Just in: another Reserve Bank of New Zealand rate cut is now much more likely! More support for house prices!

On 8 May, the Reserve Bank of New Zealand cut interest rates, firing the opening shot in a round of rate cuts among developed countries.

 

Yesterday, the Reserve Bank of Australia followed suit.

 

At yesterday's meeting, the Reserve Bank of Australia decided to lower its cash rate (OCR) by 25 basis points to 1.25%.

 

This was the Reserve Bank of Australia's first rate cut since August 2016. Its previous rate of 1.5% had been unchanged for almost 3 years.

 

 

The Reserve Bank of New Zealand's OCR is currently 1.5%, still 25 basis points higher than Australia's. How likely is another Reserve Bank of New Zealand rate cut this year?

 

First, a look at why the Reserve Bank of Australia cut rates

 

The Reserve Bank of Australia's board said it cut rates to support employment growth and lift inflation, while expressing concern about uncertainty over international trade.

 

Reasons for a second New Zealand rate cut in August

 

1. New Zealand faces all the economic risks mentioned by the Reserve Bank of Australia.

 

{Ad}

2. Before the Reserve Bank of New Zealand cut rates in early May, ASB chief economist Nick Tuffley had predicted cuts of 25 basis points each in May and August. This was because the outlook for domestic economic activity in New Zealand had deteriorated in recent months, and business confidence was clearly weak.

 

3. Last week, Prime Minister Jacinda Ardern unveiled the world's first Wellbeing Budget. As its name suggests, this budget is largely focused on improving people's wellbeing rather than promoting economic development.

 

 

 

On 2 June, JPMorgan said New Zealand's Budget offered no clear boost to the economy. With fiscal policy struggling to help the domestic economy meet its growth targets, it expected the Reserve Bank of New Zealand to cut rates by 25 basis points each in August and November this year, ultimately bringing the rate down to 1%.

 

4. The likelihood of a US Federal Reserve rate cut has soared! This is the decisive factor!

 

US Federal Reserve chair Jerome Powell said yesterday that the Fed could cut rates when needed to boost the economy and respond to the US–China trade dispute.

 

US Federal Reserve chair Powell

 

In just a month, the market-implied probability of a Federal Reserve rate cut in December has risen from below 50% to as high as 98%. The probability of a cut in July has also exceeded 50%.

 

If the Federal Reserve cuts rates, the world will follow, and New Zealand will naturally be no exception!

 

No one would be foolish enough to sit tight while everyone else turns on the monetary taps.

 

Support for New Zealand house prices

 

1. New Zealand rate cuts support New Zealand house prices. That needs little explanation.

 

2. Australia has introduced a policy allowing first-home buyers on low and middle incomes to buy with a deposit as low as 5%, supporting Australian house prices. If Australian house prices stabilise, that may not lift New Zealand house prices, but it will certainly help steady confidence among New Zealand homebuyers.

 

3. Finally, it must be stressed that if the Federal Reserve leads the world into quantitative easing, prices will rise across a wide range of major assets. This will extend beyond house prices to everyday essentials such as petrol. Everyone needs to take care to protect their wealth.