Inflation is still higher than New Zealand's central bank would like, which means the official cash rate is staying at 5.5 per cent. NZ Herald asks the public how the OCR is affecting them.
Video / Alyse Wright
The disconnect between market expectations for interest rate cuts and the Reserve Bank’s outlook will be back in the spotlight this week with the release of the latest Monetary Policy Statement (MPS).
Markets are still pricing in cuts later this year, while the Reserve Bank (RBNZ) is expectedto hold firm on its longstanding forecast for the first cut in May next year.
Nobody expects a change to the Official Cash Rate (OCR) in the MPS on Wednesday but the RBNZ’s latest assessment of the economic outlook is hotly anticipated.
Economists warn that those looking for signs that rate cuts are creeping closer will probably be disappointed.
As ANZ chief economist Sharon Zollner puts it, don’t expect the RBNZ to be “in any hurry to signal imminent cuts to an impatient market”.
“We expect the RBNZ to maintain its comment that ‘interest rates need to remain at a restrictive level for a sustained period’, essentially describing their OCR track. But there’s plenty of nuance that matters too,” Zollner said.
If the RBNZ’s policy assessment were to downplay the higher non-tradable inflation starting point in light of wins on the tradable side and signs of capacity opening up (particularly in the labour market), then the conclusion would be that the committee would be more willing to cut the OCR with “a greater share of the required disinflation still a forecast rather than fact”.
Perhaps the hardest part for analysts and the market to get their heads around was the fact that the RBNZ had created the current slowdown intentionally, Zollner said.
“We’ve all been conditioned over years to think that weak data means rate cuts will be delivered quickly, to get the economy out of an unintended hole. But this hole was dug deliberately.
“The governor admitted in November 2022 that he was going to engineer a recession, and here we are. The data at this point doesn’t actually suggest the economic slowdown is happening significantly faster than previously thought. And so, on paper at least, why would the RBNZ cut earlier than planned because things are going to plan on activity – and slower than planned in terms of domestic inflation?”
The market either thought the real economy was going to deteriorate faster than the RBNZ expected, or it was assuming that the RBNZ was bluffing for strategic reasons, she said.
“Who’s to say that’s wrong? But we don’t see OCR cuts until the RBNZ has more confidence that the downward path for inflation won’t peter out before reaching the desired destination: not only back in the band, but also likelier than not to stay there.”
ANZ’s forecast for rate cuts currently sits in line with the RBNZ for May.
Kiwibank economists have been more optimistic, closer to the market view, that cuts will be needed by November.
“By our forecasts, we see inflation returning to within the RBNZ’s 1-3 per cent target by the September [third] quarter. And it’s not until mid-October that we receive the data and, hopefully, confirmation. Thus, leaving November as the earliest kickoff date for rate cuts,” Kiwibank chief economist Jarrod Kerr said.
“We expect nothing but we think differently. We continue to expect the next move to be a cut in November, well ahead of the RBNZ’s current OCR track, which has no cut until mid-2025.”
The market was getting ahead of itself in the near term, he said.
Looking at the overnight index swap (OIS) curve, traders were placing some handsome bets on cuts to come as early as August (-11 basis points at 5.39 per cent), he said.
There were 42 basis points of cuts priced by November.
“Our call is for the first 25 basis-point cut to come in November, ahead of most commentators and the RBNZ, and even we’re surprised at the speed at which cuts are expected.”
ANZ chief economist Sharon Zollner says inflation needs to drop soon if we want to avoid more Reserve Bank interest rate rises.
Whether a cut came sooner or later, the RBNZ would eventually have to signal that an easing was coming, ANZ’s Zollner said.
“The timing and specifics of such a ‘confidence’ pivot are very difficult to pinpoint as it will depend not only on a bunch of inflation indicators but also whether the economy is still going south or recovering.
“A range of combinations of data could meet the requirements. But the general theme is that the weaker the real economy is looking, the fewer inflation runs on the board the RBNZ is likely to require in order to feel confident about cutting the OCR.”
In other words, it has to get worse before it gets better.
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.
