ANZ economists believe enough steam is being taken out of the economy to justify an official cash rate cut in February. Photo / Alex Burton
ANZ economists believe enough steam is being taken out of the economy to justify an official cash rate cut in February. Photo / Alex Burton
The more hawkish among New Zealand’s bank economists believe the Reserve Bank (RBNZ) will cut the official cash rate (OCR) three months sooner than they previously thought.
ANZ economists reckon the RBNZ will cut the OCR, which has been at 5.5 per cent for a year, to 5.25 per centin February. Previously, they believed the first cut wouldn’t come until May.
They reckon the easy parts of the battle were won when higher oil prices unwound, shipping cost increases abated, and cyclone-induced food price inflation fell.
After this, they observed a long stall.
Now, they believe we’re in the “take your medicine” phase of the fight: businesses can’t hike prices because customers can’t afford it. Businesses can’t afford to offer their employees big pay increases either, but they don’t need to because the labour market is softening.
The ANZ economists’ revision of their OCR outlook creates even more distance between their forecasts and those of the RBNZ.
Last month, the central bank issued a surprisingly hawkish Monetary Policy Statement in which it suggested the OCR could be hiked again before being cut in the middle to end of next year.
“The RBNZ’s concern about the run of higher-than-expected domestic inflation is understandable but we expect that meaningful progress is around the corner,” ANZ chief economist Sharon Zollner said.
“The real economy is very weak and, given the vibe of soft data (surveys, leading indicators and the like), we are now more confident in the weak economic outlook enshrined in our most recent Quarterly Economic Outlook.”
Zollner said the property market was “moribund”, or dying, meanwhile investment intentions, employment and credit card spending were weak.
She didn’t have a strong view on how quickly the OCR would be cut once the RBNZ turned a corner but pencilled in 25-basis-point cuts per meeting until the OCR fell to a neutral level of around 3.5 per cent.
ANZ chief economist Sharon Zollner believes inflation data will soon start to make a more convincing case the RBNZ is winning its inflation battle. Photo / Dean Purcell
According to the latest figures, annual inflation was 4 per cent in the March quarter. The RBNZ is tasked with getting it between 1 and 3 per cent.
Of concern to the RBNZ was the fact non-tradeable inflation, which is largely domestically driven, was still high at 5.8 per cent.
The rate was largely propped up by growth in insurance premiums, council rates and rents, which aren’t that sensitive to interest rate changes.
“In our view, inflation data will soon start to make a more convincing case that the RBNZ is winning this war,” Zollner said.
“We also expect that the RBNZ will take quite some convincing to actually cut the OCR, given it’s in the nature of their mandate to be cautious when assessing the outlook for inflation.”
Economists at the consultancy, Infometrics, have taken aim at the RBNZ’s approach, fearing it risked overcooking its response to inflation.
Infometrics chief forecaster Gareth Kiernan worried the RBNZ wasn’t giving adequate recognition to the fact OCR changes take time to take effect.
For example, borrowers don’t feel the effects of higher interest rates until they come to refix their loans, which could be a year or two after the RBNZ makes a move to influence inflation.
Kiernan was concerned if the RBNZ did what it said it would, monetary conditions would be kept tight all the while inflation was within target.
“That approach is a recipe to prolong the pain that households and businesses are currently feeling beyond next year and out as far as 2027,” Kiernan said.
Reserve Bank governor Adrian Orr discussing his surprisingly hawkish May Monetary Policy Statement. Photo / Mark Mitchell
“Such a long downturn for the economy would almost certainly drive inflation down towards the bottom of the bank’s 1 to 3 per cent per annum target band.
“Just as the bank’s slow reactions contributed to strong cost and inflation pressures on the way up, its delayed response could also see inflation undershooting on the way down.
“So much for the bank’s requirement to “avoid unnecessary instability in output”, as specified in its remit.”
Infometrics had expected the RBNZ to make its first OCR cut in November. But on Thursday, it pushed out its forecast to February.
Kiernan doubted keeping the OCR higher for longer would dampen rises in insurance premiums, council rates and electricity costs, so recognised the RBNZ would likely keep hammering more interest rate-sensitive parts of the economy until it was comfortable inflation was well and truly back in its box.
Speaking to the Herald after the RBNZ released its latest statement, assistant governor Karen Silk underlined the RBNZ’s commitment to getting inflation to 2 per cent – the midpoint of its target range – and keeping it there.
Kiernan hoped the RBNZ only pencilling in the first rate cut for September 2025 was more about preventing financial markets from getting too excited about looming rate cuts than a genuine indication of what would happen.
“But given the Bank’s recent rhetoric, it would be a brave person to completely rule out the OCR staying where it is, at 5.5 per cent (or above), for another year,” he said.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
