Reserve Bank tipped to step up pace of interest rate cuts this week

Monday, 7 October 2024

Economists from all the major banks have now come around to the view that the Reserve Bank will start accelerating the pace of interest-rate cuts on Wednesday by cutting the official cash rate by 50 basis points to 4.75%.

However, some say they would not be that surprised by a smaller 0.25% cut and others are warning people shouldn’t assume a bigger cut would quickly breathe much extra life into a recovery.

The Reserve Bank began reducing interest rates in August in what was viewed then as a “cliffhanger decision” that took the OCR down from 5.5% to 5.25%.

Governor Adrian Orr described that as a “low risk start” to monetary easing and it was widely assumed at the time that he would follow up with two further 25bp cuts on Wednesday and in November.

However, ANZ, ASB, BNZ, Kiwibank, Westpac are all now predicting the central bank will cut by 50bp at both meetings, taking the OCR down a full percentage point to 4.25% before the end of the year as its confidence over falling inflation grows.

Debt pricing on financial markets suggests that is also the expectation of financial traders, such as hedge funds.

Stats NZ won’t update its quarterly estimate of inflation until a week on Wednesday, when it is widely expected to report annual inflation has dropped to below 2.5%.

But ANZ said the Reserve Bank had “fairly clearly pivoted” to being more concerned that future economic growth would come in lower than expected.

Even a 50bp drop in the OCR to 4.75% would still see the “real” interest rate — subtracting for inflation — hit a peak of 2.45%, based on the Reserve Bank’s forecasts.

BNZ research head Stephen Toplis said the inflation-adjusted rate was incredibly important and meant monetary conditions were, in effect, tightening.

That was one of the reasons BNZ had led the switch to forecasting 50bp rate cuts, he said.

“It wasn't that long ago inflation was 7% and it's now going to be roughly 2%, and we haven't had a 500 basis point movement in the OCR.”.

The Motor Industry Association reported a “notable” 12.8% rise in new vehicle registrations in September, describing that as a “promising indication of market stabilisation”.

But Retail NZ chief executive Caroline Young voiced concern on Thursday that falling nominal interest rates had not had the impact its members had been hoping for to date.

Card spending figures in September indicated retail spending outside of the hospitality sector was down 3.4% on a year ago, she said.

“We had been hoping that the recent cuts in the OCR and tax breaks in August would provide some impetus for consumers to get back to the stores.”

But retailers were reporting “some pretty tough trading numbers”, she said.

Infometrics is one the minority of forecasters still predicting a smaller, 25bp cut on Wednesday and in November.

Principal economist Brad Olsen said the Reserve Bank made clear in its August monetary policy statement that future decisions would be driven by new data, and GDP and business confidence figures released since would not appear to imply a bigger cut.

Two 50bp cuts would also raise the question of whether the central bank was admitting it had made a mistake by keeping rates too high for too long, Olsen said.

“It sort of does imply it.”

People should contain their expectations of the impact larger cuts could have, given it would take “six to nine months — minimum — for these sorts of things to really come through into the system”, he said.

“More importantly, there will be a lot of households saying ‘I'm looking forward to spending more money when my mortgage rate comes down, but ‘I've got to make it to the re-fix point and in that six to nine months there’s still a risk I’ll lose my job’.”

Toplis echoed that sentiment, saying the lagged effect of interest-rate changes was too often downplayed.

“100 basis points of cuts over the next two meetings would still leave monetary conditions tighter than neutral, so it still means that they are a headwind to the economy.”

Unemployment tended to peak about 12 months after interest rates turned and the economy “hit the bottom”, he said.

“So unemployment is going to keep going up for another six to nine months and that's a drag on the economy.

“The other thing that tends to happen is that you get considerable business failures in the first stages of an upturn. That's because the well-managed companies come out of hibernation and squeeze the others.”

In a dig at the value of the Reserve Bank’s past guidance, ANZ chief economist Sharon Zollner said the “number one” reason to think its monetary policy committee might still stick to a 25bp cut was because that’s what it had laid out in August.

“The recent data hasn’t provided much in the way of downside surprises. However, we freely acknowledge that kind of reasoning has provided bad steers of late,” she said.

“If the committee thinks the best move is to cut 50bp, it’s clear they will not feel constrained in the slightest by what they’ve said in the past.”