A further three OCR cuts now expected by ANZ

ANZ’s economists now expect another three OCR cuts to a trough of 3% in July before interest rates start rising again.

Chief economist Sharon Zollner says a sensible baseline forecast is the RBNZ will follow through with its stated strategy of cutting the OCR to neutral, with a wait-and-see approach from that point.

In her view, Zollner says the updated forecast balances the upside and downside risks to the OCR.

“Both exist. We are certainly not ruling out the possibility that cuts could stop with the OCR above 3%, given the clear signs of a pickup in economic momentum, and uncertainty about at what point growth will turn inflationary.”

She says on the other side of the risk coin the durability of the economic upswing isnot assured, and it is also plausible the OCR could end up in stimulatory territory below 3%, sooner or later.

Risks can be broadly divided into two camps: output and inflation evolving differently than expected in response to the conditions, and second, unexpected changes in economic circumstances, Zolner says.

“In this global environment there’s plenty to think about on the latter score, but in this note we’ll focus primarily on the former.”

In ANZ’s big picture: the worst is past, but the recovery will be fairly hard yards, given the persistent growth headwinds of still-subdued consumer confidence, a soft labour market, and a challenging environment for our exporters (though some of them are doing remarkably well in the circumstances).

The RBNZ considers the neutral OCR to be somewhere in a 2.5% to 3.5% range.

Zollner says if the ‘true’ unobservable neutral OCR is about 2.5%, the bottom of the RBNZ’s range of estimates, then the recovery in demand is going to sputter out fairly promptly.

“The flurry of optimism in indicators such as the ANZBO and Performance of Manufacturing and Services Indexes could represent little more than the fact that the bar for improvement is low.”

On the other hand, she says if neutral ultimately turns out to be meaningfully higher than 3%, that means interest rates are less of a constraint than thought, and consumption and investment will recover more quickly.

Full impact of interest rate cuts still to be felt

Westpac is seeing signs of the economy recovering and business conditions stabilising.

Senior economist Satish Ranchhod says interest rates have been dropping back.

Importantly, the full impact of those declines is yet to be felt, as many mortgages are still on the relatively high interest rates from recent years.

However, over the next six months, about half of all mortgages will come up for re-fixing, and many borrowers will have the opportunity to re-fix at lower rates. That will give disposable incomes and spending a boost through the second half of the year.

But many households are still dealing with some significant pressures on their finances. Notably, Ranchhod says there are still big increases in the costs of necessities, like food, rates, utilities and insurance.

“On top of that, the fall in the NZ dollar is likely to push up the price of some imported goods. But even with those pressures, household spending is likely to continue firming over 2025.

On the business front, trading conditions are still tough, especially in construction, retail and hospitality.

Many businesses have also told Westpac they expect conditions to remain soft in the near term, and as a result they remain hesitant about significant capital expenditure for now.

While activity levels remained soft, most of the businesses say conditions have stabilised in recent months (rather than continuing to weaken).
That’s been reflected in the latest monthly jobs figures, which have been gradually ticking up over the last three months, after having consistently fallen between April and October last year.

Businesses are also feeling more optimistic about the trajectory of the economy further ahead, with interest rate reductions expected to support a gradual recovery in demand.

However, they were conscious that the recovery is likely to be gradual, with most not expecting a material lift in activity until the second half of the year.

Changes in global trade policy and simmering geopolitical tensions are a clear downside risk for demand and are adding to the uncertainty for many businesses.