More economists are seeing a likelihood that the Reserve Bank will not start cutting the Official Cash Rate till 2025

The view that our interest rates will now be staying high for longer is gaining traction, with some economists now seeing the Reserve Bank not beginning to cut the Official Cash Rate till 2025.

It was not that long ago some economists were actually talking of the prospect of interest rate cuts this year. But stubborn inflation, with the annual rate still elevated at 6% as of the June quarter, low unemployment of just 3.6% as of the June quarter, and more recently much stronger than expected GDP figures, have all helped to change the expectation.

As per its most recent forecasts in August the RBNZ was suggesting that the OCR may start being cut in the second half of next year. But it is latest OCR review last week the central bank did make the comment that "...interest rates may need to remain at a restrictive level for a more sustained period of time..."

The OCR is currently at 5.50%, which is where it has been since May of this year having been raised rapidly from just 0.25% as of the start of October 2021 in response to rocketing inflation, which peaked at an annual rate of 7.3% in the June 2022 quarter.

Westpac chief economist Kelly Eckhold, in Westpac's Weekly Economic Commentary said he is not convinced enough has been done – "so in terms of inflation risks we think the OCR increase ball is still in play".

He still sees an increase in the OCR at the November Statement to 5.75% – contingent on a strong set of core inflation and labour market outcomes in the next few weeks.

The next set of inflation figures are out on October 17, while the next labour market figures are due on November 1.

"Further out though, we have made changes to our forward view."

He now doesn’t see an easing in 2024 – "we think this could come in early 2025 – and hence our forecasts for longer term rates are now higher".

Eckhold said since 2022 the RBNZ’s growth forecasts have been significantly revised up and unemployment rate forecasts revised down, while the RBNZ’s inflation forecasts have remained well anchored around the idea that inflation will return to its 1-3 % target range by end 2024.

The RBNZ’s assumptions might prove correct for example if the growth potential of the economy has increased significantly with population growth, or if another negative shock hits us and drives the economy and inflation down.

"However, we are concerned that inflation might persist and that the RBNZ’s interest rate strategy may not have been sufficiently adjusted to accommodate these factors. It may be that an OCR of 5.5% is insufficient to bring inflation down fast enough without risking a rise in inflation expectations, which could compound upward pressures on costs and wages. Households and businesses might not see much respite from the pressures they have been under for a while now in that scenario," Eckhold said.

"Either way, it looks like we should be prepared for interest rates that are either higher for longer or high for longer. The data will tell us which of those outcomes we see."

In ASB's preview of ahead of last week's OCR review its economists changed their earlier call that the RBNZ would start cutting the OCR next year - and pushed the timeframe out as far as 2025. Senior economist Mark Smith said in that preview: "We believe that the RBNZ will remain wary of further upside risks surfacing and err towards keeping monetary conditions tight for longer as insurance to ensure the eventual return of sub-3% inflation. As such, we now anticipate OCR cuts will kick in a little later than we had previously expected, with early 2025 looking more likely than August 2024."

In ASB's Economic Weekly released on Monday, ASB senior economist Kim Mundy said following the RBNZ's OCR review last week "our take is that there is still a high hurdle to move the OCR, in either direction, for quite some time".

"Following the Review, we’re sticking with our view the OCR remains at 5.5% until early 2025.

"If we are right, the OCR will stay at this level for almost two years. This would make it the longest time the RBNZ has ever left the OCR at the peak rate of a tightening cycle," Mundy said.

She said one thing that "didn’t get much airtime" in the RBNZ statement last week was fiscal policy.

"That’s an unsurprising decision given that the election was a little over a week away at the time of the statement. The RBNZ simply stated that the fiscal stance in the Pre-Election Economic and Fiscal Update was mildly more expansionary than Budget 2023. "A change in government can alter the outlook for parts of the economy somewhat, given parties’ different policies. But at this stage, neither a Blue nor a Red coalition result this weekend looks likely to bring about a contractionary fiscal stance.

"And again, this just reinforces our expectation that we’re going to be living with a high OCR for longer, regardless of the election result. "This has implications for borrowers and savers alike and, in our view, it will be prudent for borrowers to budget on interest rates hanging around current levels for some time to come." Mundy said it is "also worth pointing out: that New Zealand is not alone. Unexpected resilience in economic data abroad (particularly in the US) is also raising the risk that the Federal Open Market Committee leaves rates high for longer.

"For instance, US labour market data on Friday showed employment growth is holding up at much stronger than expected levels. Eyes will be glued on economic data both here and offshore moving forward as we look for undisputed evidence that restrictive monetary policy is having the desired effect on inflation.

"If that evidence doesn’t eventuate in time, then it may become a matter of even higher interest rates," Mundy said.