Interest rate rumors a flag for potential spending change
The economic news of the last month have been dominated by the first murmurings of action from global policy makers, which will lead to a higher interest rate environment for at least the next 3-5 years. Interest rates have a huge impact on the local consumer and their ability to spend – or rather their ability to use debt to supplement income and drive further spending.
On the 21st of March 2018 the US Federal Reserve raised the federal funds rate (the equivalent to New Zealand’s OCR) by 25 basis points to 1.75%, citing a stronger economic outlook. In response, the interest rate paid on US government debt has risen throughout the month of April, culminating in the rate tipping over 3% for the first time since early 2014. These rising rates have seen the New Zealand dollar fall vs the greenback from 74 US cents down to 71 cents in the space of two weeks, as big investors have fled the New Zealand Dollar for better fixed interest returns in the US. Eventually, this reduction in the value of our dollar will lead to New Zealander’s paying more for many imported goods from the US such as motor vehicles, medicines and cleaning products.
However, the decline in the US stock market to these structural rate changes has left the US central bank following a similar, albeit slightly more cautious, route this month. The expectation being that they will hold rates in order to stabilise financial markets, and avoid setting off panic. One thing is clear, central banks around the world need to increase rates to give relief to savers and fixed income earners, particularly those living off of pensions and retirement savings. These groups have been stung by a record period of low interest rates over the past nine years following the GFC.
On the home front, it remains to be seen whether the New Zealand Reserve Bank will follow the US’s lead. Our central bank has been focused on holding or reducing rates since July 2014, in the face of low inflation created by falling prices. The costs of basic essentials like clothing and footwear (down 0.2%), and grocery food (down 1.3%) have all fallen since Q2 2014, according to Statistics New Zealand.
Increasing rates would have a big impact on consumer confidence, increasing the debt servicing costs associated with residential housing in New Zealand. This would inevitably have an impact on the discretionary income of local consumers, reducing their ability to spend on luxuries and ‘nice to haves’. If this path to higher rates is to take hold in New Zealand, we will expect to see a flip in category spending growth from the spectacular growth we have seen in Cafes and Restaurants, Takeaway Food and Hardware, back to the more staple categories like Supermarkets and Dairies, Other Food and Fuel.
Comments are closed.