If it was up to us, we would deliver a 50bp cut to 3%, a level broadly considered neutral, not even stimulatory. But it's not just about the cut, it's also about the trajectory. And we're focussed on their next move(s). They're saying just one more move (25bps) to 3.0% after next week. We're saying get to 2.5%. We're stubborn, and we're hoping they're flexible. They had to be very flexible last year. The weakness in the economy is clear and demands more attention and less restriction. With all the risks offshore, think Trumpian tariffs, and the pain still felt onshore, there's a good argument to be made for taking policy into stimulatory territory asap. Next week's decision, with updated forecasts, sets the scene for the next 3 months, at least from the RBNZ's perspective. Adrian Orr has left the RBNZ and Christian Hawkesby is in charge. Next week's decision is a chance to differentiate from the Orr era. The economic developments since the RBNZ's last MPS have deteriorated here, and especially offshore. The justification of a more 'go for growth' focussed RBNZ has strengthened. Hawkesby (hopefully Dovesby) could easily deliver a 50bp move next week and signal another 50bps to 2.5% to come. That would set policy about right for a recovery. And it's not mucking around with 25bps moves, delaying the inevitable. A more decisive RBNZ would be viewed positively across the road (Terrace), given the difficulty the Government had in balancing yesterday's budget. 2026 will be just as hard. If, however, Hawkesby decides to play the nightwatchman, then we may just get a 25bp cut and little else. That's precisely what we don't need. And we'd argue it would show an RBNZ out of touch with our economic reality. We highly recommend watching our latest podcast where we speak to Urgent Couriers's Managing Director Steve Bonnici. Urgent Couriers feel the ups and downs of the economic cycle before most. When asked about the current cycle and monetary policy actions of the RBNZ, Steve said: 'I'm frustrated (by the RBNZ's actions)…The lack of understanding of what Kiwi businesses were going through out there. The time for easing was the beginning of 2024, not the end of 2024… we're a bellwether… we've had more clients go into receivership or liquidation in the last 12 months than in any of the other cycles (back to the 1980s)'. That's what we're hearing for the vast majority of Kiwi businesses. There are three scenarios for next week: The first scenario, is lifeless. The RBNZ delivers a 25bp cut and leaves the OCR track at 3.1% or slightly below at 3.0%. This would not go down well. Wholesale market traders would drop bonds, pushing interest rates higher. The pivotal 2-year swap (interest) rate would rise from around 3.15% now to 3.25% (about 10bps). Mortgage rates would barely move… if anything, it might see a reduction in discounting. The second scenario, is what we think they will do. A 25bp cut accompanied by a lower OCR track to 2.8% (or close to). Currently, most economists sit between a low of 2.5% (Kiwibank) and a high of 3%. This scenario will push most economist forecasts below 3% to a 2.5-2.75% range. The wholesale rate markets imply a terminal rate of 2.85-2.9%. We should see a (very) slight reduction in rates, supporting current mortgage rates. The variable and 6 month rates would move lower, but the 1 year and beyond wouldn't move much at all. That's not what we need either. The third scenario, is 'go for growth', generate greenshoots. A Doveish Hawkesby should put a 50bp move on the table, and an OCR track to 2.5%. The shock without Orr would see wholesale rates poleaxed. The 2-year swap rate would immediately test 3% (down from 3.15%), and ultimately fall towards 2.75%. All mortgage rates are likely to be lowered, as needed. A slightly watered-down version could be a 25bp cut and a much more dovish track to 2.5% The RBNZ's current trajectory is unlikely, in our view. Get to neutral, and get the economy moving. Ultimately, it's better to act swiftly and decisively to get lower rates feeding through faster. More meaningful cuts are required here and now.
Scoop
22-05-2025
- Business
- Scoop
The 'Growth' Budget In A Shrinking World
Press Release – Kiwi Economics As well-telegraphed ahead of the big day, Budget 2025 revealed an economic outlook hampered by global uncertainty, resulting in a weaker fiscal outlook with a focus on consolidation. Set against a challenging backdrop, Budget 2025 revealed an inevitable downgrade to the economic and fiscal outlook. A new initiative – Investment Boost – was also announced to help the Government 'go for growth'. Heightened global uncertainty led by the unfolding tariff trade war simply means a weaker global outlook. Near-term Kiwi growth as a result has been downgraded. And weak productivity continues to hamper our long-run economic growth. A weaker economic outlook means a weaker fiscal outlook. No surprises. And that's despite a reduction in operating allowances. Operating deficits are deeper in the near-term. A return to surplus is still achieved, but only just. The Government's debt pile continues to grow in the near-term, hitting a peak of 46% but reached a year later. More debt means more issuance – $4bn more over the next four years to 2029. As well-telegraphed ahead of the big day, Budget 2025 revealed an economic outlook hampered by global uncertainty, resulting in a weaker fiscal outlook with a focus on consolidation. Heightened global uncertainty led by the unfolding tariff trade war simply means a weaker global outlook. Global growth forecasts have been cut left, right and centre. And being the heavily trade dependent country that we are, a downgrade to Kiwi growth, particularly in the near term, was inevitable. Despite the recent strength in the export sector, weaker export demand and reduced investment from tariff uncertainty are assumed to reduce New Zealand's growth by 0.2% over the next two years. Growth later accelerates to 3% in 2027, but our persistently weak productivity constrains growth further out. The operating surplus is still achieved, on paper, in 2029 – at the very end of the projections – but to an amount that needs a magnifying glass to see on a chart ($200mil or 0.0% of GDP). The weaker reality means more debt. The debt management office will have to issue an additional $4bn over the next four years to 2029. Net debt rises to a peak of 46% and remains above previous projections. In terms of key policy initiatives, the new Investment Boost scheme is the cornerstone of Budget 2025 – the Growth Budget. The scheme involves a tax incentive to encourage investment in productive assets, like machines, tools, and equipment. Beginning from today, businesses can deduct 20% of a new asset's value from that's years taxable income, on top of normal depreciation. According to the Budget, Investment boost is expected to lift GDP by 1% and wages by 1.5% over the next 20 years – with half of these gains in the next five years. The policy is expected to cost the Government around $1.5bn per year. The other headline-grabbing announcement centred around changes to KiwiSaver. Budget 2025 announced a staged increase in default employee and employer contributions to KiwiSaver. From 1 April 2026, the default rate will go to 3.5% and, from 1 April 2028, the rate will go to 4%. Other changes also include a reduction and means testing of the Government contribution, effective from 1 July 2025. The annual government contribution will be halved to 25cents for each dollar a member contributes, up to a maximum of $260.7. And members with an income of more than $180k will no longer receive it.
