Inflation figures expected to add to pressure for early rate cut

Monday, 15 July 2024

ANALYSIS: Hopes for early cuts in interest rates have jumped after what BNZ labelled a “dovish pivot” by the Reserve Bank on Wednesday.

A growing number of economists are coming round to the view that the first cuts to the 5.5% official cash rate will arrive this year, most likely in November.

Westpac senior economist Mark Smith is now in the November-camp for a 25 basis point cut, but sees a heightened chance of cuts coming “sooner and larger”.

Movements on financial markets suggest it could be “game on” for the Reserve Bank when it releases it next monetary policy statement in August.

ANZ chief economist Sharon Zollner has been quick to a wave a cautionary wet blanket, though.

The optimism could prove short-lived if inflation figures for the three months to the end of June due to be released this week disappoint, she has suggested.

That inflation data “was always going to be more important for the official cash rate outlook than whatever the Reserve Bank had to say”, she said within hours of the central bank’s review.

The Reserve Bank forecast in May that Stats NZ would report annual inflation in the three months to the end of June fell to 3.6%, from 4% in the March quarter.

If that prediction proves correct, there’s a reasonable chance we could see inflation fall back under the 3% upper end of the Reserve Bank’s target band when Stats NZ reports the September-quarter inflation figures on October 16.

The Reserve Bank has another unfortunately-timed date for reviewing monetary policy inked-in eight days earlier, on October 8.

Partial data on the monthly price movements of many key goods and services released by Stats NZ on Thursday suggests inflation may be playing ball.

ANZ and ASB are both tipping inflation will come in at 3.3% on Wednesday.

Although both think that will be more down to easing import prices than a material drop in domestic inflationary pressures, that might still leave the Reserve Bank struggling to justify another hold in August.

Westpac is tipping a drop to 3.5%, which would be less conclusive.

It would be fair to say that uncertainty about how the Reserve Bank might interpret the inflation data has increased as economists continue to struggle to get a clear handle on how the central bank sees the world.

Infometrics chief forecaster Gareth Kiernan is scathing, describing the Reserve Bank as having “a habit of flip-flopping and changing the tone of its message from one statement to the next”.

The bank’s November monetary policy statement was deemed very hawkish, its February statement as somewhat dovish, its April review as simply brief and its May statement as hawish, before its “dovish tilt” on Wednesday.

None of those were cases of commentators hamming it up for dramatic effect; on each occasion the banks’ statements instantly moved real money in currency markets, so that would suggest room for improvement in its messaging.

Based on past patterns, the hawks on the bank’s monetary policy committee might have their turn in August.

But to be fair to the Reserve Bank, it was not so much the bank’s words as its forecast track of where interest rates might be heading that appeared to wrong-foot the market in May.

Chief economist Paul Conway appeared to go a long way to set the record straight in a subsequent interview with The Post, labelling its OCR track “mechanistic” and revealing it might change the way it sets out its expectation of interest rates in future.

So, taking Conway’s comments into account, Wednesday’s dovish tilt may have been less of a lurch than it seemed.

All of the second-guessing only makes it harder for home-owners to decide when and for how long to fix their mortgages.

But relief does seem to be on the way.

If inflation comes in as ANZ and ASB expect on Wednesday and if the Reserve Bank is retrospectively deemed to make a mistake in August by nevertheless holding the OCR at 5.5%, it will have put itself into “told you so” criticism territory.