Lower interest rates may be on the horizon after the Reserve Bank said it was paying attention to repeated warnings the economy could be faltering faster than it had planned.
Just two months ago, RBNZ’s Monetary Policy Committee suggested the Official Cash Rate should be held at 5.50% until August next year and could even go up another 25 basis points.
This hawkish view seems to have evaporated, with the committee instead discussing the risk that policy settings were weighing on demand too heavily during its July meeting.
The record of meeting said there was now proof the economy was operating below its potential capacity, and recent surveys and data showed business activity was declining.
“Members discussed the risk that this may indicate that tight monetary policy is feeding through to domestic demand more strongly than expected,” it said.
Jason Wong, a senior market strategist at BNZ, said these comments had thrown open the door for rate cuts.
“Gone was the May language of discussion of a rate hike and the MPC looks like it has taken on board the recent flow of woeful economic activity data,” he said.
In recent weeks, high frequency data have been flashing warning lights last seen during the Global Financial Crisis in 2007-08 and the short-lived pandemic crash in 2020.
This prompted some economists to rethink their OCR forecasts and may have caused the RBNZ to do the same.
Abhijit Surya, an analyst at Capital Economics, said the central bank had suddenly dropped its usual line that interest rates needed to remain restrictive for “a sustained period”.
Instead, the RBNZ’s new line is: “the extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures”.
This overly poetic turn-of-phrase simply means that rates will be cut as inflation decreases.
Spring clean
While still unlikely, this raises the possibility that interest rates could be cut at the August and October meetings. Markets are now priced for the OCR to be below 5% in November.
That price could indicate regular size cuts starting in August, or RBNZ using a 50 basis point cut in October or November to kick off the easing cycle with a bang.
Wong said it was more likely that cuts would begin in November, as the RBNZ preferred to make big changes alongside a full Monetary Policy Statement and August might be too soon.
UBS economist Nic Guesnon said he hadn’t expected the Reserve Bank to change its tone so soon and there was now a “material” chance of a rate cut in August.
But Surya agreed the Reserve Bank would want to wait until hard data had confirmed what economists were currently reading in the tea leaves.
“However, with the Q3 CPI data likely to show inflation back in the target range, it seems like a policy pivot in November would be a no-brainer for the Bank,” he said.
And once monetary policy begins to be loosened, it could unwind fast. Capital Economics expects the OCR to settle at 3.5% by the end of 2025.
Flimsy flip-flop
Among the chorus of voices heralding imminent rate cuts, some economists were still sounding a note of caution.
Sharon Zollner, the chief economist at ANZ, said the market reaction was understandable as the record of meeting “read like a mini-pivot”.
“Although we think it’s a stretch to call this a full blown pivot given the Committee’s assessment of balanced risks around inflation and their caution around the impact of tax cuts,” she said.
It was becoming more likely that the easing cycle would begin in November but Zollner was sticking with her February forecast for now.
Infometrics chief forecaster, Gareth Kiernan also said he would hold on to his forecast for February until the central bank gave some more solid guidance.
It was only six weeks ago the committee was talking about hiking interest rates, he said.
“The Reserve Bank’s habit of flip-flopping and changing the tone of its message from one statement to the next means we remain cautious about the timing of the first cut to the OCR.”
“It’s hard not to get frustrated trying to divine how the Committee can pivot its view so substantially every six weeks”.
All the recent monetary policy decisions have been unanimous and the specific words used in the record of meeting are also signed off by all members of the committee.
Consumer Price Index data next week and labour market statistics in early August will help confirm or contradict the recent high frequency data.
Kiernan said economic data may need to be materially weaker than the central bank has already forecast to justify starting its easing cycle 10 months earlier than planned.
58 Comments
The first sign will be the big four Australian owned banks shaving back their TD rates, especially long terms. In fact I would predict that will first occur before the end of this month and followed by more “adjustments” not long after. On the other hand though, mortgage rates will not be similarly addressed simply because they don’t have to be.
It was only six weeks ago the committee was talking about hiking interest rates, he said.
