At the start of this year the common view in the United States was that the Federal Reserve would cut its key interest rate six times this year. Now the financial markets expect only one cut. Similarly, in Australia in January the market expectation was for three interest rate cuts in Australia. Now one at best is expected.

The common theme around the world has so far this year been one of inflation proving difficult to consolidate at the 2% pace most central banks aim for. A combination of factors is in play including stronger than expected labour markets, slower than hoped for productivity growth, higher insurance premiums, and resilience in household spending in some locations.

Here in New Zealand the year started with predictions of our first rate cut happening before the end of the year. But most forecasters now pick the first easing won’t come until either February or May next year. My pick however remains that the first cut will come in November and in the Budget, Treasury said the same thing.

Why do I still think a 2024 monetary policy easing is likely?

Primarily it comes down to the economy taking a fresh step downward since early this year as a number of negative things have struck at the same time. One of the biggest is the loss of strong feelings of job security by the younger generation of workers. Net job growth in our economy stopped in the middle of last year. But in January there were still only 14% of real estate agents in one of my five monthly surveys saying that home buyers were concerned about their employment. That reading now stands at 55% which is a record high.

A second factor in play is a surge in the cost of living for older homeowners with no mortgages. Insurance premiums have risen near 30% in the past year and council rates are rising around 20% and more in many locations.

Promises of further such rises by councils in coming years is leading some people to reassess their ability to hold onto their investment properties. Older people are also wondering if the point might be reached where rates are so high they won’t be able to remain in their home. These new cost of living fears are likely to be newly constraining spending by the older cohort of the population.

For businesses there is new cashflow pressure from the IRD cracking down on overdue tax obligations. At the same time, it is likely that excess savings built up during the pandemic have now all been used up. That comment can also be applied to households.

When we add in a handful of other factors not listed, we get a situation where the economy through autumn, winter and spring is going to be weaker than the Reserve Bank has allowed for in their inflation calculations. With evidence now emerging that businesses are not responding to weakened demand by automatically passing higher costs on through higher product prices, the Reserve Bank is likely to conclude that policy easing should begin much earlier than their current forecast of mid-2025, possibly as soon as late this year.

The initial speed with which interest rates fall may seem rapid. But at this stage it does not seem warranted to anticipate more than a 2% fall in rates over the cycle. Then again – with no-one’s economic model working any more, and since most interest predictions have been wrong since 2007, anything is possible.

This article has been provided for general information only. Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called "Tony's View". You can sign up at www.tonyalexander.nz