ASB brings Official Cash Rate cut forecast forward three months and warns that the risk of damage to the economy is growing

Economists at ASB now believe the Reserve Bank of New Zealand will begin to cut interest rates in November, as the risk of damaging the economy and employment grows.

Nick Tuffley, the retail bank’s chief economist, said they had changed their Official Cash Rate forecast after seeing signs of a sharper slowdown in the economy.

Previously, ASB had been expecting the OCR to be held at 5.5% until February next year. The RBNZ itself has projected holding rates until August 2025, while markets are betting on this October or November for the start of cuts.

The RBNZ's next OCR decision is on Wednesday, July 10. It is expected to leave the OCR unchanged.

Tuffley said households were starting to buckle under higher interest rates and inflation indicators were softening quickly.

This may change the balance of risks for the RBNZ, who have previously been thinking monetary policy should not be loosened until inflation was dead and buried.

“Now the biggest risk of regret is in our view rapidly tilting to the risk of holding monetary policy too tight for too long, unnecessarily damaging the economy and people’s employment prospects,” he said in a note on Thursday. 

The central bank should be ready to cut rates after seeing current trends confirmed in third-quarter inflation data and labour market statistics to be released in October and November.

Many economists were surprised by the weakness in NZIER’s quarterly business survey which showed 25% of firms had laid off staff and many were struggling with profitability. 

Activity indicators suggested gross domestic product would decline for another quarter and that unemployment forecasts may be underestimating the actual rise in joblessness.

ASB put its OCR call under review immediately after the survey was released and ANZ, which still expects a February cut, said the case for a November cut was building.

Tuffley said a noticeable increase in unemployment, slower wage growth, and uncertainty about employment prospects was enough to stop households from spending. 

“Consequently, we anticipate that consumer price pressures will abate noticeably over the next year. Consumers will keep a tight grip on their wallets and have increasingly less tolerance for paying ever-higher prices for goods and services,” he said.

This will force businesses to absorb input costs and cut any unnecessary expenses, as it will become too difficult to pass on any additional costs to consumers.

“We expect inflation to be lower over the next 12 months than the RBNZ forecast just back in May … giving it much greater confidence it can cut the OCR sooner rather than later”. 

But the RBNZ's OCR meeting next week may be too early to signal a change in policy as the central bank won’t have seen any hard data to back up the indicators and forecasts. 

RBNZ will release full monetary policy statements in August and November, before going on a three month hiatus until February. 

Tuffley said monetary policy had been “leaning hard against inflation for over two and a half years now” but inflation had consistently been stronger than expected. 

“Too many times, the RBNZ has been surprised by how high inflation has remained—and been in good company—but our assessment is that the dynamic is changing quickly this year”.