No waiting – OCR cuts expected next year

The ASB says If that is the case, the RBNZ’s job will be done much quicker than it thinks and it now looks likely OCR cuts will start in the second half of next year, rather than waiting until 2025.

ASB chief economist Nick Tuffley says last week’s 0.3% contraction in GDP figures wasn’t the Christmas present anybody was expecting.

“All up, the level of GDP for the third quarter was 1.6 percentage points lower than we had anticipated.”

What this means, he says, is the recent momentum in the economy has been much slower than anyone had expected. Another way of putting this is that the level of demand in the economy has been lower than anticipated, but the supply capability of the economy has also probably been lower than previously thought.

“It’s that gap between excess demand and supply that creates inflation. All other things equal, growth likely needs to slow by slightly more than expected to get inflation under control, to ensure that gap gets closed. And that is where the implications of the markedly weaker economy right now come in.

Tuffley says It really does appear like monetary policy has started to bite hard and is slowing the economy faster than expected. “If that is the case, the RBNZ’s job will be done much quicker than it thinks.

He says the bank has a lot of reforecasting to do to get on top of the implications of the GDP figures. But it now looks more likely that the RBNZ will start cutting the OCR in the second half of 2024, rather than waiting until 2025.

Confidence

Business confidence and activity metrics have strengthened considerably in recent months given the prospect of change to a more business friendly centre-right coalition government.

With the new coalition government up and running, we expect the improvement to be sustained, although pricing metrics will need to significantly decline to reassure the RBNZ that inflation will continue to ease.

Consumer sentiment has not improved to the same degree, with households still burdened by the high cost of living and softening labour market.

Consumers are likely to remain gun-shy on committing to major purchases. Household spending volumes are expected to continue to retrench on a per-capita basis as the financial squeeze continues.