Any RBNZ talk of OCR hikes this week 'would be overkill'

Economy / news

Kiwibank economists say they would recommend cutting the Official Cash Rate in August

8th Jul 24, 1:45pm by David Hargreaves

Source: 123rf.com

Any talk by the Reserve Bank this week of increasing the Official Cash Rate would be "overkill", according to Kiwibank's economists.

The economists - chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado - say in their weekly First View publication that they were "taken aback by the power of the mighty hawk they [the RBNZ] unleashed" in their last review of the OCR in May when it was revealed the possibility of a rate hike had actually been discussed by the RBNZ's Monetary Policy Committee.

The RBNZ's latest OCR review is on Wednesday, July 10. And while the central bank is universally expected to leave the OCR unchanged at the 5.5% setting it has been on since May 2023, much interest will focus on what the RBNZ says about recent economic developments and whether there will be any hints about when the OCR may be moved - with most market expectations centering on the expectations of cuts.

The Kiwibank economists said they strongly disagreed at the time with the RBNZ's May sentiments.

"We didn’t see the need for the RBNZ to exert more pain onto households and businesses. The RBNZ simply needed more time.

"And now, well, we’ve only strengthened our conviction. Any talk of hikes now would be overkill. The [economic] data has clearly turned. Actually, it turned a very long time ago, at the end of 2022. And the economy is becoming weaker by the day," the economists said.

They say there are "still some hurdles to get through". Inflation needs to be brought back within the RBNZ’s 1%-3% target band - "a hard task that should be accomplished in the next few months".

But the economists think "the complete return to 2%" - which is the explicit target point for the RBNZ - is still a 2025 story.

"Aggressive tightening from the RBNZ has worked. And setting policy today is about influencing the economy over the next 18 months. So, the RBNZ’s sights should be set on the end of 2025, start of 2026. And with that in mind, rate cuts should be considered, not hikes.

"The weakness in the economy should quell domestic inflation pressures. And by our forecasts, we still see inflation falling back within the RBNZ’s 1-3% target band by the September quarter. That should open up the first rate cut in November."

The economists say they will be on the lookout for "a material softening" in the RBNZ’s forecasts and rhetoric when it releases its next Monetary Policy Statement in August.

"We would recommend a cut in August… but we’re more concerned about the health of many businesses and households. We shall keep up the good fight," the economists said.

The economists note that because there's no Monetary Policy Statement accompanying this week's OCR review there will be no updates to the RBNZ’s economic forecasts or OCR track forecast.

"The RBNZ should acknowledge the even deeper weakness in the economy. And they must refer to the collapse in business confidence [in NZIER's Quarterly Survey of Business Opinion] last week."

BNZ's Toplis - the economy is looking well and truly derailed

BNZ head of research Stephen Toplis says in BNZ's latest Markets Outlook publication that he expects the RBNZ this week to stick to its broad view that interest rates will need to stay elevated for longer to ensure it meets its inflation target.

"That said, it’s going to be hard for the RBNZ to avoid acknowledging that the economy is now looking well and truly derailed.

"Front of mind will be last week’s Quarterly Survey of Business Opinion which provided more evidence that the current recession will roll on for a while longer, the unemployment rate will rise rapidly and, most importantly, business intentions to raise prices are declining at pace," Toplis said.

"But it’s not just the QSBO that’s telling us this. The evidence from all quarters is now overwhelming.

"However, we reiterate that the RBNZ has made it abundantly clear inflation is its objective. It has also suggested it won’t feel comfortable letting go of the reins until such time that annual inflation is within its target band.

"Therefore, with the market now pricing a greater than even chance of a rate cut in October of this year, and the distinct possibility of an August cut, we think the Bank will be loathe to say anything at the upcoming MPR [OCR review] that might further fuel this reasoning. On this basis, don’t be surprised if the RBNZ tries to push back on the market’s current enthusiasm."

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23 Comments

by Retired-Poppy | 8th Jul 24, 2:56pm 1720407393

"Any talk of hikes this week would be overkill"

Ummmmm irrrr - Orr - NO PRESSURE

by Averageman | 8th Jul 24, 2:15pm 1720404945

Has inflation fueling debt speculation been killed...?

by Zwifter | 8th Jul 24, 2:26pm 1720405608

Cut in August is guaranteed.

by sgtshortcut | 8th Jul 24, 2:31pm 1720405881

Noooooo…but the ponzi…I hope so, but I hope they use DTI’s wisely as well

by Yvil | 8th Jul 24, 6:40pm 1720420838

Nothing is guaranteed, except the past.

by squeezed_uppermiddle | 9th Jul 24, 12:03pm 1720483389

I thought as much 6 months ago but no longer. RB tomorrow will drop the risk of hikes - real economy hurting etc. Aug they will acknowledge cpi result for Q2 tracking well… then maybe Oct or Nov drop. I think the bigger question is what’s the track when they do drop? Is the new “neutral” 5? 4? Pick it and get there promptly. They drip fed 25 bps changes on way up which meant the impact of the change was delayed and harder for them to see.

by Jonny.Foe | 8th Jul 24, 2:52pm 1720407144

Fair play to Kiwibank. I wonder in my more cynical moments whether the banks are providing advice on the basis of analysis of real world data or their employers' profits. The more we go into recession, the better the banks (and offshore investors) seem to be doing. Is that how it is supposed to work? Households, businesses and Govt go into ever largers debts to offshore banks and investors, and that's how we tame inflation? Seems a bit odd.

