‘Low-risk’ start to cuts: Reserve Bank reduces official cash rate to 5.25%

Wednesday, 14 August 2024

Governor Adrian Orr says inflation appears to be coming under control, allowing for an OCR cut.

The Reserve Bank has cut the official cash rate to 5.25% after what bank economists had described as a cliffhanger decision.

Addressing the media, Orr said it had not been a difficult decision, it represented a “low risk start” to rate cuts and the bank was “in a strong position to move calmly”.

ASB responded almost immediately by dropping all its fixed and floating lending rates, while Kiwibank cut its home loan and business variable lending rates by 0.25%.

ASB chief economist Nick Tuffley said the Reserve Bank’s forecasts implied “a steady easing cycle” with two more 25 basis point cuts highly likely when the central bank reviewed monetary policy in October and November.

That would take the OCR to 4.75% by the end of November.

Reserve Bank governor Adrian Orr said the decision to cut had not been difficult as it represented a “low risk start” to rate cuts.

The Reserve Bank said inflation was returning to within the 1% to 3% target band and “inflation expectations, firms’ pricing behaviour, headline inflation, and a variety of core inflation measures” were moving consistent with low and stable inflation.

The bank said the pace of further interest-rate cuts would depend on confidence pricing behaviour remained consistent with a low inflation environment, and that inflation expectations were anchored around 2%.

The Government believes its polices have contributed.

But its forecast track suggested the OCR would drop to below 4% by late next year.

It suggested the OCR would average 4.4% in the three months to the end of June next year, just over a full percentage point lower than it had been forecasting in May.

Finance Minister Nicola Willis said she was pleased the Reserve Bank’s decision to lower the OCR showed it had “confidence that inflation is under control and the era of extreme price increases is over”.

“Taken together with our recent tax relief package, the cost of living will be even further reduced for families,” she said.

“Today’s drop also tells us the hard conditions business have faced are easing, and that in turn will give businesses the confidence to invest, hire and grow once again.”

Employers and Manufacturers Association spokesperson Alan McDonald said the cut would provide “a small but crucial boost to business confidence”.

Economists had been divided on what the central bank would do ahead of the announcement, with ASB, BNZ and British forecasting house Capital Economics tipping the rate cut, but ANZ, Kiwibank and Westpac thinking it would come later.

Infometrics principal economist Brad Olsen said the Reserve Bank had made the right decision, but it was now not possible to trust its judgment given the “u-turn” it represented from its hawkish monetary policy statement in May.

There's optimism Wednesday's OCR announcement will bring somerelief for businesses and consumers

Orr said “when the facts change, the decisions change”, suggesting it could have the confidence on inflation it could not have had in May.

The Government changed the Reserve Bank’s mandate late last year to put the focus of monetary policy firmly back on inflation.

But the bank’s statement indicated the weakness of the economy was a factor in its decision to cut.

While “official economic statistics” had evolved broadly in line with its expectations in May, other indicators pointed to a material weakening in economic activity in recent months, it said.

The bank’s monetary policy committee discussed possible reasons for the weakness.

“Alongside restrictive monetary policy, an earlier or larger impact of tighter fiscal policy could be constraining domestic demand,” the Reserve Bank said.

ASB lowered its variable home loan rate by 25 basis points, but the biggest cut is to its 18-month fixed term mortgage rate which is falling to 6.15%, from 6.49%.

Krishna Bhimavarapu, an economist at investment manager State Street Global Advisors, said the rate cut flagged the potential path for central banks to pivot to lower rates “perhaps sooner than their own guidance”.

Capital Economics economist Abhijit Surya said that although the Reserve Bank appeared to strike “a cautious tone” about further rate cuts, he thought it would cut rates more aggressively than many were anticipating.

The Reserve Bank was forecasting the economy would slip back into recession this year, before staging a gradual recovery next year, he noted.

Orr said the “darkest point was right now”, but it was expecting growth to normalise in 2026.