OPINION: It affects mortgage rates, rental prices, savings, businesses, the job and the housing market, so yes, the OCR probably affects you, but lowering it isn't always a silver bullet, writes Frances Cook.
As you read this, the Reserve Bank is dusting off its decision-making hat for one of the finance announcements we all like to keep an eye on: where the official cash rate (OCR), and interest rates, are heading next.
It’s the kind of move that ripples through almost every part of our economy.
It’s not just about mortgage rates, but what you earn on your savings, and how confident people feel about buying a house, even whether businesses hire staff, or start a new project.
Remember how our unemployment rate has been steadily heading up, and has now hit a five-year high? Yep, the OCR has a big hand to play in that.
Businesses fund a lot of their work through debt, so if interest rates are high, they often hold off hiring.
So it’s fair to say, every one of us has a stake in this week’s decision.
It can also tell us a lot about the health of our economy. Which has been feeling… not great, lately.
The case for cutting
Certainly the mood seems to be that interest rates need to be cut further. Almost everyone is predicting an OCR cut from 3.25%, to 3.00%.
Kiwibank’s Sabrina Delgado says, with construction struggling, unemployment on the rise, and house prices sluggish, the signs are clear.
“All that weakness in the economy still puts downward pressure on inflation.
“In the medium term, so say 12 months from now, we actually see inflation at risk of being below that 2% sweet spot for the Reserve Bank.”
While the headline number on inflation has ticked up slightly, dig into the numbers, and you can see two totally different things happening.
Economist Brad Olsen said major banks had already pre-emptively dropped interest rates as "everyone can see the writing on the wall". (Source: Breakfast)
The things impacted by a local OCR decision, are looking weak.
- New Zealand business investment is down, reflected in higher unemployment.
- Locally produced goods aren’t seeing the eye-watering price rises we’ve had in the past.
- Rent prices are actually falling, for the first time in years.
But other factors are keeping inflation high, such as higher council rates, price rises on goods impacted by tariffs. Those things won’t budge, not from Reserve Bank activity, anyway.
Lowering the OCR won’t make your rates bill smaller, or convince global markets to lower the price of beef.
Why that’s a risk
The morning's headlines in 90 seconds, including our first ever espionage trial, the end of an era for Cook Strait crossings, and a surprising survival story. (Source: 1News)
If you’re not a homeowner feeling the squeeze of high interest rates, you might wonder why you should care if the OCR stays higher.
After all, it’s meant to drop inflation. So if it keeps taking a stab at the cost of living, surely that’s a good thing?
But Delgado points out, there’s definitely a case for too much of a good thing.
There’s a reason why the Reserve Bank is tasked with keeping inflation in that 1-3% range.
If it drops too far, that’s bad for all of us as well. It can mean the economy slows down in ways that affect wages, investment, and jobs.
When prices aren’t moving, companies have little incentive to hire or expand. Wage growth can stall. Demand can shrink.
And if prices start falling (deflation), it’s much harder to get things moving again.
“Central bankers will always tell you that they prefer high inflation because it's actually easier to combat high inflation. You just hike interest rates until they hurt,” Delgado says.
“When you have deflation, it's a much trickier problem to solve,.”
So while many are expecting this week’s announcement to see the OCR nudge downwards, Delgado is hoping by the end of the year they’ll have cut further to 2.5%.
The case for more than one tactic
Interest rates are a blunt tool, and digging through the numbers for this column, I can’t help but think we need to be getting out some other tools from the toolkit.
Because while inflation has eased, and (some) parts of the cost--of-living crisis are looking a little better, the pain in the construction sector isn’t good for any of us.
House prices may be sluggish, but they’re still plenty unaffordable for many first home buyers.
Looking over the ditch, one of the secrets behind Australia’s wealth is their use of Super (their KiwiSaver) to invest into long-term projects, like infrastructure.
KiwiSaver could be used similarly, giving a good return to savers, and a boost to our country overall.
Investing in those long-term projects could bring some much-needed long-term thinking, and stop us from having a construction sector that lurches from boom to bust.
Not to mention, creating reliable housing supply that eases some of the underlying affordability issues in our property market.
Interest rates may be the Reserve Bank’s domain, but housing supply is a bigger piece of the affordability puzzle. Without having a proper look at what changes we can make there, we’ll be having the same conversation in another decade.
As the saying goes, if nothing changes… nothing changes.
Interest rates can point us in the right direction. But they can’t build the road to get us there.
The information in this article is general in nature and should not be read as personal financial advice.
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