Two more rate cuts to come: Reserve Bank to the rescue as recovery stalls

• The Reserve Bank cut the Official Cash Rate by 25 basis points to 3%, acknowledging stalled economic recovery.
• Two more rate cuts are expected by March, potentially lowering mortgage rates, but the housing market outlook remains subdued.
• The decision caused the Kiwi dollar to fall and the NZX50 stock market to rally.

The Reserve Bank appears to have heard the cries of the struggling business sector, not just cutting the Official Cash Rate by 25 basis points as expected, but shifting its outlook to recognise that the economic recovery has stalled.

Based on the new Official Cash Rate (OCR) track published today, two more rate cuts are expected by March next year, taking it to 2.5%.

That’s in line with the outlook of some of the gloomiest economists at ANZ and KiwiBank.

“That’s a much bigger drop than we had expected, with the RBNZ’s [Reserve Bank] OCR track now very similar to our own forecast,” ANZ chief economist Sharon Zollner said.

“We thought lingering concerns about near-term upside inflation risks would prevent such a large change in view from the RBNZ today. But while both upside and downside risks were mentioned in the press release, the focus is clearly very much on the latter.”

ANZ is now forecasting the next two 25-basis-point (bps) cuts to come in October and November (previously it had predicted November and February).

The move could push mortgage rates lower, property analysts Cotality said.

However, the general gloomy outlook for the economy meant there was not likely to be any sudden outlook for the housing market.

“If anything, the possibility of more falls in mortgage rates than previous thought could lift activity and house prices a bit. But those rate changes may be fairly minor,” Cotality chief property economist Kelvin Davidson said.

“And in the meantime, as the RBNZ has indicated, the economic and labour market outlook is still disappointing, which will tend to weigh on housing, as it’s already doing.”

The RBNZ painted a downbeat picture of the economy in its monetary policy statement.

New Zealand’s economic recovery stalled in the second quarter of this year, the RBNZ said.

“Spending by households and businesses has been constrained by global economic policy uncertainty, falling employment, higher prices for some essentials, and declining house prices.”

In an unusual split decision, the monetary policy committee debated three policy options: keeping the OCR on hold at 3.25%; cutting the OCR by 25bps to 3%; or cutting by 50bps to 2.75%.

Only the latter two options were put to the vote.

By a majority of four votes to two, the committee agreed to decrease the OCR by 25bps to 3%.

But the range of options discussed suggests a wide divergence of opinions on the committee, with at least one member still concerned about inflation risk.

The release moved markets with the Kiwi dollar falling by half a US cent.

On the interest rate markets, the two-year swap rate fell by 15bps to 2.97% while 10-year bond yields dropped by nine basis points to 4.41%.

The NZX50 stock market also rallied on the decision.

“The RBNZ is back on the warpath,” BNZ head of research Stephen Toplis said.

In light of the “dovish” statement, Toplis said he was adding an extra rate cut to BNZ’s expected rate track.

“In addition to the 25-point cut to 3% today, we maintain our view that a further 25-point reduction will be delivered in October. We now add to that expectation a final 25-point cut at the November statement, taking the low in the cash rate track to 2.5%.”

Other economists followed, with ASB and Westpac also now forecasting cuts in October and November.

Several banks cut floating mortgage rates immediately after the announcement. Westpac also trimmed fixed rates for a number of terms.

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.