Economists are eyeing earlier interest rate cuts after ‘dire’ business survey shows inflation has been ‘beaten’

A survey of businesses released on Tuesday morning was virtually screaming for the Reserve Bank of New Zealand to cut interest rates later this year, some economists say. 

Stephen Toplis, BNZ head of research, published a note headlined ‘QSBO says inflation beaten’ and called for the central bank to cut rates much sooner than projected. 

“In our humble opinion, today’s NZIER Quarterly Survey of Business Opinion [QSBO] screams: cut rates sooner rather than later,” he said. 

In May, the RBNZ projected the Official Cash Rate would be held at 5.50% until August 2025 and the central bank's Monetary Policy Committee even considered the possibility of another hike. 

The QSBO showed only a net 23% of businesses intended to lift their prices next quarter, down from 33% last quarter and well below the long-run average of 34%. 

“It would be a rarity for headline inflation to be outside the target band with this level of intention,” Toplis said. Plus, pricing intentions could continue to fall “viciously”.

Employment numbers in the survey were also stark. A net 25% said they had laid off staff in the June quarter and a net 10% said they will cut staff in the next few months.

These numbers are the weakest since the recession in 2007 and 2009, excluding the quarters which were influenced by the temporary covid shocks.

Toplis said the survey had encouraged the market’s view that the RBNZ will be forced to loosen monetary policy much sooner than it has projected. 

Bond traders have priced in a roughly 50% chance of the Official Cash rate being cut to 5.25% in October and are completely convinced it will have happened by November.

That November meeting would be the last scheduled opportunity for RBNZ’s Monetary Policy Committee to cut the Official Cash Rate before going on a three month summer break. 

Many economists were splitting the difference between the market and RBNZ with forecasts for a cut in February 2025 — but the QSBO results have caused some to reconsider this view.

‘Live’ possibility

Mark Smith, a senior economist at ASB, said their interest rate forecast was “under review” after NZIER’s survey showed the economy was “mired in a protracted slowdown”.  

Some firms were unable to pass on their increased costs and would have to let go of more staff to remain profitable. Unemployment could rise above 5% before the end of the year and consumer demand could cool even further.

“The RBNZ would have been encouraged that pricing pressures and capacity frictions are cooling, with the return to sub 3% inflation looking to be increasingly more clear-cut,” he said. 

“We do not expect the RBNZ to declare victory prematurely until it is sure that inflation is on track to settle in the 1%-to-3% inflation target range, but the case for 2024 rate cuts is building”. 

Miles Workman, an economist at ANZ, said an earlier OCR cut was possible if the next consumer price index data was “well behaved” and there was another quarterly decline in gross domestic product.

“We are forecasting the first cut to come in February, but if [those things happen] November will certainly be a ‘live’ meeting. The risks are certainly starting to tilt that way,” he said.

Workman said RBNZ would want to see trends confirmed in “hard data” before changing its policy and wouldn’t do so based on surveys and anecdotes. 

“Forward-looking activity indicators have deteriorated significantly in recent months, suggesting the economy may not be far from a tipping point in the cycle where the disinflation process starts to accelerate,” he said in a note.

Kiwibank’s economics team said this backed up their existing forecast for a November rate cut, and warned that late 2025 would be “12-to-24 months” too late.

“The inflation dragon has been slain, we’re just waiting for it to hit the turf,” they said.