The RBNZ pivot is here

The Reserve Bank meets in two days to reveal a full Monetary Policy Statement, with updated forecasts and OCR track. 

It is being touted as the economists’ Superbowl by Kiwibank.

Kiwibank chief economist Jarrod Kerr says almost all data has come out on the weaker side of expectations, and well below RBNZ estimates. 

Unemployment is rising, swiftly, and confidence in the economy remains at recessionary levels. It’s been two years of recession.

“We know the economy has been in a recession since the end of 2022. We’ve recorded a double dip recession with another contraction likely in the June quarter. That’s a triple dip. On a per head basis, we’ve recorded a deep 4.3% contraction. 

“We know inflation is cooling, and is down from 7.3% to 3.3%. And our best forecasts have inflation back below 3% in the September quarter, before returning to 2% next year.

“We know the labour market is crumbling. The unemployment rate has lifted to 4.6%, off the low of 3.2% last year. The labour market lags economic activity by about nine months. So, there is still a lot of pain to come. We forecast the unemployment rate lifting through 5% this year, to a peak of 5.2% or higher.

“And we know the housing market is struggling to find solid ground. House prices are going sideways and remain well below the peak. Over the last year house prices are up just 1% (so effectively sideways), but remain 16.5% below the November 2021 peak.

“Given what we know, we would cut, now,” Kerr says. 
BNZ’s head of research Stephen Toplis agrees.

He says the economy is buckling, inflation is controlled and a delay risks unnecessary volatility in output and interest rates, while recent RBNZ view swings provide consternation.

The pressure of extremely tight monetary conditions, slumping net migration, government cutbacks, rising unemployment, reduced investment activity and weak confidence is causing the economy to sink.

“We strongly believe the Reserve Bank should be easing monetary policy as soon as possible.

“Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate the RBNZ starts a progressive easing cycle from this week’s meeting.

Toplis the RBNZ has two choices: cut now and build in progressive rate cuts thereafter or wait and, ultimately, risk being forced into a 50 basis point cut in November.

However, Westpac industry economist Paul Clark expects the RBNZ to leave the OCR at 5.5% on Wednesday and instead position itself to cut rates in the October and November meetings.

He says importantly, the RBNZ is likely to leave open the option to scale up rate reductions beyond 25bp from October onwards should conditions warrant, while at the same time looking to discourage markets from getting too far ahead of themselves.

It is also likely to make significant downward revisions to the OCR track for 2025 and 2026, Clark says.

“The RBNZ is likely to remain cautious when forecasting inflation given that non-tradable inflation remains stubbornly high and is yet to show signs of quickly normalising.”

He says the RBNZ will also be looking at upcoming data for signs of a lift in demand/sentiment either from tax cuts or the significant fall in interest rates (including fixed mortgage rates).

“That is likely to mean the revised forward OCR track will be significantly above what is being priced by the market. Even in a dovish scenario, we think the RBNZ will still be looking for an OCR above 4% in 2025.

ANZ also expects the RBNZ to leave the OCR at 5.5% this week, even though the Record
of Meeting is likely to reveal that an OCR cut was considered this week.

ANZ chief economist Sharon Zollner says the bank doesn’t rule out a cut this week, as risks have clearly tilted towards more economic weakness than is necessary to beat inflation. “But there’s no smoking gun in the top-tier data, and our base case is that the Monetary Policy Committee will conclude that waiting for more evidence of the state of play is justified – and relatively low cost, given monetary conditions have already eased substantially.”

ANZ continues to expect the first cut in November, with but still has it tilted to coming in October if the recent weakness in high-frequency activity data persists.