RBNZ stays on hold as economists, markets debate timing of first OCR cut

Nobody is expecting the Reserve Bank to do anything when it releases its latest monetary policy statement and economic forecasts next Wednesday but there's a debate raging about when it will start cutting interest rates.

Earlier this week, financial markets had been pricing in the first official cash rate (OCR) cut as early as May next year but by Friday morning they'd pared that out to August with nearly 60 basis points of cuts priced in by the end of 2024, down from 75 points a couple of days earlier.

That's still a bit premature in most economists' eyes. ANZ chief economist Sharon Zollner, for example, thinks the first cut won't be until February 2025.

“Cuts remain a distant prospect, in our view; indeed, we've pushed out our estimate of when they will occur by one quarter,” Zollner says in her preview.

Kiwibank's economists did have a May 2024 cut penciled in, but now say “May is looking too optimistic at this stage. The RBNZ will want more data under its belt, specifically inflation prints, before changing direction.”

The Consumers Price Index at 5.6% in the September quarter was still nearly three times higher than the midpoint of RBNZ's 1% to 3% target.

But ASB chief economist Nick Tuffley reckons that the softer data recently will have made RBNZ “more comfortable with its on-hold stance” and that “the risks have tilted towards a slightly earlier start to the easing cycle than early 2025.”

Westpac's Kelly Eckhold comes down more on the hawkish side, saying the RBNZ will be “talking tough about doing little,” and he still has a small chance of another OCR hike in February 2024 in his forecasts.

“However, that call for higher rates teeters on a knife edge as the RBNZ has plenty of reasons for standing pat,” Eckhold says.

On the other hand, “Some key medium-term inflation risks remain which we think will make the bank reticent to validate the market's pricing of rate cuts next year.”

BNZ head of research Stephen Toplis reckons the weaker-than-expected September quarter employment data gives RBNZ reason to be more dovish than it was back in August.

“The labour market is easing more aggressively than anticipated and inflation has surprised to the downside,” Toplis says, adding that a cut in the December quarter next year “is now a real possibility.”

Sydney-based Paul Bloxham at HSBC, famous for dubbing the 2013/14 NZ economy “a rock star,” is more certain of a December quarter 2024 cut, although he's expecting RBNZ to maintain “a modest tightening bias” on Wednesday.

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