“The Reserve Bank’s habit of flip-flopping and changing the tone of its message from one statement to the next means we remain cautious about the timing of the first cut to the OCR.”
pretty clear Gareth Kiernan is not looking for an RBNZ job any time soon.....
Chris - that is where you do not understand FX... its a pair, who knows Kamala Harris may be the democrat star next week... could effect the pair....
right now, at this exact moment people on the bid/offer of kiwi somewhat agree on its value but in 10 mins time opinions may change...
its all about news and reviewing your opinions, probably the best game in the world, its like sport betting but the game goes on forever.
people are happy to take out 30-50 points, machines like 5...
some just like the mid/offer spread
its a crazy game
Sharon Zollner, the chief economist at ANZ, said the market reaction was understandable as the record of meeting “read like a mini-pivot”.
“Although we think it’s a stretch to call this a full blown pivot given the Committee’s assessment of balanced risks around inflation and their caution around the impact of tax cuts,” she said.
Talk (jaw boning) is cheap. The OCR was unchanged.
Jaw boning is cheap. It certainly is. But from those same jaws comes the good ol’ bob each way. That is you (bank customers) pay a bob and I (the bank) take a bob. This is precisely the problem. The RBNZ makes sort of smoke signals in the hills, and the banks then extract all the profits they can, margins and all, by exploiting the vagueness of said signals.If the RBNZ is seriously considering an OCR cut then just shut up about it and then do it when they see fit. All the prevarication, equivocation, contradiction, you name it, just feeds opportunity for profiteering, to the banks.
I disagree, expectations matter. The RBNZ announcements can affect behaviour without actually changing OCR settings.
However, it does rely on RBNZ credibility. Sticking to their line of no cuts until late 2025, certainly didn’t help this. It’s been clear for sometime that the economy would have long dice fallen apart if they stuck to that plan.
I’d like to see their announcements be more realistic, rather than hyperbole to fight against market sentiment. It’s making them less effective and providing more fodder for Orr memes.
https://www.newshub.co.nz/home/politics/2022/11/reserve-bank-s-warning-…
Reserve Bank's warning to duct-tape wallets as Christmas faces cancellation
"We're hearing that the plan is to effectively sacrifice lower-income New Zealanders at the altar of economic orthodoxy." Credits: Video - Newshub; Image - Getty Images.
Duct-tape up your wallets for Christmas, reign in your spending and don't push for a pay rise.
That's the message from the Reserve Bank Governor to try to get the cost of living under control.
Adrian Orr has also admitted he's engineering a recession to reign in inflation which he accepts is partly his fault.
'Twas the month before Christmas and all through the country, Kiwis were planning to tighten their belts.
"I'm not very good with figures but I don't go overboard," said one person.
"You shouldn't just spend money to buy something stupid," said another.
"I think it's more important just to be present at Christmas time," added a third.
While shopkeepers are doing their best to entice us in the door, the Reserve Bank Governor is warning us to resist temptation.
"Spending has to slow," Orr said.
After ratcheting up the official cash rate a brutal 75 basis points on Wednesday, Orr on Thursday morning explained himself to politicians.
"The slowdown in growth that we need means that we will have negative GDP for a while which is a recession."
It's a recession of his own making.
Green Party MP Chlöe Swarbrick asked the Governor if commentary suggesting the Reserve Bank is "deliberating engineering a recession" to tame inflation is correct.
"I think that is correct," he said. "We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth."
Later, Swarbrick told reporters: "We're hearing that the plan is to effectively sacrifice lower-income New Zealanders at the altar of economic orthodoxy."
National finance spokesperson Nicola Willis asked Orr if it was due to monetary policy being too stimulatory for too long that New Zealanders are now having to deal with higher inflation and interest rates.
"Yes," replied Orr.
Willis afterwards said she was "pleased" to hear that admission from Orr.
"I repeat my call for an independent inquiry into how we got here," she said.
There's one other thing Orr wants New Zealanders to know though.
"We are sorry that New Zealanders have been buffeted by these economic shocks," he said.
Sorry New Zealand, and it's only going to get worse.
I would 200% support a vigorous inquiry into why the RBNZ thought dropping the OCR to absurdly low levels - and holding it there, together with other stimulus, for far too long - was a good idea.
