Businesses holding up OCR cuts

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Businesses must realise that despite their costs jumping 10%, they can only raise prices 2% and must find savings and boost productivity, otherwise monetary policy won’t be eased and interest rates won’t fall.

Friday, May 10th 2024, 10:06AM 1 Comment

Independent economist Tony Alexander says just as the Reserve Bank monetary policy over-loosened during and post the pandemic, it has now over-tightened and at some point it will cut interest rates rapidly. His best guess is just before the end of this year.

“Before then the RBNZ will hold out with minimal comment for as long as it can with good justification for doing so because of one central thing. “Businesses are still planning to raise their selling prices and have yet to completely capitulate to the altered economic environment.”

He says householders, particularly those with mortgages, are doing their part in drastically cutting back spending. The central government is as well. Councils are not and neither yet are businesses. “The ball essentially is in their court. Customer demand won’t come back until they give in.”

The longer businesses take, the worse will be this end-game period for monetary policy tightening, Alexander says.

“It takes 18-24 months for tight monetary policy to have its greatest impact on inflation. Householders might think that because the first cash rate increase came in October 2021 that we should see falling interest rates now because 31 months have passed since then.

“But the initial rate rises were only 0.25% and we did not get the 0.75% jump and warning from the Reserve Bank of recession until November 2022. In May 2024 we are only 18 months along from that shock tightening.”

He says only now is the country in the really intense period of the deepest grinding into cash flows and attitudes of policy tightening.

“It is going to be a challenging winter for many businesses.”

Mortgage holders, he says, might think their only hope of an early policy easing from the RBNZ will be if the Government delivers extra tightening of fiscal policy in the 30 May Budget.

But with tax cuts planned, that is unlikely and even if the Government did radically tighten things up the early interest rate, falls will only go to offset the new source of downward pressure on the economy anyway.

Tags: OCR

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