Market News 21 January 2025

Johnny Lee writes:

INFLATION news from the US continues to drive markets, with economic data continuing to paint a picture of a strong US labour market, needing little in the way of further stimulation.

US consumer inflation for December landed at 2.9%, compared to 2.7% the month prior. Like our own Central Bank, the US Fed targets 2% over the long run. The Dow Jones saw a modest increase following the data release.

The uptick in inflation makes the next Federal Reserve meeting, scheduled early next week, unlikely to see any change to the current settings. The following meeting is planned for mid-March.

By that stage, the policy direction of the incoming US administration should be more certain, allowing the Federal Reserve to more accurately analyse the impact of such policy and the response of business alongside it.

Markets have their own view. The US Federal Reserve is expected to cut rates once or twice this year, as inflation begins to track back towards 2%. From there, interest rates may plateau, giving time for these lower borrowing rates to flow through to homeowners and debt holdings. 

Meanwhile, our own Reserve Bank meets on 19 February. The RBNZ has already flagged its intention to cut rates by another 50 basis points (0.5%) from 4.25% to 3.75%. The trajectory from there is very much data-dependent and will also be influenced by the US and Chinese data that emerges over the course of the year.

The February statement should give some clues as to the thinking within the RBNZ committee. 2025 is being flagged as the year where the ‘’worm turns’’ so to speak, and interest rates bottom out. However, the first step is February’s meeting, where a significant cut is anticipated.

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THE other big decision on the agenda for our Reserve Bank is the design and potential implementation of Digital Cash, which could offer significant benefits to a number of communities.

The early response to the Reserve Bank’s call for feedback has been largely one of scepticism. The initial feedback suggests most New Zealanders were unsure of the usefulness of Digital Cash and were reluctant to trust the Reserve Bank - or perhaps the Government - with knowledge of their finances.

Digital Cash, simplified, is a “balance” held in a “wallet” outside the retail banking system. Digital Cash would instead be issued directly by the Reserve Bank.

Most New Zealanders today set up accounts at retail banks, have funds deposited into these accounts, then use bank notes, cards, smartphones and the internet to spend and transfer the funds stored there. Trends around this are changing, however.

Use of physical cash is diminishing both here and abroad. More than half of New Zealanders no longer use cash for everyday payments, with most favouring debit cards and credit cards. Most New Zealanders have either no physical cash to hand, or a sum less than $100.

This has largely coincided with increases in the availability of card-based payment options. Purchasing items online is increasingly common, and traditional use-cases for coins and bank notes – parking meters, vending machines, etc – now offer alternatives to physical cash.

Credit card usage, interestingly, appears to be in modest decline for everyday purchases. This could be explained partly by the increasing number of retailers opting to charge additional fees for credit card and “contactless” payments, as the decline coincides with an increase in debit card use. The Government has previously stated its intention to address this issue, and competition in the form of Digital Cash would aid that cause.

By and large, the current system works well for most. While some feel bank fees are too high, the general system of currency storage and transfer works well for the majority of New Zealanders.

The Reserve Bank’s push to introduce Digital Cash is driven by a few factors. 

A form of digital money outside of the banks would introduce more competition, particularly with regards to fees. Currently, only banks and financial institutions are able to use New Zealand digital currency. People wanting to transfer money do so via their bank and are subject to the fees and availability of these institutions.

Some people can also be excluded from the banking system if individual banks refuse to provide services to them. Banks could also refuse to offer services to businesses, inhibiting competition.

The Reserve Bank hopes that introducing Digital Cash will also spur innovation, in terms of products in the financial sector.

Before being introduced, the Reserve Bank will need to ensure the system is accessible to all New Zealanders and called for feedback on how Digital Cash should be designed.

Addressing accessibility will be important. A number of communities – including the elderly and the disabled – noted in the Reserve Bank feedback that the current options available for spending are not always suitable. Relying on modern mobile devices, with non-tactile feedback, will present difficulties for some users.

Requiring an internet connection to transfer funds will also introduce some challenges. Again, this may be particularly burdensome for some groups, particularly lower socioeconomic groups. While an offline model was being explored, other countries exploring such an option struggled to create viable solutions to this.

It is important to note that the Reserve Bank is not proposing the removal or phasing out of physical cash. Like chequebooks, such a phase-out would be driven by consumers moving away from the technology.

A one-for-one “exchange rate” with physical cash would be maintained, perhaps through legislation, to ensure both options were viable.

The issue of privacy has also been flagged in the feedback. While New Zealanders generally have high levels of trust in our public institutions, there are some who avoid bank accounts and recorded transactions in order to maintain their privacy. Indeed, Bitcoin’s popularity was initially spurred by a desire to have a currency system outside the traditional banking system, allowing for anonymous transactions.

This will also be a challenge for the Reserve Bank. Perhaps the only solution will simply be time, as users adopt Digital Cash and use it without issue, while those concerned with privacy can continue using physical currency.

Introducing Digital Cash will take time, with the Reserve Bank stating it may not be fully available to the public until 2030. However, the groundwork is beginning now, in order to design a system that is both functional and one based on the needs of the general public. Initially, its use-case may be limited, with the traditional banking system currently fulfilling this role at an acceptable cost.

But the way we spend money has evolved significantly over time. Cheques are gone, cash is being replaced by cards, and changing regulations within the banking sector – particularly around anti-money laundering – have left some excluded from the banking system altogether. Creating a system outside the banks to hold New Zealand dollars in a digital form has value and would offer an alternative to physical currency. 

More details are expected to be announced by the RBNZ over the course of the year.

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Travel

Auckland - Ellerslie - 30 January - Edward Lee

Auckland - Albany - 31 January - Edward Lee

Wellington – 4 February – Edward Lee

Christchurch – 13 February – Fraser Hunter

Lower Hutt – 20 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Wairarapa – 28 February – Fraser Hunter

Napier - Mission Estate - 6 March - Edward Lee

Napier - Havelock North - 7 March - Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners Ltd