Economists are flocking to change their calls - with increasing numbers of them now forecasting that the Reserve Bank (RBNZ) will cut the Official Cash Rate (OCR) by 50 basis points in each of the next two reviews.
If correct, this means the OCR would end 2024 sitting on 4.25% down from the current 5.25%.
The catalyst for the big change in view has been the weak result in this week's NZIER Quarterly Survey of Business Opinion (QSBO). Shortly after that came out on Tuesday, BNZ economists picked a 50 point cut to the OCR next week.
Then in short order on Wednesday, economists from Westpac, ASB and HSBC all came out with forecasts that the RBNZ would cut the OCR to 4.75% in its next review on Wednesday, October 9 and follow this up with another 50 point cut in the final review for the year on November 27.
In explaining why ASB economists had changed their minds and their call, ASB chief economist Nick Tuffley and senior economist Mark Smith said they were "getting increasingly concerned by just how tight monetary conditions are, and how long they would remain restrictive if the RBNZ took a measured approach to easing".
"Inflation pressures look set to shrink very soon. The QSBO suggested that deterioration of the labour market has picked up steam and that pricing pressures have weakened considerably. It is a warning signal that inflation risks undershooting the 2% mid-point of the inflation target band. In contrast, the risk of high inflation proving to be sticky is much diminished," Tuffley and Smith said.
The ASB economists believe current OCR settings "are looking increasingly disconnected with the economic outlook".
They said still-tight monetary policy settings are "exerting a significantly contractionary impact on the economy".
"Moreover, looming fiscal tightening and rapidly- waning net migration will also weigh on demand.
"Even with consecutive 25bp cuts per meeting this disconnect will remain, with monetary policy settings still looking to be too tight given the state of the economy. A faster pace of OCR cuts would help narrow the gap from both sides. Cutting the OCR earlier and by more will also likely reduce the amount of monetary easing needed overall, all else equal."
Westpac chief economist Kelly Eckhold said a "key driver" behind the Westpac change in view has been the "strong signs that the forward inflation profile will be much more benign in aggregate than we have seen since 2021".
He said their current forecast for annual inflation as at the end of the September is for an annual rate of 2.4%, falling to 2.2% in the December quarter.
"There may be some downside risks to those short-term forecasts," Eckhold said.
He thought the RBNZ would be asking themselves "what are we waiting for?" when considering the case for maintaining the OCR at what are reasonably tight levels.
"If the answer to that question is 'not much' then the path ahead seems clear, especially given the RBNZ has a long gap between meetings from November 2024 to February 2025."
Eckhold said he hopes the RBNZ will provide a clearer set of parameters on how they would expect to operate monetary policy in 2025.
"We hope the RBNZ will avoid the temptation to cut rates too aggressively in 2025 unless well justified by the inflation and economic outlook.
"Making the point now that a faster removal of restriction implies less need to cut so deeply later would be a good way to try and deliver the 'hawkish cut' that could stabilise output and employment without driving house prices further out of reach of the public," Eckhold said.
HSBC chief economist Australia & NZ Paul Bloxham and economist Jamie Culling noted that back in August, the RBNZ flagged that "the pace of further easing will thus be conditional on ... confidence that pricing behaviour is continuing to adapt to a low inflation environment".
The HSBC economists said they saw the signal from the QSBO this week as likely to be enough to give the RBNZ confidence that pricing behaviour is indeed adapting, "opening the door for the RBNZ to provide more relief, faster, in the form of lower interest rates".
"Inflation is easing, demand is weak, and the jobs market is cooling, which all warrant less-restrictive monetary conditions," the economists say.
"In our view, the recent data, particularly the Q3 QSBO, represents another shift in pricing behaviour in the economy, which we see as likely to give the RBNZ enough evidence that behaviour is reverting back to a low inflation environment – a key focus the central bank had flagged at its August meeting in determining the pace of further monetary policy easing.
"We also expect that, following October, if the Q3 CPI and jobs market data weaken further, as we are forecasting, that the RBNZ could consider a follow-up 50bp cut in November," Bloxham and Culling said.
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