This morning has brought news that links straight into something I was thinking yesterday. As I wrote the piece on the struggles of the German economy the thought that the ECB would cut interest-rates again from the present 2% was on my mind. I had long thought they could go to 1.5% anyway, Then this morning on the other side of the world there was this.
The Committee voted to reduce the OCR by 25 basis points to 2.25 percent. Future moves in the OCR will depend on how the outlook for medium-term inflation and the economy evolve.
That was from the Reserve Bank of New Zealand or RBNZ and along the way conforms to my rule of thumb that England beating the All Blacks at rugby tends to be followed by an interest-rate cut. Actually another of my rule of thumbs is also in play.
Economic activity was weak over mid-2025 but is picking up. Lower interest rates are encouraging household spending, and the labour market is stabilising. The exchange rate has fallen, supporting exporters’ incomes.
Yes the economy is improving so they have decided to cut interest-rates. How often do central bankers get away with this nonsense! In fact there may be more nonsense as we note that inflation has just risen,
Annual consumers price inflation increased to 3 percent in the September quarter.
So as you can see they expect the economy to recover and inflation has risen so they have cut interest-rates displaying exactly the opposite of what is supposed to be their reaction function. They so rarely get called out on this. Don’t worry though as their Ivory Tower says it will be fine.
However, with spare capacity in the economy, inflation is expected to fall to around 2 percent by mid-2026.
You may have noticed that the economic recovery is now “spare capacity” as we are back to the type of output gap style thinking that was debunked over a decade ago. If we look wider the news from Australia this morning suggests that inflation is far from dead.
The Consumer Price Index (CPI) rose 3.8% in the 12 months to October 2025, up from 3.6% in the 12 months to September 2025.
The largest contributors to annual inflation were Housing (+5.9%), Food and non-alcoholic beverages (+3.2%), and Recreation and culture (+3.2%).
In the month of October, the CPI was flat (0.0%) in original terms and rose 0.3% in seasonally adjusted terms. ( ABS)
As you can see inflation has risen in a land down under as well suggesting it i a more general trend and the more up to date October number is 0.3%.In fact the acceleration in inflation in Australia has been such that the annual rate gas doubled since it was 1.9% in June. At this point the RBNZ interest-rate cut looks rather reckless.
Whilst I am in the mood for my rules of thumb.We tend to see interest-rate cuts when house prices are struggling.
The latest QV House Price Index shows average home values across Aotearoa New Zealand fell 0.8% over the quarter to the end of October, with the national average now sitting at $902,020. That figure is unchanged compared to the same time last year and 13.9% below the nationwide market peak of January 2022.
So a tick in the box for that as well.
If we now look at the money supply for a guide as to what is coming around the economic corner we see that it has been rising. Broad money growth was between 3% and 4% last year in general with the weakest reading being 2.9% in August 2024. Whereas this September it was 5.5%. So the recent inflation rise should have been no surprise but there is little case for a further interest-rate cut.
US Federal Reserve
So having looked at a central bank forcing an interest rate cut we can look at the leader of the pack.
Nov 25 (Reuters) – Federal Reserve Governor Stephen Miran tied on Tuesday a deteriorating job market to the current state of central bank interest rate policy.
“We have to recognize that the unemployment rate has been drifting higher, and that is a function of monetary policy being too tight,” Miran said in an interview on Fox Business.
When central bankers talk about the job market like that it means they are ready to vote for an interest-rate cut which was quickly confirmed. The emphasis is mine.
“My concern is that if we don’t continue cutting rates and do so at a reasonably quick pace” the jobless rate will continue to rise, the policymaker said in the interview.
Having just spotted that he follows me on social media let me say that I think that is a bad idea. Returning to policy we have also seen the US ten-year yield drop to 4% partly because of the words above and partly because of this.
US retail sales rose 0.2 per cent in September to $733.3bn, marking a slowdown from the previous month and falling short of Wall Street expectations.
Tuesday’s figure from the US Census Bureau compared with a rise of 0.6 per cent in August and expectations of 0.4 per cent among economists polled by Bloomberg in advance of the release. ( Financial Times)
The picture is especially complex due to the government shut down meaning we are thin on official data. To be frank the Financial Times narrative does not help.
Grim retail sales data fuels concerns about health of US economy
The numbers did in fact grow albeit they are values not volumes. There was also this.
The Conference Board’s gauge of US consumer confidence decreased 6.8 points to 88.7, data showed. ( Bloomberg)
Of course all of that ignores this.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 is 4.0 percent on November 25, down from 4.2 percent on November 21.
If you have even the slightest faith in the Atlanta Fed and its work then an interest-rate cut looks reckless.Indeed with growth at that level and inflation above target we would in the past have seen an interest-rate rise. In fact we can stay with the number 4% because the issue above is why bond yields have only fallen to 4% as bond markets ignore the rhetoric of central bankers.
Bank of England
I have the feeling that Bank of England Governor Andrew Bailey is also revving up for an interest-rate cut next month. With UK CPI inflation at 3.6%that is again reckless but he has the worst inflation record of any Governor for decades.
Of course much will depend on the Budget due in a couple of hours and it is hard to predict when our political class is so hopeless. Exchequer Secretary to the Treasury Dan Tomlinson has posted a PR piece where he tells us a Greggs caramel custard doughnut is “very good value”. Apparently the price has risen from £1 to £1.60 in the last year.
Comment
It feels as though the mood music has shifted back to interest-rate cuts and let me return to the ECB. It has claimed that interest-rate cuts are no longer necessary. Once you under stand how these people work that is the first step to another cut. As then they can present it as being forced by events rather than wanting to do it.
