Reserve Bank cuts official cash rate by 0.5%

Wednesday, 27 November 2024

Reserve Bank governor Adrian Orr says its future forecasts are consistent with another 50bp cut in February.

The Reserve Bank has stuck to the script written for it by financial markets by cutting the official cash rate by the expected 50 basis points to 4.25%.

Its monetary policy statement takes the OCR down to the level it was last at during the holiday season two years ago, though then inflation was running far higher at 7.2%.

The bank said inflation expectations were close to target and if economic conditions evolved as projected, it expected to be able to lower the OCR further early next year.

Capital Economics economist Marcel Thieliant said the Reserve Bank didn’t provide a clear signal about the speed of future rate cuts, but it expected a further 50bp cut when it next reviewed the OCR in February.

The Reserve Bank has significantly revised down its forecasts for future economic growth.

ASB chief economist Nick Tuffley said it expected a 25bp cut in February but the central bank had “left the doors wide pen for its future moves”.

The New Zealand dollar initially rose almost half a US cent in the wake of the monetary policy statement, suggesting some traders might have been expecting more from the Reserve Bank.

But it lost some of those gains after Reserve Bank governor Adrian Orr clarified at a press conference that its future forecasts were consistent with another 50bp cut in February though “conditional on economic projections panning out”.

Wednesday’s rate cut comes in the wake of a warning from the Treasury that an economic recovery would come later than it had expected, but also amid concerns trade tariffs and a decline in the value of the New Zealand dollar could give some fresh legs to inflation.

The Reserve Bank forecast the economy would recover next year as lower interest rates encouraged investment and other spending.

But it said the jobs market was likely to remain weak until the middle of the year.

“For some, financial stress will take time to ease.”

Global economic growth would also remain subdued in the near term and “geopolitical conditions and policy uncertainty” could contribute to increased economic and inflation volatility over the medium term, it warned.

“Geopolitical risks and climate-related energy and food risks pose uncertainty over the medium term. There may be higher relative price volatility and more unpredictability in aggregate inflation.”

The bank made only minor tweaks to its August forecasts for the level of interest rates beyond the end of next year but significantly dialled down its forecasts of economic growth all the way out to the end of 2027.

It is now predicting the economy will grow only 2% in the year to March 2026 and 2.4% the following year.

In August it had been expecting the economy would grow 2.7% and 3.2% respectively over those annual periods.

The Reserve Bank said it had downgraded its estimate of the growth potential of the economy mainly because it thought immigration would be lower than previously forecast.

But it said weak expectations for productivity growth, which have become one of the biggest global economic worries, was another factor.

The “lack of productivity growth anywhere outside of the US” was a global concern, Orr said.

“It’s a real challenge for this country and the bulk of the OECD.”

Chief economist Paul Conway said it had reduced its productivity-growth forecasts over the medium term by “a couple of tenths of a percentage point, which is the main reason why we've got mildly slower GDP growth further out”.

Finance Minister Nicola Willis said the rate cut was 'welcome news for families and businesses'.

The ongoing cuts in the OCR would “mean more relief for Kiwis’ back pockets”, she said, describing that as good news for families and businesses.

Finance Minister Nicola Willis was quick to note the impact rate cuts have had on mortgage repayments.

“To give one example, a family with a $500,000 mortgage on a 25-year term could expect to be about $180 a fortnight better off than it was a few months ago, if its rate dropped from 7% to 5.75%,” she said.

“For businesses, lower rates mean lower borrowing costs and more money in the economy.”

Prime Minister Christopher Luxon also said the cut was positive news and would give families an “extra dose of confidence” heading into Christmas.

“This generation of political leadership has had to relearn the lessons of 35 years ago, which is, if you let government spending get out of control … then drive into domestic inflation, then drive up interest rates, then put the economy into recession for the last three years.

“That is the history of economics that we've had to relearn. And so we have been working our way rather assiduously through making sure we have daily practice around good financial management so that we can be a good partner to monetary policy to lower inflation and also, obviously, interest rates,” he said.