The Reserve Bank's forecasts for the Official Cash Rate are "too high and too hawkish", according to Kiwibank's chief economist Jarrod Kerr.
In Kiwibank's latest Our Take publication, Kerr forecasts that the RBNZ will cut the OCR (currently on 4.25%) to 3.00% in 2025. The RBNZ's currently forecasting it will drop the OCR to 3.5% by the end of next year.
Kerr says because of the the RBNZ's forecast OCR track there are not enough cuts being priced in by wholesale interest rate markets.
"We believe the RBNZ will be forced to lower their track (again), and deliver faster cuts," Kerr said.
Kerr's views contrast with those of Westpac chief economist Kelly Eckhold, who says there is a risk the RBNZ may actually cut the OCR too far next year and may need to start raising rates again in 2026.
Kerr says Kiwibank economists have been "fierce advocates" of lower rates.
"We believe rates were hiked too high, for too long, and we’re suffering the consequences," he says.
"The swift reversal of heavy-handed hikes is needed to limit the economic scarring, which is becoming more evident in labour market data, business failings and financial hardship. The spike in Kiwisaver hardship withdrawals, is one such development.
"The crystal ball is cloudy, but the direction of the Kiwi cash rate is crystal clear. We need to see rates pulled lower over 2025, if the current lift in confidence is going to translate into activity, and then investment and hiring intentions.
"The continued need for rate relief is obvious, to us. Taking off the handbrake and putting policy in neutral is now the game."
But it's the pace of getting back to 'neutral' that Kerr has disagreement with.
"The chart below highlights the RBNZ’s estimate of neutral. It’s the theoretical rate that neither hurts nor stimulates.
"It’s the Goldilocks rate that’s not too hot or too cold. And you only know where it is, when you’ve gone past it. But it provides good guidance on how far the RBNZ thinks they need to go to remove the restrictiveness of policy.
"That Goldilocks rate was revised higher, again, from 2.75% to 2.9%. And accordingly, our end point forecast is higher today. We have changed our call from a 2.5% endpoint to 3%. So the cash rate has another 125bps to go, with 50 in February a nice start to the new year. And we believe the RBNZ will cut to 3% next year."
But Kerr says what surprised the Kiwibank economists in the latest RBNZ Monetary Policy Statement was the time it takes to get monetary policy back to neutral.
"According to the RBNZ’s OCR track, the cash rate finishes 2025 at 3.5%. That’s just 75bps of cuts over the entire year, of which 50bps is delivered in February. And the final move to 3% does not happen until deep into 2027.
"It’s a strange track. There’s an argument that they should frontload cuts to 3.5%, which we agree with. But then they argue a need to keep the cash rate slightly restrictive over most of the forecast horizon.
"So frontload because the data has deteriorated, and inflation is back in its box. But then hold restrictive for an extended period to make sure inflation stays in its box. We’ll take the other side of this bet.
"We believe the RBNZ’s track, and market pricing, will prove to be too high and hawkish. The implied cash rate is likely to move towards 3% in 2025, and thoughts of rate hikes (priced into the curve from 2026 and beyond) will be postponed."
Kerr says the lowering of interest rates will provide much needed relief for indebted households and businesses.
"And it is the expectation of these rate cuts that has us in the more “optimistic” camp when thinking about economic growth, household wellbeing, business expansion, and the recovery of the housing market."
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