The research arm of the global food and agribusiness bank expects the Reserve Bank to move quickly to shift the OCR to a “neutral” position, which it estimates will be in the vicinity of 3.25%.
“Consequently we expect another 50-basis-point (bps) cut in November to take the OCR to 4.25%,” the bank said in a report. The current OCR is 4.75%.
The bank expects the speed of transmission of monetary policy to be faster than it was at the start of the tightening cycle because an “unusually large share” of New Zealand’s mortgages are currently referenced to variable interest rates and fixed rates with a remaining term of less than nine months.
“This means the full effect of rate cuts will likely be felt in the economy more quickly than in the past, which could be an argument for the RBNZ [Reserve Bank] to proceed carefully while it notes the effect of past policy changes on economic activity.
“There is some argument for a 75bps cut in November given the long layover until the next policy meeting [of the Reserve Bank] in February, but we think the RBNZ will be content to remain methodical.
”We see the pace of cuts slowing from February onwards with 25bps cuts delivered at consecutive meetings in February, April, May and July to reach an OCR of 3.25%.
“We note that there is a risk that the OCR could be taken below this level if the RBNZ has conviction that the neutral rate is lower, or if they judge that the weakening labour market justifies an accommodative monetary policy stance.”
The bank said it expected Donald Trump to win the US presidential election next month, which would have potential implications for the New Zealand economy because the US would likely impose tariffs on imports.
Rabobank expects Donald Trump to win the US presidential election next month, with potential implications for the New Zealand economy.
Meanwhile, Rabobank said the Reserve Bank was likely to keep cutting the OCR because it judges the economy is now experiencing “spare capacity”.
“That means that aggregate supply now exceeds aggregate demand and is putting downward pressure on inflation. This is the opposite problem that the economy experienced from late 2020 through to early 2024.
“Consequently, firms are reporting that they have very little power to pass on increased costs and are also finding it much easier to find both skilled and unskilled labour. Crucially, these indicators are back to pre-Covid levels in the case of firm [business] pricing power and are looser than pre-Covid levels regarding the ease of finding workers.”
Rabobank said these responses suggest that capacity constraints in the labour market have mostly disappeared and demand-led upside risks to consumer inflation are now likely to be well-contained.
“With the economy now in a state of spare capacity, pricing pressures dissipating and the labour market showing signs of ongoing deterioration, there is a strong case to be made that there is no longer any need for monetary policy to remain restrictive.”
Noting a statement this month by Reserve Bank deputy governor Christian Hawkesby that the OCR was “headed more toward neutral”, Rabobank said the “neutral” interest rate was the level consistent with the economy operating at full employment with inflation at-target.
“In April ... the RBNZ published a paper estimating the nominal neutral interest rate lay somewhere between 1.75% and 4%. The wide range of estimates obviously points to there being a great deal of uncertainty over where the neutral rate really lies, but it may also provide some clues as to the point at which the RBNZ may begin to tread more carefully in reducing the OCR,” the bank said.
The 4% upper end of the range of estimates could be a “sensible” point for the Reserve Bank to slow the pace of monetary easing while it gauges the effects of prior policy movements on credit growth, household consumption and employment.
The bank said the Reserve Bank’s central estimate of the long-term neutral rate was a touch below 3%, “but the neutral rate in the short run may be slightly higher due to short term inflation expectations remaining above the RBNZ’s 2% target”.
“There is also a risk that the true level of the long-run neutral rate is actually higher than the RBNZ’s latest estimate. Market indicators and central bankers from other jurisdictions continue to suggest that nominal neutral rates have been rising since the onset of the pandemic, reversing the pre-Covid trend of lower neutral rates.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
