In today’s headlines with Chereè Kinnear the most burgled neighbourhoods revealed, debate over speed limit increases and cardiologists warn of a heart services crisis.
The Reserve Bank of New Zealand is expected to hold firm this week, leaving the official cash rate unchanged at 5.5% for the seventh consecutive time and making no significant changes to its hawkish outlook for future rate cuts.
The Reserve Bank (RBNZ) toughened its stancein May’s Monetary Policy Statement, pushing its projections for the first cut out as far as August or September next year.
It delivers the rate call and a shorter one-page Monetary Policy Review at 2pm on Wednesday.
Economists see little chance that it will shift its tough outlook while it awaits more evidence inflation is falling back towards its target band of 1-3%.
But as the economic downturn deepens, there is a growing consensus the RBNZ will need to pivot from its current stance later this year.
“The clear consensus in the investor community is that the RBNZ will have to ease monetary conditions a lot earlier than it has been suggesting,” said BNZ head of research Stephen Toplis.
”This is fully revealed in the fact that a rate cut in November of this year is fully priced. Indeed, there is even a small chance of an October cut in the mix.”
Importantly, this was a Monetary Policy Review, not a Monetary Policy Statement, he said.
“So there will be no interest rate track for nervous financial market participants to focus on so it will simply be the words of the record of the meeting that will inform market pricing,” he said.
“With this in mind, folk will be looking for any repeated comment that the committee pondered raising interest rates at this meeting as it did in May.”
In an ideal world, the RBNZ would like to see the market take back some of its “relative dovishness”, he said.
“But it is hard to see how it might achieve this. The May warning of a possible rate hike was quickly dismissed by markets as investors focused on the plethora of weak real economy data.
“With that data likely to remain equally as weak, it’s hard to see anything other than a short-term blip in rates even if the RBNZ hawks fly. In contrast, any sign of a shift towards a softening stance could well see an October cut fully priced.”
ANZ chief economist Sharon Zollner noted that soft survey data since May tilted the equation towards earlier cuts.
ANZ chief economist Sharon Zollner. Photo / Dean Purcell
ANZ has stuck with forecasts expecting the first cut in February although she noted the risk that it could come in November.
“It’s worth remembering that that would require a huge change in view from the RBNZ’s current expectation,” she said.
Last week ASB economists shifted their forecast from February to a November cut, joining Kiwibank and the markets.
Singapore-based Abhijit Surya, of Capital Economics, also sees the economic downturn deepening sharply and forcing a November cut.
“To be sure, the bank will probably strike a hawkish tone out of an abundance of caution. However, with the economy in tatters and inflation on its way back to the RBNZ’s 1-3% target, we still expect a pivot to policy easing by year-end,” Surya said.
“If we’re right that inflation will be back within the RBNZ’s target range by Q3, the committee should have no qualms about cutting rates at its November meeting. Furthermore, we expect the bank to cut rates more aggressively than most anticipate. After all, the long and variable lags of monetary policy cut both ways.”
The more restrictive policy settings remained, the greater the risk that inflation would undershoot the bank’s target in the medium term, he said.
“The upshot is that we’re sticking to our forecast for a terminal policy rate of 3.5% at end-2025. That is noticeably below the ~4.25% level markets are pricing in as well as the consensus forecast of 3.75%.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist. He also presents and produces videos and podcasts and is the author of the best-selling book BBQ Economics. Liam joined the Herald in 2003.
