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While markets have been betting for weeks that the Federal Reserve would cut interest rates in August, that did not look like a realistic prospect until now.
regardless It moves in August, October or Novemberthe RBNZ is always facing a huge shift. The RBNZ’s official rate trajectory (published in May) still expects the first rate cut to take place in August next year.
Unlike market economists, central banks cannot update these as they see fit.
But to be clear, the debate is about whether they will cut the OCR in August this year. That’s August this year, the August we are in now! Next Wednesday at 2pm to be exact.
So this is a very big leap.
Before all the market turmoil unfolded, I thought the gap between the predicted rate cut in August 2025 and the actual rate cut in August 2024 was too big.
That may still be the case. But now there has been a dramatic shift in the tide, and the RBNZ can point to it as a sign of a turnaround. It’s hard to tell how dramatic that shift is (especially when you’re writing this on deadline before Wall Street opens).
Even if the market recovers in the short term, there is a chance of some volatility for a while. The risk of further investor panic remains very real.
Yesterday, economists from both the Bank of New Zealand and Bank of New Zealand called for the RBNZ to cut rates in August, which put pressure on the central bank. To be fair, both the Bank of New Zealand and Bank of New Zealand have said we are long overdue for a rate cut.
But recent calls have been stronger.
“Overly tight monetary policy has caused a lot of pain but has kept the inflation beast in check,” wrote Kiwibank chief economist Jarrod Kerr. “Households and businesses are struggling.”
“Almost all the data came in below expectations and well below the RBNZ estimates. Unemployment is rising rapidly and confidence in the economy remains at recession levels. The economy is two years into recession. Interest rates need to be lowered now.”
Kerr described the RBNZ’s hawkish monetary policy statement in May as a “major misstep in the wrong direction”.
“We are recommending a rate cut next week and then at each subsequent meeting until the cash rate reaches 2.5 per cent,” Mr Kerr said.
BNZ head of research Stephen Toplis also called for an “immediate rate cut”.
“We firmly believe that the Reserve Bank should have eased monetary policy sooner rather than later. In fact, we have a record that the Reserve Bank should have already done so,” he said.
“Given the lag between interest rate changes and their impact on the economy and New Zealand’s current precarious position, we strongly recommend that the Bank initiate a gradual easing cycle from its August meeting.”
Will the Reserve Bank of New Zealand cut interest rates?
While the market has largely priced in a rate cut from the Reserve Bank of New Zealand next week, neither Kerr nor Toplis are sure the central bank will actually cut rates.
Kerr noted that current market odds are 92% (as of Tuesday).
“And the rate cut next August is close to 220 basis points (3.32%). The terminal rate has fallen from 4% a few weeks ago to 2.95% today.”
Just before the sharp sell-off in Asian stocks on Monday afternoon, Westpac economists brought forward their forecast for the first OCR cut to October and said they expected a second cut to come in November.
“Recent data suggest that the decline in economic activity in the June quarter of 2024 was larger than previously expected. This is reflected in a range of high-frequency indicators such as business and consumer confidence and purchasing managers’ indices.
“We think GDP fell by 0.6% in the June quarter. Given this weak performance, economic growth is likely to remain subdued in the second half of 2024.
“Importantly, we are also now seeing clear signs that the labour market is adjusting more quickly to a period of weak growth. We now expect the unemployment rate to rise more quickly to a higher peak of 5.6% in 2025.”
That’s bad news indeed – no matter how much mortgage holders might want lower interest rates.
We should perhaps not lose sight of the fact that all the talk of rate cuts is driven by concerns about the state of the domestic and global economy.
Based on this, I hope Westpac is right. A rate cut next week would be good for mortgage holders. But for that to happen, the global economy would probably need to have a bad week.
Did the Fed wait too long?
This week’s sell-off has undoubtedly locked in the Fed’s determination to cut interest rates in September. Many financial commentators said the Fed had screwed up by not taking action last week.
Some are even suggesting an emergency rate cut before September. That’s possible if the sell-off intensifies, but it also risks exacerbating panic.
Whether the outlook for the U.S. economy has really changed so much in a week is debatable. Economists and New York Times Columnist Paul Krugman believes the recession warning lights are flashing.
“The U.S. may (probably) not be in recession yet. But the economy certainly looks like it’s in the pre-recession stage,” he wrote on Tuesday.
“The Fed clearly made a mistake by not cutting rates last week; in fact, it should have started cutting rates months ago. Unfortunately, we can’t turn back the clock. But the Fed’s Open Market Committee, which sets short-term interest rates, can and should cut rates significantly at its next meeting, scheduled for mid-September — perhaps by half a percentage point instead of the customary quarter percentage point.”
How severe the market sell-off really is? We won’t know until a few days later.
But you could say that Wall Street investors simply lost their patience and had a collective tantrum.
