Preparing for rate cuts (Pt 1.)

Well, we’ve finally got some good inflation news.

Inflation was 3.3% annually for the June 2024 quarter. This is the lowest it has been since June 2021.

If you need a little reminder, here it is:

The inflation target in NZ is between 1- 3%

June quarter of 2021 inflation was 3.3%

To September 2021 it was 4.9%

To December 2021 it was 5.9%

To March 2022 it was 6.9%

To June 2022 it was 7.3%

To September 2022 it was 7.2%

To December 2022 it was 7.2%

To March 2023 it was 6.7%

To June 2023 it was 6%

To September 2023 it was 5.6%

To December 2023 it was 4.7%

To March 2024 it was 4%

To June 2024 it was 3.3% (we are here)

At least now we know that transitory is apparently 3 years. That is a joke.

But we aren’t quite there yet. Still slightly outside the 3% target band.

However, there is at least some confidence that we are heading inside it.

And for a lot of people that will mean sweet, sweet interest rate cuts.

The elixir we are craving to turn the economic tap back on.

I don’t think that slow rate cuts (should they be slow) will be everything people think they will be because, as you’ve learned, interest rate cuts or hikes take some time to wash through the system.

There is a huge lag with interest rates impacting the economy.

Interest rates rise, disposable dollars decrease, GDP falls, businesses fail and unemployment rises. I think we still have more of this last one to unfold.

And, if interest rates decreases are 'sharp and fast', who knows what that means for us or what unemployment could be if that is the case?

However, there is a psychological impact of cuts (hope) and also a disposable income aspect.

As I say, I don’t want to get too excited about rate cuts because it is still hard out there, and I think there is still pain to come.

But it is worth thinking about what you’ll do when rates are cut.

And doing this EARLY! It’s ok to be proactive.

Just like tax cuts, many people say that any cuts in interest rates will be used up in increasing cost of living payments.

Which makes sense.

But we want to be more deliberate about what any interest rate cut might mean for us.

As the Reserve Bank of NZ looks to finally bring interest rates down, this will be the first time people have experienced interest rates decreasing for some time.

This could mean a number of things:

? Lower mortgage payments

? Refinancing opportunities for some

? Decrease in income for term deposit holders and savers

? Asset prices may increase providing leverage options

? The cost of servicing debts, such as personal loans, credit cards, and auto loans may come down

? Businesses may see cheaper financing costs

We are all going to need to make budget adjustments by updating our incoming and outgoings.

But a warning here. Don’t get too carried away.

I hear people tell me their house is going to be worth more at the end of this year, so they are holding off on the sale.

Markets have a good ability to humble you and not do what you expect them to do.

And seriously, how much is it going to rise between now and December whilst unemployment is increasing? Only hindsight will have that answer.

Then, on the behaviour side, JUST because interest rates become cheaper doesn’t mean you have to go back to the trough of debt.

Debt allows us to buy things before we can afford them. Read that again.

People think that because they can ‘make the payments’, they can afford the asset/item.

No, you can afford to service the debt.

A lot of people don’t like to admit that.

So stop and think about what you have learned through this economic contraction.

? What has it taught you that you can go without?

? Did you implement any good financial habits?

You may have gotten rid of a credit card, decreased it, cut BNPL or become less reliant on debt.

You had to become someone new to achieve that.

Now the next test is here, if rates decrease, will you go back to old ways of ‘ticking it up’ or ‘putting it on the mortgage’.

Don’t waste the lessons this contraction has taught you.

And remember, things go up and down.

Be prepared for potential future rate increases too.

Be prepared for potential future increases in unemployment too.

You just don’t know!

Be bold,

Luke

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