Interest rate cuts unlikely in 2024, economist says
An independent economist is challenging the market view that monetary policy tightening will ease in 2024, saying the inflation pattern and inflation expectations remain uncomfortably high.
Speaking at a Bluestone Home Loans economic update webinar on March 7, Cameron Bagrie (pictured above) of Bagrie Economics said the current economic climate was a different world to what central banks have been used to over the last 30 years.
A combination of money printing, supply shocks, a shift in labour markets and geo-political tensions is making the job of central banks more difficult, he said.
“I think we’re moving back into that world of more inflation and more volatility … we’ve had that trend lower in interest rates … that trend has accounted for about 50% of the increase in asset prices over the last 30 years,” Bagrie said.
The Reserve Bank of New Zealand has delivered 450 basis points of tightening since October 2021, taking the official cash rate from 0.25% to 4.75% in February.
Referring to the latest Ipsos New Zealand issues monitor, Bagrie identified that the top three issues concerning Kiwis were inflation and the cost of living (65% of New Zealanders identified it as a top three issue), followed by housing and healthcare. According to Ipsos, inflation and the cost of living is now at the highest level of concern since measurement began in early 2018.
Similarly, an RBNZ survey of market participants showed that expectations were for inflation to be above 3% (above its 1% to 3% target range) in two years’ time.
That would mark four years of inflation being outside the RBNZ’s 1% to 3% target remit, Bagrie said.
The issue at the moment is that the inflation pattern – and inflation expectations – are just too uncomfortably high, Bagrie said.
“It looks like inflation is going to be harder to contain, and what that means is interest rates are going to keep trucking higher (although markets already anticipate pretty well the peak),” Bagrie said.
When will interest rates drop?
Bagrie said he thought the peak for one, two and five-year fixed rates had almost been reached. However, he did not expect interest rates to drop back towards 4%.
“I think inflation is going to be a bit more sticky and central banks are going to have to keep at it until the job is done,” Bagrie said. “Maybe two years out, we see numbers that have got a 5 handle back in front of them … I just don’t think the neutral OCR is anywhere near 2% anymore.”
For the OCR announcement on April 5, Bagrie said he expected a rise of either 0.25% or 0.50%.
Financial markets hold the view that the RBNZ could start to lower interest rates in 2024, but Bagrie said his assumption differed.
“Unless we see one hell of an economic accident, I don’t think the RBNZ is going to be easing in 2024,” he said.
‘Neutral’ interest rate range could increase
Bagrie noted that the trade-offs (economic cost) of getting inflation down were lower growth, lower asset prices and higher unemployment.
The collateral damage is where New Zealand starts to see job losses, Bagrie said, noting that the RBNZ is projecting unemployment (currently 3.4%) to reach 5.7%.
Bagrie said he would be keeping an eye on the “neutral” interest rate, where the RBNZ neither had neither it foot on the accelerator or the brake.
“What the RBNZ put in their November monetary policy statement was alluding to the idea that a neutral OCR (currently low 2s to up around 3%) could be on the move again … and up as opposed to down,” Bagrie said. “I suspect some of the structural drivers of neutral rates are starting to turn around.”
Non-performing loans tipped to rise
Some movement in bank non-performing loans is evident, but it is off a low base, Bagrie said.
As interest rates moved downwards, some borrowers did not take the cash benefit of lower interest rates and kept their nominal payments the same, putting them ahead of mortgage run rate, he said.
Non-performing loan numbers are currently artificially low, and borrowers are now starting to feel the squeeze, he said. Cash flow wise, the gap between where borrowers needed to be versus where they are is starting to close up.
“As that closes up, we’re going to start to see a bit more acceleration in those bank non-performing loans,” he said.
