Reserve Bank’s cutting cycle begin
The Reserve Bank cut the official cash rate a full year earlier than it had previously forecast, taking the rate down to 5.25 percent in its August update.
It said inflation was returning to the 1 percent to 3 percent target band, and the monetary policy committee had noted that weakening in the New Zealand economic had become more pronounced and broad-based.
The Reserve Bank’s growth outlook changed considerably in August compared to the forecasts it had included in the May statement. It now expects the country to have two quarters of negative economic growth in June and September, meeting the definition of the second technical recession since 2022.
The monetary policy committee said a number of high-frequency indicators pointed to a downturn that was steeper than had been expected at its last forecast.
The committee said high interest rates as well as Government policy and falling migration could be playing a role.
“Committee members agreed that monetary policy restraint can now begin to ease. The pace of loosening will depend on the extent to which price-setting behaviour continues to adapt to lower inflation and inflation expectations remain well anchored to the target mid-point.”
They noted that employment growth had slowed and there had been declines in private sector jobs, hours worked and wage growth.
“The impact of government spending restraint and public sector job losses are expected to materialise in further weakening in employment growth over coming quarters.”
The bank is forecasting that the OCR could drop to 3 percent by the end of 2027, but economists say the pace could be much faster.
ASB economists said they expected a 25 basis point cut at every meeting until the rate was 3.25 percent, but noted that the market was speculating that the rate could be cut by larger steps than 25bps.
“That looks less of a chance over the rest of 2024, as the RBNZ is already factoring in a fair degree of weakness in the key economic data out over the next few months.
“But the OCR is still around 200bp above the likely neutral level, and the RBNZ might need to hasten the pace at some point. Equally, inflation could still prove sticky or people’s response to falling interest rates could spark up the economy more rapidly than expected.”
Kiwibank economists said there would be a “cutting spree” to take the OCR to 2.5 percent.
ANZ economists said there was uncertainty now about how the economy would respond to lower interest rates. They said it had been a tricky decision for the bank because it had to have decided it had sufficient confidence in the inflation outlook – and if activity then held up more than expected, that could be a problem.
“Typically, the OCR is lowered in response to some kind of negative national income and confidence shock, but that’s not the case in this deliberate recession. How much activity has been deferred rather than cancelled?
“Even though it’s hard to envisage here and now, given the clear weakness in the economy, there is a risk that activity and the housing market in particular could surprise everyone with the speed with which it bounces back. The RBNZ has built in a decline in GDP in both Q2 and Q3, meaning the bar for upside surprises is relatively low. In the bigger picture, the evolution of a deliberate policy-induced recession and recovery is uncharted territory for all of us, and uncertainty is significant.”
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