The Reserve Bank needs to cut the Official Cash Rate by 0.25% today, and signal the start of a gradual easing cycle.
There is near-unanimous expectations that the OCR will be left unchanged.
Nevertheless, there is a real lack of alternative views being expressed, with most commentary focused on what the Reserve Bank will do, rather than what it should do.
Monetary policy changes have a one to two-year lag before they flow through to the economy, due to the popularity of fixed-rate home loans in New Zealand. So, today’s OCR changes will only really impact inflation outcomes in 2025 and 2026.
But, if we stick at the current OCR, there’s still another 1% increase in store in the average fixed home loan rate over the next year as homeowners roll onto new, higher rates, equivalent to a further $3.5 billion annually out of Kiwi homeowners’ pockets.
By doing nothing, by just holding the OCR as it is, the Reserve Bank will effectively be tightening monetary conditions.
A cut call is at stark odds with the RBNZ’s latest projections, which suggest the OCR will remain at current levels until mid-2025.
Most economists are picking either late 2024 or the first half of 2025 before rates come down again.
But the series of OCR hikes delivered to date (totalling 5.25%) have done enough to return inflation to the RBNZ’s mandated target of between 1% to 3% – and that any further delay to decreasing rates will cause unnecessary pain for New Zealand’s economy and homeowners.
It also comes following the release of New Zealand’s latest GDP figures, last month, showing New Zealand is once again in recession.
I’m concerned at the RBNZ’s attitude here – one which has the support of most economists – that continuing to effectively tighten monetary conditions is the way to go, just to be sure inflation is slayed. It’s humans and businesses feeling the impact of this ‘just to be sure’ approach. I believe Kiwi deserve better.
The Reserve Bank Governor, Adrian Orr, has delivered on his promise from late 2022, when he said he was prepared to tip New Zealand into recession in order to tame inflation. The fact that the RBNZ has achieved this despite 3% population growth – which, if anything, should bolster the economy – demonstrates just how tough the approach has been.
On a per capita basis, New Zealand’s economy is almost back to where it was five years ago. And it’s continuing to cool, with a recent Westpac analysis describing the economic outlook in every region as cool, cold or frosty. As the recession bites and worker shortages abate, the outlook for employment is weakening, as is that for wages. And tighter fiscal policy, with spending and staff cuts across the public sector, will serve to further dampen demand and inflation pressures.
A lot of analysis dissects every turn of phrase from the Reserve Bank to try and interpret its thinking, rather than focusing on the underlying drivers and the evidence of the lagged impact of monetary policy outcomes.
Interestingly, wholesale markets are pricing for the first OCR cut in August, and three OCR cuts by the end of the year.
Time will tell who was right.”
