Economists lighting the path to OCR cuts

With the Reserve Bank now moving towards an easing stance, it only seems to be a matter of when – not if - the cash rate is cut in 2024.

Mortgage rates have already been drifting lower lately. That news will have been welcomed by existing mortgage holders and aspiring buyers and now Westpac, not as bullish as other banks on monetary policy, has now put its toe further into the water and expects the OCR to be cut in October compared to November previously.

Westpac’s new economic forecasts show the RBNZ starting to temper the degree of restriction from their October Monetary Policy Review by reducing the OCR by 25bp to 5.25%.

It continues to expect a further 25bp cut in November, leaving the OCR at 5% at year end.

The June quarter inflation figures due out tomorrow, should give a better steer on when the RBNZ might contemplate lowering the OCR.

Kiwibank economists believe consumer price growth likely slowed slightly over the quarter, 0.5% from 0.6%. and the inflation headline rate fell to 3.4% from 4%. The RBNZ’s latest forecasts see inflation slowing to 3.6%.

Westpac chief economist Kelly Eckhold says the bank’s longer-term forecast for the OCR is unchanged, with the OCR to fall to 4.5% at the May 2025 Monetary Policy Statement and to reach its current estimate of the terminal rate of 3.75% in early 2026.

The bank’s economists think GDP fell 0.6% in the June quarter.

“Given this weak performance, it looks likely that growth will continue to be subdued in the second half of 2024,” Eckhold says.

“Importantly, we now also see definitive signs the labour market is adjusting more quickly to the weak growth profile that has been in place for some time.

“We now expect the unemployment rate to move more quickly to a higher peak of 5.6% next year. He says this will give the RBNZ comfort that the path of inflation towards 2% is more assured than had been the case earlier this year and the 1-3% target range will likely finally be reached in the September quarter.”

Eckhold says domestic inflation remains uncomfortably high, and this will continue to worry the RBNZ.

“So, while there is certainly a case for reducing the degree of restriction, we don’t see the RBNZ being keen on getting too far ahead of itself and moving quickly toward or into easy territory.”

And while Kiwibank also expects inflation to return to the 1-3% band by the September quarter it doesn’t expect an OCR cut until November.

Kiwibank economist Mary Jo Vergara says the path for inflation from here, is the path for policy.

She says inflation looks on track to pierce below 3% by the September quarter this year, and on its way to 2% in 2025.

And the psychological shift of seeing an inflation rate with a 2%-handle should not be disparaged.

“The September quarter inflation print is key for a November cut. But the June quarter print will determine if the RBNZ will open the door at the next MPS (13 August) to rate cuts.”