The stars - or should that be the data - have all aligned for another interest rate cut next week, Kiwibank economists say.
The Reserve Bank (RBNZ) has its next review of the Official Cash Rate (OCR) on Wednesday, August 20. At the moment the OCR is on 3.25%, having been reduced from the cycle peak level of 5.5% since last August.
The Kiwibank economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado, say in their weekly First View publication all the key data releases in the lead up to the RBNZ's meeting next week had all "supported the case for lower rates".
A cut next week would likely see the OCR dropped to 3.00%. The Kiwibank economists have long since been pushing for the OCR to go as low as 2.5% - and they are still maintaining that.
"...The cash rate will need to go to 2.5%, eventually," they said.
The RBNZ made six consecutive cuts to the OCR from August last year, but then held tight on 3.25% in the last review in July.
"Since the RBNZ paused in July there were three key data releases we knew would be carefully picked apart before the August meeting," the Kiwibank economists said.
"The first was June quarter Kiwi inflation, which showed weak underlying price pressures, despite a lift in the headline rate to 2.7%.
"Then last week, we saw the remaining two key data prints: the Kiwi labour market report and the RBNZ’s survey of inflation expectations. Both of which support the case for further rate cuts. A 25bps cut next week to 3%, followed by an eventual move to 2.5%," the economists said.
The Kiwibank economics team said that at first glance, the June jobs report looked a bit better than expected.
"But under the microscope, the Kiwi labour market is clearly soft," they said.
"The unemployment rate came in at 5.2%, slightly below our forecast of 5.3%. But it’s the deeper slide in labour force participation that kept a lid on the unemployment rate. From (a downwardly revised) 70.7% to 70.5%, the participation rate has dropped to a four-year low. That in itself is a sign of a weak labour market.
"People are leaving the labour market because it is simply not as attractive as it once was. In fact, the labour force shrank over the year. That doesn’t happen often. The 0.4% decline is the deepest since March 2013. Labour demand is soft. The June quarter recorded a 0.1% decline in employment. And the 0.1% gain in the March quarter was revised to flat. On an annual basis, employment growth is running at the weakest rates since the GFC."
The economists said the underutilisation rate – a broader measure of untapped labour market capacity – rose to 12.8%, the highest since September 2020.
"There’s clearly significant slack within the Kiwi labour market."
Overall, the labour market is weaker than the RBNZ had expected back in May, the economists said.
"The unemployment rate may have been in line with their forecast, but only because of the drop in the participation rate. Labour demand is clearly weaker than the 0.2% gain the RBNZ had forecast in May," they said.
"Alongside contained and anchored inflation expectations the door remains open for a 25bps [basis points] rate cut later this month. And the cash rate will need to go to 2.5%, eventually."
10 Comments
It should be a 0.5% cut or bigger, that will change sentiment. Another 0.25% will do almost nothing.
Agree. Need a jolt. Even if they plan 0.25 and 0.25, just front load it to get attention.
Agree but it smells of panic and bad past decisions.
They will go 25 and 25, personally I think they should go 50 now and perhaps another 25 next.
This sucker is going down........
We're sitting in the back row though.
The reserve Bank probably needs all the runway they can get to manage the next 5-10 years.
Panic is probably appropriate
Not sure about that. Spooking NZD would raise cost of imports creating inflationary pressure
Too late to save the Titanic once you see the stars...I mean the iceberg
Can see it making a big change. Bailing out the speculators is just capitulation to the banking lobby. Would be in Nats wheelhouse though.
We can either borrow and sprinkle or cut rates …..
."The cash rate will need to go to 2.5%, eventually,
Yep, and even lower.
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