Banks bringing OCR cut expectations forward

In its preview of this month’s RBNZ Monetary Policy Review, the bank says cracks in households are starting to spread – inflation will be next.

Monetary policy has been leaning hard against inflation for over two and a half years and too many times, the RBNZ has been surprised by how high inflation has remained.

But ASB chief economist Nick Tuffley says the bank’s assessment is the dynamic is changing quickly this year. Households are starting to buckle more noticeably under the various pressures of high interest rates and high (though easing) living cost inflation.

“To date the labour market has been a bit of a saviour, with employment holding up and wage growth relatively stronger.”

Tuffley says even that story is starting to change, with cost-cutting pressures in organisations, wage growth slowing, and job security worries on the up.

“Crucially, we are starting to see inflation indicators soften with more alacrity. We are more confident inflation will be comfortably back in the target band by year end.”

He says now the biggest risk of regret for the RBNZ is rapidly tilting to the risk of holding monetary policy too tight for too long, unnecessarily damaging the economy and people’s employment prospects.

“We expect the RBNZ will start cutting the OCR this year – in November, after it has digested the third quarter CPI and labour market releases in October and November.”

This month’s OCR announcement may be too soon to see much shift in the RBNZ’s balance of inflation risks, Tuffley says.

The bank expects there will be much greater detail at this month’s meeting of how the Monetary Policy Committee assessed the state of inflation and its statement as an opportunity for the RBNZ to signal its assessment of the Budget impact on inflation.

“We saw the front-loading of tax cuts relative to spending cuts as unhelpful to the RBNZ, but nonetheless don’t see the fiscal stance as a blocker for OCR cuts this year – particularly with further fiscal restraint already signaled,” he says.