Unlike in 1987 and 2008, the underlying reasons for this adjustment are not hard to understand. Investors have been concerned for some time about the prospect of the Fed winning the inflation war without triggering a recession.
At the same time, they’re piling into tech stocks as artificial intelligence hype creates an unstable bubble in parts of the market. The combination has created a fire that needs only a spark to ignite.
It has two.
A weaker-than-expected U.S. jobs report on Friday stoked fears of a recession. Meanwhile, a specific shift in Japan’s economic outlook led to a dramatic shift in investor sentiment and Nikkei suffers biggest one-day drop since 1987.
It could have been worse. It still could have been, of course. The tech stocks in the Nasdaq really weren’t immune to a correction. But if we can get through this without the whole system collapsing, then lower rates should start to lift other markets.
hope so.
From the beginning of 2023 to its peak in June, AI chipmaker Nvidia’s stock price rose 740%. This has somewhat made up for the fact that it has fallen 20% in the past two months.
This is a reminder that unless you are a trader, you should take a long-term view when investing. Unless you are betting on the decline of modern civilization, there is no reason to short the market. The market has always created wealth for investors. Just look at the chart of the S&P 500 over 30 years (see below).
Look at the starting point, look at the ending point, and then draw an imaginary line between the two. That’s what most of us should focus on. If you’re a stock trader, it’s a different story. But as Warren Buffett said this week: If you’re afraid of a market sell-off, you shouldn’t trade stocks.
What is New Zealand’s total debt as a percentage of GDP?
This Week’s Reader Debt Nation feature Question: How has our total national debt as a percentage of GDP changed?
for Debt Nation We find the total debt amount by combining the following formula The latest Reserve Bank private debt data, the Treasury’s Crown debt data, the Local Government Finance Agency’s municipal debt data and the Tax Office’s student loan data.
This year our national debt totaled $827 billion.
We remain very concerned about the ratio of net core Crown debt to GDP. This has risen significantly over the past few years. the second part Debt Nation Series created by Jenée Tibshraeny. When we start Debt Nation In 2016, the UK Crown’s net debt was just 24% of GDP, but after the period of borrowing and spending during the pandemic, it has now reached 44%.
I hadn’t thought of total debt as a percentage of GDP as a metric before. But it’s interesting — especially when we look at how it has changed since 2016.
New Zealand’s most recent nominal GDP for the year ended March 31 was $410 billion. This means our total debt to GDP ratio is 201%.
This is really terrible. It shows that despite our relatively low Crown debt ratio, we are still in a precarious position in terms of overall debt.
Of course, the bulk of this is our mortgage debt, with debt owed to foreign banks at $361 billion, or 44% of total debt (see chart below).
I have never been shy about pointing out that our large private debt (and persistent current account deficits) limits the government’s ability to borrow, as it does in countries like Japan (where net government debt is 168% of GDP).
But if we look at how the total debt-to-GDP ratio has changed since 2016, we see an interesting shift in the composition of the debt.
At the time (Q1 2016), GDP was $258 billion and our total debt was $492 billion. That’s about 190%.
It is no surprise, then, that our total debt as a percentage of GDP has risen. What is perhaps surprising is that the increase appears to be relatively modest.
The reasons for this situation have to do with the madness of the epidemic and its consequences.
“The structural shift from private to public sector debt is a big theme in the post-pandemic world,” said Miles Workman, senior economist at ANZ.
“If fiscal policy had been less procyclical in recent years (i.e. the previous government repeatedly increased spending without sufficient economic capacity to absorb it), the RBNZ would not have had to raise the OCR as much as it did, private sector credit would probably be slightly higher and public sector debt would probably be slightly lower.
“In other words, without the resources in the economy to meet the additional demands of the government (without adding to CPI inflationary pressures), the RBNZ has had to make room for the additional government spending by increasing the OCR – which puts pressure on private sector credit.”
So if we look at household credit data (typically mortgages and consumer debt), we see that as a percentage of GDP in 2020 peaked in 2021 as the housing market rose like crazy under the influence of stimulus interest rates.
But since then, the number has dropped dramatically.
Oddly, you could say that our national debt structure looks more balanced today, but I wouldn’t overstate that because nominally we have more debt and we are vulnerable to another surge in private debt if house prices rise again.
As Workman Debt Nation Monday’s feature: “New Zealanders are not very good at saving and our net external liabilities reflect that. We have borrowed a lot from the rest of the world.”
Liam Dann is the New Zealand Herald’s Business Editor-at-Large. He is a senior writer and columnist, as well as a video and podcast host and producer. He joined the Herald in 2003. To subscribe to my weekly newsletter, click on your user profile New Zealand Herald and select “My Newsletter”. For a step-by-step guide, Click hereIf you have a burning question about the quirks or intricacies of economics, please send it to liam.dann@nzherald.co.nz Or leave a message in the comments section.
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