PAUL MCBETH: The Reserve Bank’s done cutting rates – now what?

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. He rents from a private landlord in the Auckland CBD.

The Reserve Bank’s campaign slicing 3.25 percentage points from the official cash rate over the past 15 months has slowly been working its way through the system.

It’s only now that we’re starting to see that juice flow into the economy, with executives in the NZX’s latest corporate earnings season feeling more confident about the coming year and even households shaking off the 2025 blues that made winter feel that little bit longer and a touch cooler than usual.

We all know interest rate cuts take a long time to work through the system given the vast bulk of homeowners fix their mortgages, but as soon as the headlines start rolling out, we seem to throw that knowledge out the window and demand an immediate response.

Sure, a rate cut should give business owners and mortgage borrowers confidence to take on a bit more debt in the future, but that won’t necessarily translate to firing off a text to the bank manager until it’s time to re-fix.

Which for about $90 billion of the $282 billion loaned out by the banks to residential mortgage holders should be some time in the next six months, followed by another $83 billion in the six months after that.

That’s a lot of people rolling on to lower borrowing rates who will enjoy a meaningful difference.

How would I know

Go back to September last year and a 12-month mortgage rate was going for almost 6.4%, compared to the 4.5% rate people can get today.

On a $366,000 mortgage – the average size for the 17,400 or so borrowers in September – that’s about $100 a week difference.

That’s pretty chunky for someone on an average weekly pretax pay cheque of $1,661, which nets down to actual cash in hand of $1,230 after the Inland Revenue Department takes its cut and the prudent borrower makes their minimum KiwiSaver contribution.

It's easy to brush off a more Pollyanna-ish view of the economy as cherry-picking vibes, but households have already responded.

The latest retail trade figures for the September quarter show the same amount of growth from the prior year as previous easing cycles, while Reserve Bank figures have mortgage lending growing at its fastest annual pace in three years.

I sure don’t mind a change

What’s more, business lending is also picking up steam, with the annual pace of 5.1% back to 2023 levels.

Unsurprisingly, the NZX’s small and midcap indices – which are made up of firms with a more domestic focus – have been outperforming the benchmark S&P/NZX 50 index with our homegrown prospects finding favour among some of the sharper investors, institutional and retail alike.

As Welcome chief executive Anton Douglas pointed out, those lower interest rates have coincided with some useful regulatory tweaks, combining to get projects over the line that wouldn’t have passed muster a year and a half ago.

That’s helpful for a newcomer to the credit market – Welcome’s the first finance company to get a non-bank deposit taker licence in almost a decade – but also speaks to the underlying economic momentum not necessarily visible to 160,000 people out of work and hunting for a job, let alone the other 100,000 who simply aren’t looking or the 133,000 – mostly women – part-time workers who’d take on more hours if they were there.

It's another truism that the labour market brings up the rear of the economy, with employers usually reluctant to lay people off until they really have to, and similarly only hiring when they’re sure they’ll be able to foot the bill of another mouth to feed.

I'm only faking when I get it right

People still don’t feel secure in their jobs and while the Reserve Bank expects that will start improving in the coming year, all that spare capacity by jobhunters means wage growth will probably be a modest 2% for the next couple of years.

That won’t offer much joy to households feeling the inflationary pinch over the past couple of years, especially when consumer prices are probably going to nudge up a little faster than pay packets and a growing proportion of their spending has been going towards the grocery bill.

The question then becomes where will the country’s 1.2 million or so mortgage holders put their extra $5,200 a year?

Because job insecurity and increasingly volatile global markets don’t tend to encourage a fast and loose approach to spending, even if the dawning of summer has people in a genuinely better mood and more willing to have a few more quiet ales at their favourite bar or restaurant.

It’s easy to sit back and think all will be well in the coming year, but that’s a very similar refrain to what we were saying in 2024.

The economic tide is definitely turning, but it’s still up to us to make sure we catch a wave.

Image from Curious News.