The Reserve Bank is due to take another step forward in its interest rate-cutting journey.
Its Monetary Policy Committee is widely expected to lower the Official Cash Rate (OCR) by 25 basis points to 3% – a rate that is broadly deemed to be neutral – neither contractionary nor expansionary.
The move might have little immediate impact on mortgage and term deposit rates, as banks pre-emptively cut rates last week.
However, the dial could be shifted if the committee suggests its view of the world has changed.
Indeed, all eyes will be on how much lower it believes the OCR will go and how quickly it sees the rate getting there.
While there is consensus among economists the OCR needs to be cut on Wednesday, views differ when it comes to where it should bottom out in this cycle.
Economists are also conscious the Reserve Bank might not give away its hand entirely on Wednesday. It might not want to spook the horses by coming across too dovish. Rather, it might want to give itself optionality – the ability to assess the economic data as it comes in and adjust rates accordingly.
Uncertainty was a key theme of its last monetary policy statement, with one of the committee’s members expressing their desire to take a correspondingly cautious approach.
The pill that might be difficult for some to swallow is that the Reserve Bank is mandated to ensure the annual inflation rate remains between 1 and 3% in the medium term. Its job isn’t to give the sluggish economy a shot in the arm.
This said, some economists believe the committee urgently needs to do more to revive the economy.
They believe the chilling effect tariffs are having on economic growth worldwide is such that the committee can cut the OCR more without reigniting inflation.
Kiwibank chief economist Jarrod Kerr reckons the economy “demands stimulus”.
“We need a stimulatory rate if we’re going to encourage businesses to take on risk – either invest or hire,” Kerr said.
“We need a stimulatory rate if we’re going to see embattled households boost discretionary spend. [An OCR of] 2.5% is closer to what we need. And the risks are towards a 2% cash rate, not 3%, in our opinion.”
BNZ chief economist Stephen Toplis, who sees the OCR falling to 2.75%, believes the Reserve Bank doesn’t need to be deterred by near-term inflationary pressures, which are largely driven by high global commodity prices that affect domestic good prices.
“While there is no immediate sign of any respite for domestic consumers on this front, there is strengthening evidence that New Zealand commodity prices have peaked,” Toplis said.
“Already the pace of commodity price inflation is falling, and we expect more easing in the months ahead. Indeed, there is even a chance of outright price declines.”
ANZ chief economist Sharon Zollner similarly believes the Reserve Bank could justify further OCR cuts.
“The big quarterly data (Consumers Price Index, gross domestic product, unemployment) since the last OCR review in July have been much as the Reserve Bank expected (or stronger) but the timelier growth indicators have been very soft. We’ve also seen some mixed inflation data,” she said.
“Our big-picture view is that we expect the Reserve Bank to pivot more dovish and ultimately cut the OCR to 2.5% as the soft high-frequency data increasingly shows up in the hard data. But next week is likely too soon for a lurch in that direction.”
Westpac chief economist Kelly Eckhold has a completely different view. He is much more worried about inflation rearing its head again.
While he expects the Reserve Bank to cut the OCR by 25 basis points on Wednesday, he believes there is a good case for it holding fire, like it did when it last met in July.
He recognises concerns over tariffs may have dented business and consumer sentiment, but doesn’t believe it has dented economic activity.
“Uncertainty will pass, while the impact of commodity prices and interest rates will be more enduring,” he said.
Noting the Reserve Bank has already cut the OCR by 225 basis points in this cycle, Eckhold believes it can afford to sit tight for a bit and wait for the effects of these cuts to flow through the economy.
“Policy lags are long and variable – that’s what we are seeing now,” he said.
He said raising expectations for an OCR of 2% or 2.75% was risky, given the annual inflation rate sat at 2.7% in the June quarter.
“There is plenty of scope to ease more down the road should low inflation rates become a more tangible reality. And it is an inflation mandate in the end.”
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.