Guest post by Tony Alexander
It came as no surprise to anyone in the world of economics and financial markets this week when the Reserve Bank left its official cash rate unchanged at 5.5%.
It has been at that level since the end of May this year but in the four months since then, wholesale borrowing costs which banks must pay have continued to go higher.
These rises of between 0.25% and 0.9% have come about not because the Reserve Bank has given any new signal that extra tightening of monetary policy will be required, but because of higher rates in the United States. What happens in America matters for the rest of the world. And with the economy and job market over there proving to be in better shape than thought, the expectations people have had for US interest rates comfortably falling through 2024 have changed.
But we cannot rule that out entirely and I know from experience that often when things have been moving in one direction for a long time, we ignore clear signs that a change in direction may be imminent.
We are not there yet, but there is something which could cause hopes for lower interest rates from mid-2024 to return.
Data just released by the NZIER in their Quarterly Survey of Business Opinion show a substantial backing off of pressures in the labour market. Businesses now say it is quite easy to get unskilled labour and ease of getting skilled people is the best since 2011 if we ignore the initial panic days of the pandemic.
For the moment we have little evidence in hand to suggest that Kiwi employees feel any weakening of their bargaining ability in the labour market. So, wage demands for now are likely to remain high as inflation tracks at 6%. But at some stage people will realise that employers have more choice than has been the case for many years and those making greatest demands for more remuneration will find themselves being invited to make good on their implied threat, and go to work elsewhere.
This will be an important development because wages comprise 60% and more of operating costs for many businesses and as this source of cost pressure eases off the pressure in turn for those businesses to keep raising their selling prices will abate.
But the processes are in motion and the chances remain good that at some point in 2024, the Reserve Bank will see not just that consumer spending remains crunched alongside falling house construction, but that wages growth is slowing rapidly. When they see that, we can expect some expression of optimism about inflation which will immediately cause falls in wholesale borrowing costs.
We have as much clarity around whether this happens early in 2024 or late now as we did at the start of this year. As central bankers in Australia and the United States have stated quite firmly in the past week, the degree of uncertainty about how quickly inflation eases off is extreme.
For borrowers, as stated here before, the situation remains one where hedging one’s bets is a valid strategy. For most people that will mean some mixture of 12, 18 and 24 month fixed rates. For some it might mean fixing a portion at a three year interest rate, though in practice my surveys show very few people are tempted to lock in for such a long period of time.
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