ASB chief economist Nick Tuffley says it now looks more likely the Official Cash Rate will be cut in the second half of next year - rather than in 2025

ASB chief economist Nick Tuffley says it now looks more likely that the Reserve Bank (RBNZ) will start cutting the Official Cash Rate (OCR) in the second half of 2024 rather than waiting till 2025.

This follows last week's GDP shock, which showed a 0.3% fall for the September quarter versus the RBNZ's expectation of a 0.3% rise. The RBNZ hasn't been forecasting any fall in the OCR, currently at 5.5%, till 2025.

However, following the release of the GDP figures, the wholesale interest rates are now pricing in the first OCR cut in May of next year, with FOUR cuts being priced in for the whole of 2024.

In the ASB's Economic Weekly publication, Tuffley says the GDP figures "weren’t the Christmas present we were expecting".

"All up, the level of GDP as at Q3 was 1.6 percentage points lower than we had anticipated.

"And GDP is down 0.6% over the year to September, with three out of four quarters registering contraction. That is in effect a mild recession at a headline level – and a marked 3% contraction to date on a per-capita basis."

In terms of what it all means, Tuffley said recent momentum in the economy "has been much slower than anyone had expected: for ourselves and the RBNZ about 0.8-0.9 percentage point less momentum in the most recently published six months".

Tuffley said looking over the past couple of years, the economy’s "non-inflationary speed limit" now looks a little slower.

"Inflation was very high over that past two years, even as growth was lower.

"Another way of putting this is that the level of demand in the economy has been lower than anticipated, but the supply capability of the economy has also probably been lower than previously thought. It’s that gap between excess demand and supply that creates inflation. All other things equal, growth likely needs to slow by slightly more than expected to get inflation under control, to ensure that gap gets closed.

"And that is where the implications of the markedly weaker economy right now come in.

"It really does appear like monetary policy has started to bite hard and is slowing the economy faster than expected.

"If that is the case, the RBNZ’s job will be done much quicker than it thinks. We have a lot of re-forecasting to do to get on top of the implications of the GDP figures. But it now looks more likely that the RBNZ will start cutting the OCR in the second half of 2024, rather than waiting until 2025. We will formally review our OCR outlook, so watch this space."

Westpac economists, who had been forecasting another rise in the OCR in February say in their Weekly Economic Commentary this "is now much less likely", but they still believe the OCR will remain at 5.5% for 2024.

Westpac chief economist Kelly Eckhold said the GDP data "tell us that the economy is in a much weaker position than we (and even more so, the RBNZ) thought even a few weeks ago".

"We think it’s likely, absent any further surprises, that the RBNZ will revert to something like their August 2023 MPS view that the OCR will remain at 5.5% until the latter part of 2024.

"We continue to see them as remaining much more cautious than markets on the prospects for lower rates. While the recent data provides a decent basis for revising down forecasts of inflation this is not the same as being confident those forecasts will be borne out.

"The RBNZ’s new Remit requires a sole focus on inflation, and we are sure that they will need to be confident they can hit 2% CPI inflation in the second half of 2025 and meet the new Remit. All going well, we can see a path to where they get that confidence by the time of the August 2024 MPS [Monetary Policy Statement] – but there is a lot of water to go under the bridge before that happens," Eckhold said.

"We continue to see the strongest case for a gradual reduction in the OCR from the beginning of 2025."