Rates are down, but some households are still facing above-inflation cost increases
Mortgage rate cuts are delivering significant relief to many New Zealand households, but the benefits are flowing unevenly across different groups, with those facing the highest inflation often gaining the least from lower interest costs.
Kiwibank chief economist Jarrod Kerr (pictured) says mortgage rates have fallen dramatically from their peak. However, senior economist Sabrina Delgado says the relief is not evenly distributed across all New Zealanders.
"Mortgage rates have dropped from a peak of 7.5%, and we're now in the 4s. Households were just thinking, thank god, that massive weight is off my shoulders,” Kerr said.
"The falling interest rates do help out most New Zealand households, even if they don't have a mortgage,” Delgado added. “They might have a personal loan, and that helps too. But you just see less of an impact across different demographics.”
For high-expenditure households with mortgages, the impact has been substantial. Electricity and council rates have been rising, so falling interest rates have deducted around 2% off their cost of living. Delgado says that’s monetary policy doing what it has been designed to do.
However, the picture is very different for superannuitants and beneficiaries, who have far less exposure to mortgages. Just 8.5% of Kiwi retirees have a mortgage.
It’s also not good news for lower expenditure households, who have seen cost prices higher than CPI.
The lowest expenditure group saw costs rise 4% over the year, well above the 3% CPI and the RBNZ's target band. The average household saw costs increase 2.4%, while those in the highest expenditure group only saw costs rise 0.8%.
"It gets unfair because the ones that are worst off and getting the highest inflation are those that are in the lowest expenditure group,” Delgado says. “The lowest expenditure group saw costs go up 4% over the year, and that's above 3% CPI. So for them, inflation doesn't feel like it's running at 3% or within RBNZ's target band."
Labour market supports further cuts
The latest labour market data has reinforced expectations for further interest rate cuts, with the unemployment rate climbing to 5.3%, a nine-year high.
Kiwibank notes the labour market appears to be stabilising, but the degree of slack still in the market should provide the RBNZ with comfort that inflation will return to the 2% target next year.
With weak wage growth, the labour market is not a source of inflationary pressure. Annual wage growth slowed to 2.1%, down from 2.3%, the weakest in over four years.
The number of unemployed in New Zealand hit 160,000, the highest since March 1994. The labour force participation rate dropped to 70.3% from 70.5%, the lowest in over four years.
However, there were some positive signs. Total hours worked lifted 0.9% over the September quarter, breaking a seven-quarter stretch of declines. Employers had previously been slashing hours in response to soft economic demand, but this appears to be reversing.
Markets price in further cuts
Kiwibank's head of balance sheet management Ross Weston says market consensus is for a 25-basis-point cut at the RBNZ's November meeting, with pricing currently reflecting a 29-basis-point reduction. One offshore bank is forecasting a more aggressive 50-basis-point cut.
Looking ahead to February, expectations for a follow-up move are fluctuating between 10 and 15 basis points worth of cuts.
"Mortgage fixing activity remains concentrated in the 1-year term and is unlikely to extend further until there is clearer confirmation of the end to the rate-cutting cycle," Weston says.
The RBNZ's survey of inflation expectations, due this week, will be closely watched for signs of a continued, gradual decline in inflation pressures. It is the last key data point before the Monetary Policy Statement on November 27.