by Independent_Observer | 8th Jul 24, 3:07pm 1720408066

Yes and what happens if this really is a stagflationary recession as opposed to a deflationary recession that everyone assumes? So rising rates is the cure not the disease?

ie if we start dropping and inflation roars higher again, will we have bank economists demanding for higher rates to ease the pain of inflation consumers might experience in the economy? Or do we forever live our lives under the paradigm that falling interest rates are our saviour (but never the cause) to our problems because we primarily live our lives governed by recency and confirmation bias?

by Jonny.Foe | 8th Jul 24, 3:25pm 1720409152

I think the graph in my comment shows us where the real problem is - our economy is hopelessly out of balance. The cost of the stuff we import has gone up a lot and, as a result, our domestic sectors (private and govt) are going further and further into debt to finance our current account deficit and bank profits. Higher or increased interest rates in this scenario just add fuel to the fire - ever larger interest payments to offshore investors and banks, which increase our current account deficit (and so it goes on). Meanwhile our dominant uncompetitive domestic sectors just pass on the higher cost of some imports and the higher cost of debt, insurance, rates etc to their customers - dropping supply rather than prices to meet demand. Hence, the stagflation.

I have had this discussion with bank ecomomists and they just keep returning to the same narrow question... 'so, are you saying that we should tighten or loosen monetary policy?' Is that what our economic strategy thinking has been reduced to - wiggling rates up and down?

by bw | 8th Jul 24, 3:31pm 1720409511

Yes.

Wiggling rates is the symptom, not the Disease. A Disease we refuse to deal with. One born of the application of Debt. Fix that - which for decades we have chosen not to - and we fix most of the problems we have.

by Jonny.Foe | 8th Jul 24, 4:45pm 1720413932

Getting private debt down from 150% to 137% of GDP has been painful. How do we get it down to 40%?

by bdogg | 8th Jul 24, 6:19pm 1720419540

Pump our rookie GDP number up.

by Jonny.Foe | 8th Jul 24, 7:22pm 1720423359

Lol, the two are connected. Our GDP only increases when private debt goes up. The latter drives the former.

by Erant | 8th Jul 24, 3:36pm 1720409762

Banks use their economists and their announcements to communicate and coordinate their commercial business with other commercial banks. To do so subversively would be regarded as anticompetitive, but doing so in the open is apparently OK. Their is obviously a great advantage in moving together given that they collectively create more than 95% of the money in circulation.

by Mark L | 8th Jul 24, 5:00pm 1720414846

Barring the 'loose money' period of 2009 to 2022 that distorted the value of assets, the current setting doesn't seem high.

by Jonny.Foe | 8th Jul 24, 5:37pm 1720417022

The interest rate is only half of the equation. The other is private debt level.

If your country has low private debt, then a higher interest rate doesn't cause too much pain because the cost of servicing that debt is not too stifling. When your private debt is around 140% of GDP like NZ then a 5.5% interest rate (7.5% avg on loans) pulls around 10% of your GDP out of the economy and redistributes it to bank equity holders, savers and Govt (taxation). Your economy gets smothered by debt costs.

Here's a picture of interest payable on private debt as a % of GDP. As you can see, when the interest payable on private debt goes above about 8% of GDP, we go into recession quick sharp. Now look at the trend in private debt and interest rates (OCR). Basically, since 2009, our high private debt levels mean that we have to have interest rates lower than 3% to keep the economy moving. We're trapped.

by powerupkiwi | 8th Jul 24, 8:16pm 1720426588

If you’re going to do a job, do it right. +.25

by Zwifter | 8th Jul 24, 8:26pm 1720427166

Its going down 25bps in August and they will signal more cuts in 2025.

by stefanblaise | 8th Jul 24, 10:33pm 1720434815

Let these bankers eat Brioche.

by R.R | 8th Jul 24, 11:02pm 1720436529

Well is inflation dead? If not raise the rate…. Didn’t they change the mandate of the reserve bank to simply target inflation? As opposed to watching economic activity…. Aussie inflation is holding and creeping up btw.

by OldSkoolEconomics | 9th Jul 24, 9:10am 1720473054

Exactly that.

We overcooked our economy.. by dropping rates too far for too long and printing and handing out money. House prices rose and the equity made people feel even richer and they spent that too.

Businesses adjusted to the boom and now have an unsustainable demand for sales. Everyone seems to be hanging the there for 2025 expecting we can go str8 back to the boom spending levels.. we cant.

So now we have accept a massive downturn to the economy (for possibly as long as the boom lasted ) and accept massively reduced revenues and incomes.. and a lower standard of living. And rebuild our economy properly.

You can't sit and eat excess fast food for a year then take a magic pill and lose the weight to be back where u started. you gotta accept it will take a long period of dieting and exercise and change in most of how you live.

Rbnz needs to sort inflation using elavated rates. the parts of the economy that have excess debt and struggle without access to cheap credit and excess money in the system - will just need to work their way through it or bust.

by Zwifter | 9th Jul 24, 10:20am 1720477200

Nah, Trump is going to save the world in November, making New Zealand great again. The market can turn on a dime, people will be wracking up more debt in no time. Even people with millions have stopped spending, its a mental thing as soon as the sentiment changes its away we go again.

by bdogg | 9th Jul 24, 1:21pm 1720488109

Have you not heard of Ozempic? That’ll sort the gluttonous lifestyle out. There is always something that pops up to keep the can being kicked down the road, and the Rbnz are lacing up.