Economists at ASB now believe the Reserve Bank of New Zealand will begin to cut interest rates in November, as the risk of damaging the economy and employment grows.
Nick Tuffley, the retail bank’s chief economist, said they had changed their Official Cash Rate forecast after seeing signs of a sharper slowdown in the economy.
Previously, ASB had been expecting the OCR to be held at 5.5% until February next year. The RBNZ itself has projected holding rates until August 2025, while markets are betting on this October or November for the start of cuts.
The RBNZ's next OCR decision is on Wednesday, July 10. It is expected to leave the OCR unchanged.
Tuffley said households were starting to buckle under higher interest rates and inflation indicators were softening quickly.
This may change the balance of risks for the RBNZ, who have previously been thinking monetary policy should not be loosened until inflation was dead and buried.
“Now the biggest risk of regret is in our view rapidly tilting to the risk of holding monetary policy too tight for too long, unnecessarily damaging the economy and people’s employment prospects,” he said in a note on Thursday.
The central bank should be ready to cut rates after seeing current trends confirmed in third-quarter inflation data and labour market statistics to be released in October and November.
Many economists were surprised by the weakness in NZIER’s quarterly business survey which showed 25% of firms had laid off staff and many were struggling with profitability.
Activity indicators suggested gross domestic product would decline for another quarter and that unemployment forecasts may be underestimating the actual rise in joblessness.
ASB put its OCR call under review immediately after the survey was released and ANZ, which still expects a February cut, said the case for a November cut was building.
Tuffley said a noticeable increase in unemployment, slower wage growth, and uncertainty about employment prospects was enough to stop households from spending.
“Consequently, we anticipate that consumer price pressures will abate noticeably over the next year. Consumers will keep a tight grip on their wallets and have increasingly less tolerance for paying ever-higher prices for goods and services,” he said.
This will force businesses to absorb input costs and cut any unnecessary expenses, as it will become too difficult to pass on any additional costs to consumers.
“We expect inflation to be lower over the next 12 months than the RBNZ forecast just back in May … giving it much greater confidence it can cut the OCR sooner rather than later”.
But the RBNZ's OCR meeting next week may be too early to signal a change in policy as the central bank won’t have seen any hard data to back up the indicators and forecasts.
RBNZ will release full monetary policy statements in August and November, before going on a three month hiatus until February.
Tuffley said monetary policy had been “leaning hard against inflation for over two and a half years now” but inflation had consistently been stronger than expected.
“Too many times, the RBNZ has been surprised by how high inflation has remained—and been in good company—but our assessment is that the dynamic is changing quickly this year”.
21 Comments
upside = downside for some
BNZ trims some popular term deposit offers, but its 6.15% special remains | interest.co.nz
And if Chris Bishop has managed to reduce the price of a building block of land from $500,000 to $50,000 - as it looks like he's started to do - then maybe, just maybe that can happen. (i.e.; reduce the price of property and see the need to channel so much into that one area of our economy, fall - disinflationary, in other words, and let a falling cost of servicing the existing mortgage Debt cushion those who got 'caught at the top'; not forcing them to sell)
No one has an issue with the price of Debt being reduced for Productive Enterprise. It's the Speculative stuff that sees the OCR where it is. Get rid of that component of our economy and let's see where it settles.
To paraphrase a famous All Black - I seem to be living in an economy of two halves.
On a personal level I see tightening belts from wage earning friends and family, calculators on display at the supermarket and minimal big ticket purchases.
On a business level as a farmer our costs are spiralling ever higher;
Transport companies adding 10% fuel surcharges to their monthly statements (supposedly temporary) regardless of diesel price.
Service businesses adding charges such as 'rag fees', 'courier fees'. 'misc', and now 'environmental fees'..
And EVERYONE adding $5 admin fees wherever they can.
There has been no sign of these additional costs/charges slowing down, so regardless of how keen we are personally for interest rates to reduce - in my world costs are still climbing so why would the Reserve Bank back off yet?
Yes, I see the same pattern. Businesses are passing higher costs onto each other and households. And, some of the methods are pretty underhand (junk fees). The cost of debt is of course a major input cost for businesses, so maybe the cost pressures that are driving prices would ease if RBNZ reduced rates?
27 November 2024 Monetary Policy Statement media conference and live-stream
US election is on the 5th and the FED decision is on the 7th
MPS has a full release and a press conference as does Feb 25.
I also think they will probably cut in Nov, by then things will be dire, a cut may help open wallets for xmas, but i doubt it.
anyone thinking pooperty will get a fifth wind is deluded.
I am thoroughly sick of banks forecasting. Like the weather person they are just doing a mix of speculating and jawboning and attempted market manipulation to suit their employers agenda. The titles should reflect the vested interest in their proposed outcome not build a theme that suits their narrative.
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