The "only discussion" for the Reserve Bank (RBNZ) at its forthcoming October review of the Official Cash Rate (OCR) is whether it should cut by 25 basis points or 50, Kiwibank economists say.
In the latest First View publication, chief economist Jarrod Kerr and senior economist Mary Jo Vergara said they would advocate a 50 bps cut at the October 9 review, followed by another 50 bps cut at the last OCR review for the year in late November.
The RBNZ began what's expected to be a series of interest rate cuts in August, when it dropped the OCR from 5.5% to 5.25%. Inflation, which peaked at an annual rate of 7.3% in mid-2022, is widely expected to fall back into the targeted 1% to 3% range in the September 2024 quarter.
"Restrictive monetary policy has done enough damage to restrain inflationary pressures. Enough is enough," Kerr and Vergara said.
"And the RBNZ are responding – late, but in earnest. A rate cut in October is as close to a done deal as you get," they said.
"We argue the RBNZ needs to get the cash rate below 4%, asap. It takes up to 18 months for rate cuts to filter through the economy. We all love fixed rates. And fixed rates need time to roll off. Effectively, the RBNZ are cutting today for an economy at the end of 2025, the start of 2026. Get moving…"
Last week the US Federal Reserve began easing monetary policy in the United States with a 50 bps cut to rates.
Kerr and Vergar think the RBNZ will "need to do more than the Fed next year", as the Kiwi economy requires more rate relief.
"Economic output has contracted in five of the last seven quarters," they said.
On a per capita basis, they said, last week's NZ GDP report for the June quarter was "miserable".
"We’ve seen seven consecutive contractions, with a sizable -0.5% in the June quarter. Activity per head is down 2.7% over the year, and down 4.6% from September 2022 – far worse than the cumulative 4.2% decline during the GFC. There is light at the end of the tunnel, and it’s burning brighter. We think the RBNZ’s decision to cut the cash rate in August, marks the turning point in this cycle."
In ASB's Economic Weekly publication, ASB chief economist Nick Tuffley noted that the decline in per capita GDP in New Zealand takes it back to the level it was at the end of 2020.
"On our current forecasts that go out to June 2027, we don’t expect per-capita GDP to get back to the 2022 peak in that timeframe. Unless growth surpasses our expectations (always possible!) we are staring at least 5 years of stagnation in living standards. After the Global Financial Crisis there was also a large ‘lost’ period, of 5 years," he said.
He observed that the US Fed’s 50 bps move has spurred greater speculation of OCR cuts in NZ as well.
"Over 80bp of cuts are priced over the last two [RBNZ OCR] meetings of the year (i.e. a done deal that one meeting will deliver a 50bp cut or a decent chance of both meetings delivering 50bp cuts)," Tuffley said.
"Pricing by the [RBNZ] February [OCR] meeting is over 125bp, in effect two 50bp cuts and a 25bp cut over those three meetings.
"That is a lot built in. It will be the data that dictates the pace, mapped against the implications for the RBNZ’s inflation outlook. Growing suggestion of inflation playing out weaker than the RBNZ’s expectations could indeed prompt the RBNZ to move more aggressively," Tuffley said.
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