BNZ economists are calling for "immediate" interest rate cuts by the Reserve Bank (RBNZ) and say the economy is "buckling".
And shortly after that call was made on Tuesday, Kiwibank economists reiterated their RBNZ "missteps and sprained ankles" theme of last week and now "recommend" a rate cut next week. There's more from the Kiwibank team further down the article.
In an Economy Watch publication, BNZ head of research Stephen Toplis said the RBNZ has two choices: cut the Official Cash Rate (OCR) now and build in progressive rate cuts thereafter or wait and, ultimately, "risk being forced into" a 50 basis point cut in November. He thought it unlikely that the easing cycle would commence in October.
The RBNZ has its next review of the OCR, which has been at 5.5% since May 2023, on Wednesday, August 14.
"...We strongly believe the Reserve Bank should be easing monetary policy as soon as possible," Toplis said.
"Indeed, we are on record as having said that it should already have done so. Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate that the Bank [RBNZ] starts a progressive easing cycle from the August meeting."
Toplis said the RBNZ is supposed to take into consideration the minimisation of volatility in output and interest rates when setting policy.
"To delay cutting much longer risks maximising such volatility," he said.
Toplis said that while, Ironically, the BNZ economists' rate call may seem "a tad aggressive" it’s not as aggressive as the financial markets are currently pricing.
"The market currently has 100 basis points of cuts by November compared to our 75. We think this unlikely.
"We doubt the RBNZ will want the market to rally any more than it currently has so don’t be surprised if the interest rate track it publishes [with its next OCR review] is higher than the eventual rate outcome.
"At the same time, any suggestion by the Bank [RBNZ] that it will not be moving any time soon is likely to be met with derision by markets which will likely reprice the near term but build in more aggressive cuts further down the track."
Toplis said "one way or another", BNZ's economists feel more confident with the view that the cash rate will be 100 basis points lower by February of next year than they do with the expectation that the RBNZ will pull the trigger in August.
"We’d have been quite confident about August had it not been for the RBNZ’s tilt to a tightening bias back in May.
"That shift completely threw us as we could see no justification for it," Toplis said.
"The reversal of that view in July seemed sensible and we can only assume that in the course of time the RBNZ will see the May shift as a mistake.
"Be that as it may, the Bank’s [RBNZ] propensity to surprise leaves us with a huge degree of nervousness about our call. With that in mind, we note the RBNZ’s focus on productivity in its latest MPS. Its concern about declining productivity was a key element in its hawkish tilt and there’s a good chance that productivity has fallen again.
"Putting all this together we are, with great trepidation but with a strong sense of what is appropriate, shifting our expected first rate cut from November to August with consecutive rate cuts thereafter heading to an unchanged low of 2.75%."
In an Our Take publication, Kiwibank's chief economist Jarrod Kerr recommends a cut next week, followed by a cut at every meeting until the cash rates hits 2.5%.
He said he is still not convinced, however, that the RBNZ will "pull the trigger" next week, but "they should".
"It would be hard to go from pushing out rate cuts and raising the probability of rate hikes in the May MPS [Monetary Policy Statement], to cutting in August," Kerr said.
"There’s a credibility issue for the RBNZ’s forecasting team. The RBNZ could always argue 'when the facts change...' but to be brutally honest, the facts changed long ago."
Kerr said looking at current financial market pricing, anything less than cutting in August will cause a large spike in wholesale rates.
"So even if they [RBNZ] hold in August and signal cuts from October, the market already has much more than that priced," he said.
"A 'hold' of any description would cause a big back up in interest rates."
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