The Reserve Bank has indicated it may cut interest rates once more - but some economists believe there could be more than that

Economists are raising the possibility that the Reserve Bank may cut interest rates twice more before the end of this year - despite the RBNZ indicating the possibility of just one more cut in the next 12 months.

Some bank economists say the economy is slowing more rapidly than is openly acknowledged - "in our view".

Other bank economists have raised the spectre that the RBNZ may need to take further macro-prudential measures - such as the actions already seen against the housing market - as a direct result of the rate reduction.

The ANZ has been very much in the vanguard of - effectively pushing for - the RBNZ to cut rates. It predicted today's cut and is sticking with its pick that there will be a follow-up next month..

Chief economist Cameron Bagrie and senior economist Philip Borkin said the RBNZ’s current forecast implied half a percentage point of cuts all up, "but the door is certainly open to more".

"Beyond the immediate macro developments seen as justifying today’s action, the RBNZ importantly also acknowledged that there are still risks of weak price-setting behaviour becoming entrenched, and that this would require a further policy response. That’s a green light for the market to push for three cuts," they said.

"A July cut remains our base case given the risk profile we see for the upcoming economic data flow. The odds are also sitting around 50% for whether there is an additional cut beyond that before year end."

Bagrie and Borkin said the RBNZ's previous projected combination of monetary conditions ("TWI and a flat-lined OCR") was insufficient to get inflation back to 2% - the targeted mid-point of the RBNZ's official monetary policy target.

"The RBNZ simply felt it need to act. End of story."

Bagrie and Borkin said the RBNZ’s GDP forecasts over the June to December quarters (0.8% per quarter) "look high" given economic challenges that are beginning to mount.

"We are already detecting weaker signals for Q2 economic activity and to us, the risks look more skewed to a below-trend outcome. The market will continue to push for more than one cut from here. That said, the RBNZ’s non-tradable inflation estimates for Q2 and Q3 (0.3% q/q and 0.2% q/q respectively) look more realistic than the previous projections and are consistent with our Monthly Inflation Gauge.

"...The economy is slowing more rapidly than is openly acknowledged, in our view."

Strategy 'too cute'

Bagrie and Borkin said normally they would expect the RBNZ to follow one cut with another in very short order.

"But it is interesting to note that communication from the RBNZ suggests they are looking at being more tactical from meeting to meeting. As such, on the face of it a follow-up move in July looks a 50-50 proposition. That sort of strategy looks a little too cute to be advisable to us (witness the RBA’s experience of late)."

While the ANZ and about five other banking economic teams had picked a rate reduction, around eight had not.

The BNZ was one of those that didn't and its head of research Stephen Toplis was refreshingly candid in his assessment:

"Got that one wrong!"

He said the BNZ economists were "clearly surprised" that the RBNZ lowered its cash rate.

"We continue to believe there was no urgency to move and that the cut will exacerbate the excesses in the housing market. But, that said, we can also see the logic behind the Bank’s move.

'RBNZ was spooked'

"In short, it was spooked by the threat that the NZD would spike if it didn’t cut and was very conscious that the combination of falling dairy prices and rising oil prices was threatening to undermine economic activity. Moreover, the RBNZ has always intimated it would want to make its first move at the time of a Monetary Policy Statement and it may have thought that September was just a wait too long. And so it responded."

Toplis also saw the likelihood that there could now be as many as three rate cuts this year.

"From a financial markets’ perspective what is now important is what will happen next. In that regard, we believe that, having started the easing process, the RBNZ will have no option but to continue it. Accordingly, we now forecast the RBNZ to cut again in July and believe there is a 50/50 chance of yet another reduction in September."

Westpac was another bank that didn't pick the rate reduction.

"The Reserve Bank surprised much of the market, including us,by reducing the OCR by 25 basis points to 3.25% today," chief economist Dominick Stephens and senior economist Michael Gordon said.

They believe the decision by the RBNZ is risky.

"We feel the monetary policy situation is more finely balanced than the RBNZ’s assessment.

"New Zealand is torn between rampant house prices and strong domestic demand on one hand, and a weak export sector and low inflation on the other. The RBNZ has chosen to emphasise the latter and downplay the former. But today’s OCR cut does run the risk further stimulating the Auckland housing market."

'Not anticipated'

They said that since the OCR cut wasn’t fully anticipated by the market, wholesale interest rates had fallen, which in turn was likely to flow through to fixed-term mortgage rates.

"Today’s REINZ House Price Index showed that Auckland house prices have risen 25.6% in a year, and if that continues, domestic demand (and consequently domestic inflation) is sure to get a lift.

"The RBNZ has presumably decided that this is a risk worth running. Nor does the RBNZ really make a case that the risks around the housing market have been adequately addressed through other measures. For instance, the proposed restrictions on loan-to-value ratios for investor lending in Auckland are expected to reduce house price inflation by 2-4%. That is less than the gain made in the month of May alone, according to today’s REINZ House Price Index.

"There is every likelihood that we will see yet another tightening of macro-prudential policy, as a result of the lower OCR."

ASB had predicted rate cuts - but later in the year.

'Merely a matter of when'

"The need to cut the OCR has become increasingly evident over the past month and in our view was merely a matter of when," ASB economists said.

"We had expected the first cut would be a little later this year but the RBNZ has made a more decisive change in its view – and all credit to the Bank for doing so.

"The inflation environment has proved to be very different to what the RBNZ envisaged when it started lifting the OCR last year; the RBNZ is now responding to that. Dairy price weakness and strong growth in labour supply have been important drivers of the RBNZ’s shift in stance."

The ASB economists are forecasting a further quarter of a percentage point cut in rates.

"On balance we lean to the next cut occurring in September," they said.

"But a cut in July is a very real possibility. We lean to September because of the potential for the upcoming CPI to be stronger than the RBNZ has forecast, the relatively measured tone of the Statement, and a medium-term inflation outlook that looks far more comfortable against the stated objective of aiming for a 2% rate.

"On the NZD, the RBNZ is clear that there is scope for further falls – and that they are justified. We wouldn’t see further near-term NZD weakness as an impediment to delivering a second OCR cut."