Moving forward to the past - rates have further to fall

Kiwibank says the economic environment simply demands more interest rate relief.

After the RBNZ cut the OCR to 3.5% two days ago, Kiwibank says another 100 basis points of rate cuts to 2.5% are needed by the end of the year.

With a 2.5% cash rate, all wholesale and retail interest rates will have further to fall.

“The downside risks we have all feared are coming from offshore and knocking at our door,” Jarrod Kerr, Kiwibank chief economist says.

Although US President Donald Trump has paused his global tariffs for 90 days, it excludes China. 

Kerr says the downside risks for global growth steam from the US-China tariff tit-for-tat. China says it will fight to the bitter end after being slapped with 125% tariffs by Trump and his administration.

New Zealand will not be able to avoid the repercussions. 

“As a small, heavily trade-dependent economy, the country’s forecast recovery hangs in the balance,” Kerr says.

“The RBNZ will need to step in to shore up confidence and support activity.”

Kiwibank has long-advocated for more stimulatory policy settings. It called for a 2.5% terminal rate prior to the RBNZ’s November Monetary Policy Statement (MPS).

“But the central bank let its hawkish flag fly high with a confusing lift in its OCR projections. We reluctantly lifted our forecast end point to 3%.”

We’re here to forecast what the RBNZ is likely to be (not so much what we think they should do). But we strongly warned: “We think the RBNZ’s bias may be moving in the wrong direction, as it did in May. It is too hawkish. Time will tell.”

Kerr says time is now telling the country the RBNZ must lower the cash rate below neutral (3%)

The issues on tariffs for New Zealand’s domestic outlook as the RBNZ has pointed out remain around the negative impact on global growth.

“And while measuring the inflationary impacts is less clear cut with a multitude of sway factors, the RBNZ saying in its Monetary Policy Review on Wednesday that on balance there’s “downside risks to the outlook for inflation in New Zealand over the medium term” adds more fuel to our change in call for the need of a stimulatory cash rate,” Kerr says.

Kiwibank says the OCR track will likely drop below 3% in the RBNZ’s Monetary Policy Statement forecast next month.

The pivotal two-year swap rate is reflecting the lower for longer cash rate expectations, falling to 3.07%, the lowest level since they were hiking in 2022 out of Covid.

Again, the trading bank sees downside risk to the two-year swap rate, with 2.75% or lower in range.

Another cut next month

Wespac chief economist Kelly Eckhold says there is now a clear choice between a 25bp or 50bp OCR cut next month.

“It’s hard to say how large the adjustment will be now,” he says. “There are downside risks to our forecast of a trough in the OCR of 3.25%.”

Eckhold says the RBNZ is correct in not being prescriptive in terms of how global events will evolve and how they will impact on New Zealand. The reaction of the New Zealand dollar will be key in that regard. 

Westpac expects the New Zealand dollar to take on a significant part of the adjustment – especially if darker scenarios emerge. This will complicate the usual playbook of cutting rates to support growth. 

“If significant rate cuts are required, then these will likely further cement in the tentative recovery of the domestic economy that has been taking hold up until now, Eckhold says. “Large OCR cuts could end up being procyclical if the NZD is doing its job and providing stimulus.” 

 Looking ahead to the RBNZ’s 28 May Monetary Policy Statement, he says there are several key high frequency indicators to watch - the first quarter labour market report for the unemployment rate and labour costs and the lead-up to the Budget on 22 May, given the risks the Government expands spending to cover pressing priorities in both operational and capital spending. 

Aside from economic data, developments in international commodity prices – especially for New Zealand’s key exports – and the exchange rate will also be important in gauging the extent to which additional interest rate support is likely to be required, Eckhold says.