Scoop
12-05-2025
- Business
- Scoop
Deal Or No Deal: Dealing With The Cards Trump Dealt
Press Release – Kiwi Economics In some good news, we got the first trade deal out of the US last week. The UK was lucky first, and managed to negotiate down the tariffs on steel and autos. Other countries running a trade surplus with the US, however, may not get as good. Every indicator in the latest Kiwi unemployment report points to weakness. Employment barely grew, hours worked was down, and wage growth cooled. Youth are bearing the brunt (see COTW). It reinforces the need for further rate relief. In some good news, we got the first trade 'deal' out of the US last week. The UK was lucky first, and managed to negotiate down the tariffs on steel and autos. Other countries running a trade surplus with the US, however, may not get as good. Rents are falling. Because the stock of rental properties on the market keeps rising. Investors, unable to sell their investment property (at the price they want/need), are putting houses (back) up for rent. See the Special Topic for more. Here's our take on current events The latest Kiwi labour market report speaks volumes to the state of our economy. Everything in the report showed scars of the recession. The unemployment rate was unchanged at 5.1%, below the RBNZ's estimate of 5.2% and our forecast 5.3%. But the details of the report were weak, as expected. Workers may not be losing their jobs, but many are losing valuable hours. The underutilisation rate rose, even as unemployment remained steady. While the number of people with jobs, but not enough hours, rose again. And the trend was also highlighted in the fall in full time employment and rise in part time. What matters more for the economic outlook, is the hours worked. Hours worked fell a hefty 2.9% over the year, and has been declining for 5 consecutive quarters. Declining hours is also being met with weaker wages. More and more workers are receiving smaller and smaller pay rises. For example, the number of workers receiving a pay rise above 2% but below 3% has been steadily increasing for 7 quarters. And the wage bill (private sector Labour Cost Index, seasonally adjusted) rose 2.5% over the year, down from 2.9%yoy last quarter and a peak of 4.5%. That's indicative of a sharp recession. And so too is the drop in participation. The participation rate fell, again, to 70.8% from 70.9%. That's a mighty fall from the 72.4% peak in mid-2023. Put simply, the labour market is not as attractive as it once was. As the demand for workers falls, would-be-workers give up and leave. All indicators support our call for lower interest rates. Demand for labour has clearly softened, and wage inflation is quickly cooling. We should have stimulatory monetary policy (not the current restrictive setting). We expect another 100bps of rate cuts to 2.5%. The uncertainty surrounding Trump's tariffs demands caution as well. Progress has finally been made on trade negotiations. Late last week, President Donald Trump and British Prime Minister Keir Starmer announced a trade agreement. Though light on details, and not formally signed, the general terms of the deal would see the US leaving it's 10% baseline tariff on most UK goods. However, the 25% tariff on British steel is gone, and the tariff on British cars will fall from 27.5% to the baseline 10% – but just for the first 100k cars imported each year. Additionally, both countries have agreed to new reciprocal access on beef with UK farmers given a first-ever tariff-free quota for 13,000 metric tonnes. Tariff de-escalation is the story many want to hear. That said, the UK deal should not be seen as the blueprint for future trade deals. The US is targeting countries in which the US runs a trade deficit. The US runs a trade surplus with the UK, which may explain their relative moderate concession. Trump may demand more from countries with which the US runs a trade deficit. It's part of his desire to rebalance the US trade deficit, and generate revenue to lower taxes. As for de-escalation between China and the US, we know talks are finally happening in Switzerland. But so far, the only news we have is that 'substantial progress' is being made and that talks are 'productive. We'll keep watching… waiting… and waiting… Chart of the Week: Last ones in, first ones out. You know the labour market is tight, when you start to pull from the fringes of the market – youth and young adults. Conversely, when the labour market weakens, the younger workers typically bear the brunt of rising unemployment. We're seeing this play out today. Total employment is around 21k lower than last year's levels. And youth (15-19 years) and young adult (20-24 years) make up close to half of the decline. The youth unemployment rate has climbed to 23.9% – the highest since 2013. It also appears that these younger workers are exiting the market, as the participation rate falls to 50.2%. In a silver lining, some have returned to education. That's good news for when they re-enter the market down the line. Despite this, there has still been an increase in the rate for those not in education, employment, or training (NEET). In the last 12 months, the youth NEET rate increased by 0.4%pts to 12.3% and the young adult NEET rate rose 1.9%pts to 16.6%. Like others disillusioned by the current economic environment, some may be waiting on the sidelines, hoping for better times. The other alternative is to flock the nest entirely. The labour market across the Tasman is relatively stronger. The Aussie youth unemployment rate is a stark 9.9%pts below ours at 14%.
