As had been widely expected, on February 19 when the Reserve Bank undertook its most recent monetary policy review the cash rate was cut 0.5%. It now sits at 3.75% and the Reserve Bank project that before the end of this year it will lie at either 3.0% or 3.25%.

That outlook sounds reasonable until one considers the large uncertainties injected into everyone’s financial predictions around the world now because of the trade war initiated by US President Trump. Tariffs retard the efficient distribution of resources around countries so a certain outcome from the war is that the pace of growth in global productivity and average standard of living will be reduced.

But that is where near unanimity of views ends. What the implications are for inflation is impossible to reasonably calculate at this stage. There will definitely be higher inflation in the United States. Inflation will also be higher in countries which impose reciprocal tariffs on the United States such as Europe, Canada, and Mexico.

However, in countries like Australia and New Zealand that don’t raise tariffs there might be downward pressure on inflation if extra goods are sent in our direction from countries choosing to export less to the United States. But we will face some upward pressure on the prices of goods we import from the United States.

At this stage my expectation is that New Zealand’s inflation track will be minimally affected, and the Reserve Bank is unlikely to adjust its monetary policy outlook unless the world economic outlook deteriorates to a large degree. That is possible but we will have to wait and see.

This means investors can reasonably anticipate up to 0.75% being cut from bank short-term deposit rates by the end of this year with far smaller cuts for longer terms. In fact, cuts for term deposits of three years and more may be exceptionally small for the rest of the year.

This is for three reasons.

First, the financial markets had already factored in a fall in the official cash rate to near 3% by the end of this year before the February 19 policy review where the Reserve Bank brought forward their 3% timing by a year.

Second, there may be upward pressure on United States medium to long-term interest rates because of the US President’s policies. These rates have a strong influence on medium to long-term rates in the rest of the world and if those rates rise then they will go up also in New Zealand.

Third, NZ business margins remain under solid pressure and a key monthly business survey tells us that when businesses get the chance, they are going to raise their prices again. Add in planned increases in council rates and electricity prices and very soon the markets will be giving thought to this simple relationship. A cyclical recovery in an economy brings a cyclical recovery in inflation. That in turn eventually (with very uncertain timing) brings a cyclical recovery in interest rates.

Overall, barring a world recession we are close to a bottoming out of bank deposit and lending interest rates in New Zealand. This might not please some younger borrowers hoping for a return to the very low rates seen from 2018 – 2022. But given the factors which drove those low rates – pandemic and worries about deflation – this situation of a return to “normal” seems far preferable.

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