What’s next for the official cash rate?
Monday, 8 July 2024
The Reserve Bank will review the official cash rate on Wednesday.
The OCR has been on hold at 5.5% since mid-2023 and economists agree a cut is unlikely this week.
However, opinions on when the rate might drop are split.
The Reserve Bank will review the official cash rate (OCR) on Wednesday and while economists agree a cut is unlikely this week, they remain divided over when the rate might finally drop.
The OCR has been on hold at 5.5% since mid-2023 and economists have widely predicted cuts won’t come until 2025.
However, ASB chief economist Nick Tuffley said the bank now expected a cut in November, after the release of third quarter consumers price index and labour market data.
“July’s OCR announcement may be too soon to see much shift in the RBNZ’s balance of inflation risks. But any greater emphasis on the risks of weaker than expected medium-term inflation would be a sign the RBNZ is already starting to change its tune.”
Tuffley said monetary policy had been leaning hard against inflation for more than two-and-a-half years and, for much of that time, inflation pressures had been stronger and more persistent than expected.
That had created “a perfect storm” of overstimulated demand, global production and logistics disruption, acute labour shortages, and weak productivity.
“Too many times, the RBNZ has been surprised by how high inflation has remained – and been in good company,” Tuffley said.
“But our assessment is the dynamic is changing quickly this year. Households are starting to buckle more noticeably under the various pressures of high interest rates and high ‒ though easing ‒ living cost inflation.”
The labour market had so far been something of a saviour, he said, with employment holding up and wage growth relatively strong.
“Even that story is starting to change, with cost-cutting pressures in organisations, wage growth slowing, and job security worries on the up,” he said.
“Crucially, we are starting to see inflation indicators soften with more alacrity. We are more confident that Inflation will be comfortably back in the target band by year end.”
Westpac NZ chief economist Kelly Eckhold also expected the OCR would remain at 5.5% this week but said it was unlikely Wednesday’s announcement would show any tilt towards cuts this year.
“If that’s coming it would be at the August monetary policy statement,” he said.
“The RBNZ will emphasise the upside risks to consumer spending and inflation emanating from the less contractionary than expected Budget 2024.
“But they will balance this with some dovish messages associated with potential downside risks to growth as the economy continues to stall and the labour market eases.”
Meanwhile, Kiwibank’s economists said when the RBNZ started easing, whether in November, February, or later, the big move in rates would be over 2025 and 2026 as the terminal cash rate was adjusted towards a neutral setting.
“The rates market will need to adjust to a 3% terminal rate, and that’s another 100 basis points of decline, or bull-steepening.
“For now, the RBNZ are in a holding pattern. Inflation remains outside the target band and interest rates will remain restrictive. But we think the RBNZ will be able to ease policy earlier than they currently expect [second half of 2025].”
Kiwibank expected to see the first rate cut come in November, but there were still risks that could be delayed.
“Regardless, we are confident that the next move in rates is down. We may be wrong on timing, but it’s the direction and magnitude of policy moves that’s important.”