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2 April 2024

Interest rate wobbles – Tony Alexander

Since a set of bank economists predicted an extra 0.5% tightening of monetary policy some six weeks ago, confusion has reigned in people’s minds regarding where borrowing costs are headed.


No other economist agreed with their prediction and when the Reserve Bank reviewed its cash rate on February 28, they left it unchanged and removed a warning that it might go up again. Why was it not reasonable to expect extra interest rate rises, and also, why aren’t bank wholesale borrowing costs back to where they were before the bad interest rate forecast was made?

Monetary policy takes between 18 and 24 months to affect inflation. While the first rise in the cash rate came 29 months ago in October 2021, the initial increases were only small 0.25% rises. Increases of 0.5% did not start until 23 months ago in April 2022. But more importantly, the large 0.75% rise and warning of recession did not happen until October 2022. That is just 17 months ago.

Only now are we entering the period when the greatest tightening of monetary policy can be expected to have its greatest impact on inflation. So, predictions of further rate rises were more akin to the kids in the back of the car screaming “Are we there yet” when you’ve only been on the road two hours and the journey takes much longer.

But what about the fact that the likes of the cost to a bank of borrowing money at a fixed rate for lending fixed two years still sits near 4.85% from 4.6% at the start of the year? The recent peak was 5.2%. We can put this down to developments in the United States.

Early this year the markets had a strong expectation that there would be six cuts to the Federal Reserve main interest rate over 2024. The Federal Reserve however kept saying only three cuts are likely and now that some economic numbers have been less weak than the markets hoped their expectations have changed to line up with those of the Federal Reserve. US monetary policy is likely to be eased this year but only with cuts adding up to 0.75%, not 1.5%.

I’ve started this article with a discussion about recent NZ interest rate movements because it is relevant to something which is happening in the housing market. In the middle of 2023, a wave of buyers entered the market causing sales to rise by 20% seasonally adjusted in the June quarter. Prices began rising at an average of 0.8% a month.

But since that surge sales have flattened and most recently edged lower while prices in January on average were the same as they were in October. Why has the market’s cyclical recovery stalled for now?

  • One reason I can tell from the monthly survey of real estate agents which I run with NZHL is that buyers have become newly nervous about interest rates. They have the ANZ to thank for that.
  • A second reason is that buyer worries about employment and incomes have jumped up. This is important because it tells the Reserve Bank that their tightening efforts are affecting the labour market and much slower wages growth lies just around the corner.
  • The third and probably biggest factor is this. I have for the past year and a half noted that there is a two-year queue of frustrated buyers who will get activated and propel the market forward. Some have been active but many more are still sitting on their hands. What has happened is that the 2-3 year queue of sellers has also become activated by the signs of rising house sales and prices, and they have swamped the market.
The number of properties listed online for sale with realestate.co.nz has risen to just under an eight year high of 29,000 from 24,700 in July. For the moment there are more sellers than buyers, FOMO has retreated, and we are solidly back in a buyer’s market again.


When will that change again? Probably not until interest rates are solidly seen as falling. When might that happen? Probably before the end of this year with the price impact helped by falling house building and rapidly rising population. Interesting times lie ahead – but they’ve been pushed out about nine months in time principally by the wave of sellers looking to transact.

This article has been provided for general information only. Tony Alexander is an independent economist.

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