'We are hitting the point where the RBNZ’s worries should switch from the risks from cutting the OCR too soon to the risks of keeping it too high for too long'

Economists say it's now all up to forthcoming economic data as they eye cuts by the Reserve Bank (RBNZ) to the Official Cash Rate (OCR) sooner rather than later.

Following the release last week of Consumers Price Index (CPI) figures for the June quarter showing annual inflation falling from 4.0% to 3.3% - just outside the RBNZ's targeted 1% to 3% range - there's been feverish speculation around when the RBNZ might cut the OCR from the current 5.5%.

The RBNZ has three more reviews of the OCR left this year, on August 14, October 9 and November 27.

Most economists are leaning toward the first cut coming in November, but a cut as early as August is definitely seen as a possibility.

Financial markets are pricing in a 50-50 chance of a 25 basis point cut in August, while an October cut is fully priced in and nearly THREE cuts are priced in by November.

Banks have already been pre-empting expected OCR cuts by dropping both their mortgage and term deposit rates.

In ASB's Economic Weekly publication ASB's chief economist Nick Tuffley said we were now getting to the point at which the RBNZ’s worries should switch from the risks from cutting the OCR too soon to the risks of keeping it too high for too long.

"What we saw over the past week simply reinforced that the risks are shifting quickly," Tuffley said..

"It is time for the RBNZ to seriously consider cutting the OCR in our view, and if my team was the [RBNZ] Monetary Policy Committee for the critical day of August 14 that is the way we would probably lean," he said.

"However, it is relatively easy for us to say that, as we don’t have the ultimate accountability that the Committee has to the RBNZ Board and through to the Government. To use an analogy, we are at the equivalent of the wild west end of the justice system: judge, jury and executioner. The RBNZ is more at the Supreme Court end, where due process and careful deliberation of the evidence is carried out."

Tuffley noted that the various core CPI measures for the second quarter showed considerable falls.

"That was a big contrast to the Q1 outcomes. It should also give the RBNZ added confidence that inflation will shortly be contained – even as it cuts interest rates."

He noted that other data over the past week also reinforced that the economy is cooling further.

"After the drop in house sales (reported last Monday), the Business NZ/BNZ Performance of Services Index slumped to its lowest level outside lockdowns. It’s all adding up to the RBNZ cutting sooner rather than later. We have shifted – again – our OCR forecast to now expect a 25bp cut in October. It could be earlier or later – it’s up to the data," Tuffley said.

Kiwibank economists reckon "it all depends on the data" as well.

In their First View publication, Kiwibank chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado note that their long-held call for a rate cut in November "has gone from being a distant outlier, to consensus".

"We forecast just one 25bp cut in November, but would welcome an earlier move," the economists said.

"Market pricing is what the RBNZ should do. But not necessarily what they will do. The tide has turned, however. And the RBNZ discussion of rate hikes in May, should turn to rate cuts in August. The change in tone in August, we believe will set the bank up for a cut in November."

The Kiwibank economists said inflation is on track to break back below 3% in the current (September) quarter, and is on its way to 2% [the RBNZ's explicit target] in 2025.

"Along with a further loosening in the labour market, the RBNZ should be in a position to deliver a rate cut by Christmas. We are sticking with the first cut to come in November, for now. But prospects of an even earlier cut are rising.

"It all depends on the data."