Bank economists largely give blessing for Reserve Bank to leave OCR unchanged

Monday, 8 July 2024

Economists from the country’s five major banks are voicing no doubts that the Reserve Bank will leave the official cash rate unchanged at 5.5% when it releases its latest review of monetary policy on Wednesday.

With the exception of BNZ research head Stephen Toplis, they told The Post they would also make the same decision if it was up to them.

That is despite mounting concern over the economic outlook, sharp drops in business and consumer confidence and speculation the economy may have slipped back into recession.

The review will be the first opportunity for the Reserve Bank to make any substantive remarks about the Government’s fiscal policy and the tax cuts in its May Budget, though forecasters aren’t expecting any fireworks.

ANZ chief economist Sharon Zollner said she could see why some people thought the Reserve Bank was “massively overdoing it and making a mistake” by keeping rates too high, and it was possible those critics would be proved correct.

The economy had been “knocked for six” by the central bank raising the OCR by 500 basis points in record time and 90% of the impact of that had now flowed through to people’s mortgages, she said.

But Zollner said it remained unclear how fast the economy could grow without causing inflation and it was the Reserve Bank’s job to be “hard-nosed”.

“If they ease too soon, they'd have to haul everyone back for round two, which would be much worse. If they hold rates a little bit long, they can cut faster and be reasonably optimistic that they would be able to patch things up.”

Westpac chief economist Kelly Eckhold also believed the Reserve Bank both should and would leave rates unchanged this time.

“I do think it would be too soon to begin reducing rates, simply because we don't really have any tangible evidence that actual core inflation pressures are moderating yet,” he said. “Declines are all in the forecasts, as opposed to in the hard data.”

Eckhold was expecting only a short statement from the central bank.

Markets were looking for any sign it was shifting its outlook and potentially looking at easing interest rates this year “but I doubt that we will see very much in the statement that would give that sort of message”.

Zollner said it was probably “another one of those reviews that they'd probably rather just skip if they could”.

Kiwibank has been more vocal than many about the deterioration in business and consumer confidence, warning on Tuesday that the Reserve Bank needed to lower interest rates to avoid longer-term damage to the economy, or “economic scarring”.

Given the lag between interest rate changes and their impact on the economy, the Reserve Bank was making decisions now for the economy in 18 months to two years’ time, chief economist Jarrod Kerr cautioned.

But he clarified he wasn’t advocating for a rate cut before the Reserve Bank had the benefit of reviewing June quarter inflation data that is due out on July 17.

Instead, he believed the right time for the first rate cut would be when the Reserve Bank releases its next full monetary policy statement in August, and Kiwibank is not actually forecasting a rate cut until November.

Toplis said that even though BNZ would cut rates now based on its own take on the economy, it would be “silly” for the Reserve Bank itself to do so given the signals it had previously sent.

“We've reached a point now where we think that — given how we see the world going forward and our view on the starting point — now would be an appropriate time to cut rates.

“The Reserve Bank has had a different back story, so if it turned around and cut rates now it would look very stupid.”

ASB chief economist Nick Tuffley believed the chance of rate cuts this year was “really growing”.

“Whenever I'm out talking with customers, that question ‘when are our interest rates coming down?’ is near universal.”

But the review of monetary policy came at an unfortunate time, just ahead of the release of new inflation numbers, he said.

“We're getting close to the point where ‘cutting, cutting, cutting’ now would be a good option,” but without the benefit of that data it was a bit too soon, he said.

Tuffley expected the Reserve Bank would leave any more material comment on the Budget until its monetary policy statement in August.

The Budget had cut both ways for the bank, being “very slightly more stimulatory in the near term” but contractionary over the forecast period through to 2028, he said.

The bank had given the Government a “pretty good warning shot” the week prior to the Budget that inflation was still a major concern for them and any fiscal policy that worked against that wouldn't be well received, he said.

Toplis doubted the bank would go as far as to give a direct indication of what the Budget might mean for its rate track.

When banks are expecting the first OCR cut

ASB & KiwiBank: November 2024

ANZ, BNZ, Westpac: February 2025

Reserve Bank: implied August 2025