More economists predict official cash rate cut earlier

Saturday, 20 January 2024

Adrian Orr will probably keep talking tough right up until the point of cuts, ANZ says.

A growing number of economists now say the official cash rate (OCR) is likely to drop in August.

That’s significantly earlier than the start of 2025, as many had previously expected, and well ahead of the Reserve Bank’s own forecasts. It has said it does not expect to move until mid-next year.

Gareth Kiernan, chief forecaster at Infometrics, said his team was preparing a new set of forecasts, to be published in two weeks.

“As part of the new forecasts, we are revising the timing of our first interest rate cut to August.

Reserve Bank governor Adrian Orr calls for continued 'flexibility' in how it does its job (video first published December 20, 2023).

“Our modelling suggests that there continues to be less inflation in the system than previously and that the Reserve Bank’s interest rate increases have done their job. Inflation now looks likely to be below 3%pa before the end of this year – ruling out the need for further tightening, and opening the door for a gradual easing from August this year.”

It follows ANZ, which said on Thursday that it too believed that the Reserve Bank would start to cut in August, with a steady sequence of 25 basis point drops taking the official cash rate to 3.5% over 12 months.

“On our current forecasts, by the September quarter inflation is back in the band, unemployment has cracked the 5% mark and is still rising, and the output gap is deeply negative.”

But ANZ’s economists said people should not be surprised if the central bank kept talking tough.

“The sensible strategy for the Reserve Bank is to deny-deny-deny-cut, in a bid to avoid a premature easing in financial conditions that would be hard to haul a dovish market back from.”

ASB said it, too, had changed its prediction for a cut to August in December last year.

But others said there could be more of a wait. Kelly Eckhold, chief economist at Westpac, said he still not expect a move this year.

Jarrod Kerr, chief economist at Kiwibank, had earlier expected that rates could move from May but pushed it back to November

“We did this following the Reserve Bank’s stern statement in November last year. We were a bit aggressive with our May ‘rate cut commencement’ call. But that is becoming consensus amongst interest rate traders now. I still think it is possible that we get a cut in May … I think the Reserve Bank will want to see inflation running below 3% first. And that will take a bit more time.”