“Come back in November”, Jarrod Kerr, Kiwibank chief economist says.
He and peers at Westpac, BNZ and ANZ expect the Reserve Bank (RBNZ) to keep the OCR at 5.5% in its review on Wednesday.
They also expect the RBNZ to keep the Monetary Policy Statement similar to April, although Kerr foresees a few dovish chirps acknowledging the deterioration in economic data and a fresh OCR track.
“In a purely technical sense, the RBNZ’s OCR track indicates a 35% chance of another hike. We’d expect that risk to be all but removed next week and instead the focus will turn to the timing of cuts,” Kerr says.
For now, the RBNZ has said monetary policy must remain restrictive to get inflation sustainably back within its 1-3% target band.
Where he disagrees when interest rate cuts will begin. “The last OCR track indicates rate cuts by about mid-next year, while we continue to call for cuts to commence in November.”
Kiwibank sees inflation returning to the RBNZ’s target by the September quarter, but data and confirmation doesn’t come through until mid-October, leaving November as the earliest kick-off date for rate cuts.
However, amidst interest rates, the cost-of-living and a falling housing market, Kerr says the risks to the downside cannot be ignored, especially as monetary policy works with a lag of 18 months to two years.
Long-term strategy
Westpac chief economist Kelly Eckhold says he doesn’t see a significant change in the ‘watch, worry and wait’ strategy the RBNZ has been following since last year’s Monetary Policy Statement.
Eckhold expects the RBNZ to reiterate that while economic growth remains weak, inflation pressures remain elevated.
“There is little to support the idea that interest rates can be cut earlier than the RBNZ previously assumed of early to mid-2025.
Westpac sees three main scenarios:
CPI reading the clue
BNZ’s chief economist Mike Jones says it’s the third quarter CPI reading that really matters.
The bank’s annual CPI forecast for the third quarter this year is just 2.7%, the lowest since March 2021.
However, Jones says there is a big missing link in the BNZ and Reserve Bank’s growth forecasts and that is the impact of fiscal policy, especially the Government’s tax cuts, on activity.
“There is no doubt tax cuts will boost private consumption and GDP but this will also be at least partially offset by government cuts elsewhere.”
So, Jones thinks the RBNZ will simply stick to the same story it delivered in February and April.
“If the central bank wants to send a little signal about how it sees things evolving then a small nudge in its interest rate track would be a good way to do this but we’re not sure anything will happen in this space either.”
Sitting tight
Sharon Zollner, the ANZ’s chief economist, says a lot still needs to go the RBNZ’s way before it can contemplate OCR cuts.
She says economic drivers that provide confidence disinflation will continue are:
The ANZ says there may also be further spending cuts in next week’s Budget and beyond.
It continues to pencil in OCR cuts from May 2025, but the data will ultimately determine when the RBNZ pulls the trigger. Zollner’s sense is that risks are shaded to an earlier start to cuts than forecast.
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