Growing calls for 50bp cut to the official cash rate

Monday, 7 October 2024

Calls to slash the official cash rate are growing as the Reserve Bank’s next official cash rate announcement draws nearer.

Economists had been split over how much the Reserve Bank would cut interest rates.

But the gap between those predicting a 25 basis point cut and those leaning towards a 50bp reduction is closing.

Westpac and ASB economists now expect to see the OCR fall by 100bp by the end of the year.

With the official cash rate up for review this week, the divide between economists predicting a 25 basis point cut and those leaning towards a 50bp reduction is closing.

Lloyd Burr explains why there's always a difference between the Official Cash Rate (OCR) and the mortgage rates banks charge us.

Until last week, economists had been fairly evenly split over how much the Reserve Bank (RBNZ) would ‒ and should ‒ cut interest rates.

But as Wednesday’s announcement draws closer, calls for a 50bp reduction have grown.

ASB last week predicted two 25bp cuts in October and November, but that view had since changed, chief economist Nick Tuffley said.

There were increasing concerns about how tight monetary conditions were and how long they would remain restrictive if the RBNZ took a more measured approach to easing, he said.

“We now forecast 50bp cuts at both the October and November OCR decisions. Our previous OCR outlook didn’t have the OCR returning to a neutral level until the second half of next year [but] a couple of 50bp cuts will speed up that journey.”

The OCR was now expected to be at 4% by February 2025, Tuffley said.

“Subsequent OCR moves will be more heavily conditional on the economic outlook, but we have pencilled in a terminal rate of 3.25% from around mid-2025.”

Westpac had also revised its forecast and now anticipated 50bp cuts in both October and November, chief economist Kelly Eckhold said.

Westpac chief economist Kelly Eckhold says it’s getting harder to justify keeping interest rates at current levels. (File photo)

But the bank expected the pace of interest rate cuts to slow next year, and had pencilled in 25bp cuts in February and May.

“That going to leave the OCR at 3.75%, which is the same level we always expected it to trough at, but about six months earlier,” Eckhold said.

Although business optimism had improved significantly in recent months, the Quarterly Survey of Business Opinion showed the economy was still quite weak and disinflationary pressures remained strong.

Kiwibank chief economist Jarrod Kerr says a 50 basis point cut to the official cash rate provides relief, not stimulus. (File photo)

“Hence, it’s getting harder to authoritatively answer the question “What are you waiting for?” when it comes to why you need to keep interest rates as high, relative to long run neutral levels, as we currently believe they are,“ he said.

Kiwibank chief economist Jarrod Kerr last week tipped two 50bp cuts before the end of the year and said that view hadn’t shifted.

“Let’s be clear, cutting in 50bps provides relief, not stimulus. We are 250bps away from the RBNZ’s estimate of long term neutral. Neutral, a Goldilocks rate that’s “just right” and not too hot or cold, is estimated to be around 2.75%.

“So in order to remove the restrictiveness of current policy settings, the RBNZ should accelerate their cuts.”

The RBNZ should cut to 2.5%, “the lighter side of neutral, with a hint of stimulus”. Kerr said.

“And then there are the lags. The lag between cutting the cash rate and the greatest impact on the economy is around 18 months, historically. That’s early in 2026.

“We believe the 18-month lag will be shorter in the current cycle, because most households have shortened up their mortgage fixing.”

Most mortgages were currently fixed for less than a year, with the six-month rate the most popular, he said.

But while that was good news, it would still mean a six- to 12-month lag.

“Larger cuts today will give greater relief in 2025. ‘Survive til 25’ will become ‘thrive in 25’.”