Reserve Bank of NZ Governor Adrian Orr. The RBNZ is due to review the rate next Wednesday but no change is expected. Photo / Mark Mitchell
Reserve Bank of NZ Governor Adrian Orr. The RBNZ is due to review the rate next Wednesday but no change is expected. Photo / Mark Mitchell
In a promising move for struggling mortgage holders, ASB economists have brought forward their forecast for the first Official Cash Rate Cut - to November from February - as economic conditions darken.
“The dynamic is changing quickly this year,” said ASB chief economist Nick Tuffley. “Crucially, we are starting tosee inflation indicators soften with more alacrity. We are more confident that inflation will be comfortably back in the target band by year-end.”
Households are starting to buckle more noticeably under the various pressures of high interest rates and high (though easing) living cost inflation, he said.
“To date the labour market has been a bit of a saviour, with employment holding up and wage growth relatively stronger. Even that story is starting to change, with cost-cutting pressures in organisations, wage growth slowing, and job security worries on the up.”
The official cash rate is currently sitting at 5.5 per cent and has been on hold there since May last year. The RBNZ is due to review the rate next Wednesday but no change is expected.
ASB joins KiwiBank’s economics team which has stuck with a November rate cut forecast for some time. Markets are also now fully pricing in a November cut, despite the fact that the Reserve Bank’s most recent projections are that it won’t cut until September next year.
Market pricing suggests that there is a 30 per cent chance of a cut in August, a 65 per cent chance in October, and has fully priced in a cut by November. By April next year, market pricing indicates that there will have been three cuts in total by then.
Westpac markets strategist Imre Speizer said the market was getting more aggressive in its pricing of anticipated rate cuts.
“We have had bits of little data, and all of them have been on the weak side, so the market has seized on this as offering further evidence that the economy is slowing down and that the Reserve Bank’s hand will be forced.”
The bulk of the other local bank economists are forecasting the first cut in February 2025.
“Getting inflation back comfortably in the 1-3% target band is what the RBNZ has been trying hard to do for over two and a half years. But inflation proved surprisingly resistant, so the RBNZ pushed even harder,” Tuffley said.
“Now, though, we are seeing mounting evidence that tight monetary policy is starting to make the economy buckle. That will increasingly flow through to an unravelling of inflation pressures, which we expect the RBNZ to respond to fairly quickly.”
Nick Tuffley, ASB chief economist.
An important element of reduced inflation pressure would be the change in households’ willingness and ability to keep spending, he said.
“The ability has been increasingly sapped by the sustained period of high interest rates, the tail end of which is still coming into effect. Although cost of living increases are easing, there continues to be a marked pull-back in spending on goods in general, even if some people are still determined to spend on things like travel. We expect the health of the labour market to be an increasingly important influence on inflation this year.”
In its preview for next week’s OCR review ANZ chief economist Sharon Zollner retained her call for a February cut but noted that the risks to that forecast were tilting towards November.
“But it’s worth remembering that that would require a huge change in view from the RBNZ’s current expectation.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
