The Reserve Bank (RBNZ) needs to cut the Official Cash Rate (OCR) by more than it has signalled this year, according to Kiwibank economists.
In Kiwibank's weekly First View publication, chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say they are hopeful that an economic recovery in the second half of this year should help businesses avoid further significant cuts to headcount.
"But should we not get the required rate relief from the RBNZ, the risk of further job losses only grows.
"It’s why we think the RBNZ will need to deliver more than they have signalled this year."
The Kiwibank economists have long been of the view that interest rates "were hiked too high, for too long, and we’re suffering the consequences".
They have reiterated their call for the OCR to be reduced to 3% this year.
At the moment the OCR is at 4.25%, having been progressively cut since August 2024 from its cycle-high of 5.5%.
RBNZ Governor Adrian Orr was surprisingly explicit in suggestions late last year that the bank would move the OCR down to 3.75% in its first review for 2025 next week. But after that, many market observers think the RBNZ will proceed cautiously.
In its latest Monetary Policy Statement issued in November, the RBNZ signalled it would be cutting the OCR only as far down as 3.5% by the end of 2025.
"When we last heard from the RBNZ, in November, they signalled another two cuts to 3.5% this year, and a very slow move to 3% deep into 2026/2027," the Kiwibank economists said.
"Why wait? Why muck around? That leaves conditions too tight for too long.
"We argue we need to get to 3% (neutral) this year. Especially with inflation already stabilising at 2%. Holding out for longer is just going to cause unnecessary and indeed avoidable damage to the labour market."
Official figures released last week showed that as of the December quarter the unemployment rate had hit a four-year high of 5.1%, up from 4.8% in the September quarter.
In BNZ's weekly Markets Outlook publication, head of research Stephen Toplis, says the OCR should be cut 25 basis points per meeting, following the 50 expected next week, until such time that the RBNZ "thinks it’s done enough".
"In theory, that should mean the cash rate falling to a level deemed as being below neutral, i.e one that is outright stimulatory," he said.
"The big debate, of course, is where is neutral? And how much lower than neutral do you need to go to get the desired outcome. For the most part, it doesn’t matter where we think neutral is. The Reserve Bank decides where rates go and will shift them according to where they think neutral is.
"On this basis, due attention needs to be given to Chief Economist Paul Conway’s recent speech in which he confirmed the RBNZ sees neutral as being in a 2.5% to 3.5% band meaning that a working assumption of 3.0% is a good bet.
"On this basis we have a low in the cash rate of 2.75% pencilled in. It’s the same pencil we have been using since first forecasting this low point in the rate cycle almost two years ago. Any number of reasons mean it might not land there but it still seems to us to be a good working assumption," Toplis said.
He said financial markets have already priced in "an aggressive rate cut trajectory".
"This means that if the RBNZ does not follow through with substantially lower rates then retail interest rates will begin to drift to higher."
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