Tony Alexander: Interest rates could drop 0.5% next week (but 2025 is another story)

Analysis: Every three months the NZIER Economic Research Group conducts a survey called the Quarterly Survey of Business Opinion – QSBO – on non-agricultural businesses across the country. The latest survey results were released this week, and they tell us some important things. The first is that when asked what businesses plan to do with their selling prices in the next three months, only a net 7% said they plan to raise those prices.

Three months ago it was a net 23% and a year ago 45%, compared to a long-term average of 21%. This gives us confidence that inflation is coming down fast at this point and the Reserve Bank may cut the official cash rate by 25 basis points to 5% on October 9, or even 50 basis points if it feels generous. .

However, ANZ’s monthly business outlook survey was also released this week. It asks about the coming year, not the next three months, and here’s where things get interesting. A net above average of 43% of businesses still say they plan to increase their selling prices in the next 12 months.

Both surveys suggest that the Reserve Bank need not be concerned about inflation falling below 1% in the Reserve Bank’s 1-3% target band due to the current rapid deceleration. How is that relevant?

Find out more:

– Tony Alexander: Landlords plan to raise rents as tenants become harder to find

– How much is your suburb worth? OneRoof House Price Report – October 2024

– Scramble for houses in elite school zones after rejection letters rise

Not much for the next few months as monetary easing continues. But don’t be surprised if the Reserve Bank pauses its rate cuts to see how things play out in the second half of 2025.

It may be encouraged to do this because as with price setting plans we can also see a lot of difference between small and medium terms when it comes to business ideas about the strength of the economy.

A net 1% of QSBO businesses expect conditions to worsen over the next six months. But the ANZ survey shows a much higher net 61% things get better in a year’s time.

I read this because businesses have adopted the “survive to 25” mantra. Times are tough now and are set to remain so for some time to come, but there is financial nirvana with robust customer flows – all because of low borrowing costs.

Independent economist Tony Alexander: “When the inflation genie is almost back in the bottle it can easily come out again.” Fiona Goodall

But it is worth remembering that one third of our exports go to China and its economy is in a weak state. Housing activity continues to decline until the end of 2025. Councils plan to raise our rates repeatedly. The government is tightening the fiscal policy. Declining sheep numbers and problems with power supply and prices are forcing factories and processing plants to close.

Better times are certainly ahead, and businesses and investors would do well to plan for them. But even if the inflation genie is almost back in the bottle, it can easily come out again – that’s what the businesses in the ANZ survey are telling us.

I have completed my monthly survey of real estate agents specifically regarding the housing market and have two main things to say. First-home buyers and investors are actively looking for properties, with more people showing up at open homes and increasing auctions.

However, we remain firmly in a buyer’s market and FOMO is not taking off. This suggests that immediate prospects for average price gains will be muted, which is good news from an affordability perspective, but bad news for declining active builders, as price increases will return and encourage people to build again rather than buy second-hand homes. For now, the incentive to buy something that already exists is constant.

– Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz

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