Continuing to lower interest rates is a policy misstep
At the end of March, the Reserve Bank of New Zealand released their latest statement to the market expressing their view that ‘the more likely direction of our next official cash rate move is down.’ The market subsequently priced in two interest rate cuts from here and the major banks have since lowered mortgage rates.
Whilst households may have breathed a sigh of relief as the cost of servicing debt goes lower, retirees and income dependent investors likely preferred to look the other way.
The bigger question here is, does the state of the underlying New Zealand economy really warrant further interest rate cuts? Much of the last communication highlighted a weakening global economic outlook notwithstanding reduced momentum in domestic spending. However, what has the global experience taught us?
If we look at Europe, they are contemplating an extension of their negative interest rate setting as growth and inflation remains weak despite ten years of printing money and trying to encourage banks to lend, essentially providing them with ‘free’ funding. Japan more recently capped the return on their ten year bonds at 0.00% and has been stuck in a low rate cycle for thirty years.
Australia has been at an overnight interest rate setting of 1.50% since 2016. Once central banks reduce interest rates to zero or close to it, it is very difficult to unwind this policy setting.
So why does the Reserve Bank seem hell bent on lowering interest rates from what is already an historic low. They will tell you because there is moderating growth and no inflationary pressure, yet we have close to full employment and what has constituted a rampant housing market and equity market for the last five years. Do we really need lower interest rates from here and will it change either household or business decisions? Or is this another ‘sugar hit’ that will be short lived and yet have the potential to keep us mired in this interest rate cycle for years to come. If businesses can’t operate at current hurdles rates, or households can’t afford mortgages at current borrowing levels, then the value of those assets or businesses need to adjust.
Central banks globally have shown their commitment to preserving capital but inadvertently are creating a greater divide between the ‘have’s and the have not’s. Eventually it becomes not about the interest rate but the availability of credit. This will always be more readily available to those who have held assets through this latest business cycle. Lowering interest rates may be seen as necessary to foster growth, but be careful what you wish for.