Economists, markets expect a 50bp OCR cut on Wednesday

Economists expect the Reserve Bank will follow the US Federal Reserve's example and cut its official cash rate by 50 basis points to 4.75% on Wednesday, and the markets have nearly priced in a cut of this magnitude, and many have another 50 basis points cut pencilled in for next month two.

At least a couple of economists saying it's a line-ball call whether RBNZ cuts by 25 or 50 points: “Not cutting at all has never entered our minds,” says BNZ head of research Stephen Toplis.

He suggests the magnitude of the cut will come down to how much weight RBNZ decides to put on last week's quarterly survey of business opinion (QSBO) from the New Zealand Institute of Economic Reserach or ANZ's monthly survey which came out the day before the QSBO.

While the ANZ survey indicated businesses are upbeat about the outlook and the QSBO painted a much more miserable picture, Toplis notes the ANZ asks about the outlook one year ahead and the QSBO asks about the next three months.

“It should be of no surprise that the shorter-term view is far more miserable as very few businesses will be expecting a sudden lurch to the positive,” he says.

ANZ chief economist Sharon Zollner says the arguments for a 25 or 50 point cut are a coin-flip.

While the 0.2% June quarter contraction in economic growth wasn't as bad as the 0.5% squeeze RBNZ had forecast, other data, particularly the QSBO “has confirmed that disinflation is on track and looks set to remain so.”

Both Zollner and Toplis focus on the employment outlook and filled jobs data released last week showed a 0.2% gain, but it was the first gain since March and is likely to be revised downwards, according to Westpac economist Darren Gibbs.

ASB economist Mark Smith says any gain is unlikely to be sustained because higher frequency data is pointing to falls in hiring from late August or early September.

“The regret to the RBNZ from holding the OCR too high for too long and causing longer-term economic damage to the labour market now outweighs the risk of inflation remaining stuck well above 2% if OCR cuts are quickly delivered.”

The Consumers Price Index stood at 3.3% in the year ended June but RBNZ has forecast it will fall to 2.3% for the year ended September – the timing of RBNZ's OCR review is somewhat unfortunate as the September CPI data will be released exactly a week later.

The June quarter CPI was 0.4% and, if multiplied by four, would suggest inflation is already below the mid-point of RBNZ's 1% to 3% target.

Kiwibank chief economist Jarrod Kerr is of a similar mind, saying the easiest thing for RBNZ to do is to cut by 50 basis points.

“Overly restrictive monetary policy has inflicted much pain and tamed the inflation beast. Households and businesses are struggling. It's been two years of recession. Interest rate relief is required now,” Kerr says, adding that RBNZ needs to take into account long policy lags, meaning a rate cut usually takes between six and 18 months to fully impact the economy.

Toplis says the pricing intentions shown in the QSBO, with a net 22% of merchants saying they had lowered their prices in the September quarter, highlight the risk that inflation could fall below the bottom end of RBNZ's target.

“We have long argued the RBNZ has been slow to cut rates in the face of an imploding economy, weakening labour market and a return of inflation to target,” Toplis says.