Reserve Bank cuts official cash rate by 0.5%, says inflation back in band

Wednesday, 9 October 2024

Finance Minister Nicola Willis talks to media after OCR cut

The Reserve Bank has cut the official cash rate by 50 basis points to the new rate of 4.75%, saying it believes inflation has dropped back into its target band.

Stats NZ is not due to update its quarterly inflation figures until next week, but the Reserve Bank said it had assessed annual inflation was now within its 1% to 3% target range and “converging on the 2% midpoint”.

Most economists are tipping Stats NZ will report next week the annual inflation rate fell to a little under 2.5% in the September quarter.

The Reserve Bank said the economy now had “excess capacity”, with economic activity subdued, business investment and consumer spending weak, employment conditions continuing to soften and low productivity growth constraining activity.

All major banks forecast the 50bp cut and are predicting a further 50bp cut when the Reserve Bank releases its final monetary policy statement for the year on November 27, which would take the OCR down to 4.25%.

Banks had been jostling for a marketing advantage by pre-empting the Reserve Bank’s call.

Confirmation of the 50bp cut today has cemented that expectation, though the Reserve Bank reiterated future changes to the OCR “would depend on its evolving assessment of the economy”.

ASB cut its fixed-term mortgage rates by between 0.1 and 0.16% shortly before the announcement, in anticipation of a rate cut.

Kiwibank, which had been bullish on the need for a steep cut in the OCR, announced yesterday that it would cut its floating mortgage rate by 50 basis points to 7.75% later this month.

Westpac cut its floating rates by 0.5% and its fixed rate mortgages 0.1% in the wake of the monetary review.

Finance Minister Nicola Willis said the cut in the OCR was “welcome news for families and businesses”.

“It’s early days and there is still more work to do, but our careful and deliberate plan to rebuild the economy is working,” she said.

The Reserve Bank highlighted subdued economic activity, but Finance Minister Nicola Willis said the Government’s plan to rebuild the economy was working.

“Like businesses, we are confident that brighter days are ahead.”

The Reserve Bank said borrowers’ current preference for shorter-term mortgage rates would increase the speed at which changes in the OCR fed through into households’ finances over the coming months.

CoreLogic chief property economist Kelvin Davidson noted ahead of the Reserve Bank review that the proportion of new mortgages being taken out on terms of one year or less had jumped from only 36% in December to 68% in August.

ASB chief economist Nick Tuffley described the Reserve Bank’s statement as short and said it gave few clues as to what its next step might be.

But ASB continued to expect another 50bp cut in November, with further moves next year “even more conditional on the state of the economy”.

Capital Economics economist Abhijit Surya noted that the Reserve Bank’s monetary policy committee revealed it did discuss the option of a smaller 25bp rate cut this time around.

“A 50bp cut wasn’t a done deal from the start,” he said.

The Reserve Bank says economic activity is subdued, business investment and consumer spending is weak, and employment conditions are continuing to soften.

But he expected the bank would dish up additional 50bp cuts at its next two meetings next month and in February.

“Looking further ahead, we expect the Reserve Bank to cut its OCR to a trough of 2.25% by the end of next year,” Surya said — acknowledging that was “markedly below” the consensus among analysts that it would end next year at 3%.

ANZ chief economist Sharon Zollner said the record of the monetary policy committee’s meeting promised nothing in terms of future moves.

But she said its tone “leaned towards the dovish side, insofar as confidence about the inflation outlook has clearly grown”.

“We still expect a 50bp cut in November at this stage, as does the market.

“Whether the market starts to contemplate a lesser 25bp cut or a larger 75bp cut will depend on incoming data, with the focus very much on September quarter inflation data next week.”

Infometrics principal economist Brad Olsen said it believed there was potential for a 75bp cut next month, given there would then be a gap of almost three months before its next monetary policy review.

The New Zealand dollar fell by about a quarter of a US cent to just over US$0.61 in the wake of the rate cut, confirming traders viewed the review as dovish overall.

Although rate cuts should stimulate the economy relative to no cuts at all, BNZ research head Stephen Toplis has noted the “real” or inflation-adjusted OCR has so far been rising as inflation falls at a faster pace than the OCR comes down.

That and rising unemployment has led him and others to temper expectations about the impact of current rate cuts on the economy.

The Reserve Bank also observed in its commentary today that “financial conditions remain restrictive and credit demand remains subdued”.

Retail NZ chief executive Caroline Young voiced disappointment last week that falling nominal interest rates and tax cuts had not so far had the impact its members had been hoping for.