Future Official Cash Rate decisions in 2025 are ‘all effectively live’, ASB economists say

There is “value” for the Reserve Bank (RBNZ) in waiting before making the next cut to the Official Cash Rate (OCR), according to ASB economists.

The RBNZ cut the OCR from 3.5% to 3.25% last week – the latest in a series of cuts that have seen the OCR reduced from its cycle peak of 5.5% last August.

However, while the forecasts in the RBNZ’s latest Monetary Policy Statement (MPS) indicated there may be two further cuts, the timing given for these suggested there could now be a ‘pause’ before there is a further cut.

Financial market pricing is giving little more than a 25% chance that the OCR will be cut again at the next review on July 9.

ASB senior economist Mark Smith said the ASB economists don’t envy the task facing global central bankers at the moment.

“…Policy-making is always uncertain, and central banks globally have had to lurch from facing one uncertainty to the next.

“At present, the RBNZ has to overlay highly uncertain trade war impacts on top of an economy that is in the early stages of coming out of recession, with plenty of spare capacity, but with higher near-term inflation,” Smith said.

“This is occurring at a time where monetary policy settings are being normalised, with the 3.25% OCR close to our neutral OCR estimates.”

The ASB economists’ assessment is that the RBNZ “will need to transition from acting to slow the economy to actively supporting it”. However, it’s difficult to know in advance how much policy support will be needed.

The ASB economists expect OCR moves will continue in small 25-point steps, with the likelihood of pauses along the way.

“ It is difficult to know precisely when then OCR will be cut – future OCR decisions over 2025 are all effectively ‘live’,” Smith said.

There appeared no imminent need for the OCR to move lower, “absent of a large global downturn”.

Smith noted that there is “a relative paucity” of economic data between now and the July OCR review for the RBNZ to get a clear steer on how significant the current short-term inflation spike will be.

June quarter inflation figures are not released till after the RBNZ has its July OCR review, and the” various” RBNZ-sponsored inflation expectations measures aren’t due out until August.

“The RBNZ may be inclined to wait,” Smith said.

“Waiting beyond July will give the RBNZ time to assess the impacts of the global trade scene – likely to be uncertain and dynamic. It would also allow the RBNZ to ascertain how transitory the current spike in NZ inflation is and implications for medium-term inflationary pressures.”

The ASB economists are expecting a 25 point cut to the OCR in the following review on August  20 (to 3.00%). They have then pencilled in another 25 point cut in October but acknowledge that the timing is fluid.

“We expect the OCR to remain at 2.75% but note that the NZ interest rate outlook is highly uncertain and fluid and conditional on local and global considerations,” Smith said.

“…If, however, inflation does not prove to be as transitory as we hope, the OCR endpoint is likely to be somewhat higher than 2.75%. There is a lot of uncertainty at present, and the RBNZ will take it one meeting at a time.”