They really haven't explained themselves thus far.
And if we are not to believe they are a pack of cowboys ... They must explain themselves and publish their models.
That, and deliberately pumping money into housing long after it was apparent that (a) there was no emergency, and (b) it was causing an obscene housing bubble. The Reserve Bank of Australia recognised the folly of doing this, and stopped their emergency bank funding in June 2021 - while the RBNZ carried on for another 18 months!
I'm sure all the failing businesses, recently unemployed staff, FHB's who are in negative equity, and the middle income earners who's wallets have been hammered really appreciate this apology, as it undoes all the weekly damage they see when swiping the card and watching their earnings go up in smoke to the banks.
the RBNZ only have ONE mandate now this government removed all other targets and that is to keep inflation between 1-3 % using the OCR
Our inflation mandate
To keep inflation low and stable, the Government has set us an inflation target of keeping inflation between 1% and 3% over the medium term, with a focus on keeping future inflation near the 2% midpoint.
Low inflation is the best contribution we can make to boosting the economic wellbeing and prosperity for all New Zealanders.
If prices are stable, households and businesses can better plan their spending and investment. Low and stable inflation helps the economy to grow.
With the brakes on so hard, falling under 2% or even 1% seems possible. Unless you are a monopoly you’re going to find it very difficult to raise prices right now.
Once that 1.8% quarter drops out in September, inflation will be close to 2% but the RBNZ will still have their foot firmly on the brake.
Good grief man. Imports make up a third of our consumption. The price of our imports went up by 25% - including lots of stuff that directly drives domestic prices (eg diesel).
So prices in NZ went up around a third of 25%.
All of this 'RBNZ just need to control inflation with their mighty OCR lever' is soooo stupid. It's not like RBNZ could halve wages is it? Or reduce the cost of local govt rates or insurance?
"It's not like RBNZ could halve wages is it?"
But they can reduce disposable incomes. Which amounts to the same thing.
Does anyone else feel good about they way the RBNZ does it?
I mean ... making savers richer - most of them are overseas btw - is such a good idea, right?
I've mixed opinions on this. Given human behaviour will always resist buckling down spending when times are good, how else do we convince the public to spend less to tame inflation when they are getting pay increases and enjoying a greater standard of living for that time? Would you spend less than before if you got a new job with a large salary increase because the government said so? Given the scale of impact needed to tame inflation, I'm interested to hear different pathways for this. Naturally as JFoe has suggested, preventing price shocks becoming contagious in the economy is paramount, but prevention can't always happen, then where to?
Yeah so why the hell did they leave rates so low so long when clearly this was inflationary along with Robertson's monetary lollie scramble - anyone could have seen that inflation was heading for 5%+ but they DIDN'T DO ANYTHING. So saying they have one mandate is all well and good but it seems they forgot about that only a few years ago.
Also easily forgotten apparently, that application and retention of that rate impelled probably the largest surge into property investment that NZ has ever witnessed along with escalating and exacerbating the plight of younger generations endeavouring to purchase their own home.
They have already left it too late to cut rates.
There is a significant lag between when rates are cut and when the economy starts feeling any real relief from those cuts. By the time RBNZ realises what is going on, the economy is going to be in terrible shape. RBNZ’s incompetence is going to be undeniable and on full display in 6 months time. They overreacted with a flood of cheap money during covid, and have now overreacted to that mistake by smothering the economy within an inch of its life. There was a reason so many experts were outraged when Orr was reappointed.
NO - Powell has indicated a rate cut is pending even though he acknowledged inflation was not beaten
"Powell, over his two days of commentary before the Senate and House committees that oversee the central bank, indicated the Fed was edging closer to a rate cut decision, while also insisting that he was not yet ready to declare that inflation had been beaten"
Source: https://www.reuters.com/markets/us/feds-powell-says-balance-sheet-drawd….
Powell also acknowledged the risk of leaving the rate too high for too long
"Leaving monetary policy too tight for too long, "could unduly weaken economic activity and employment," Powell said,
Source: https://www.reuters.com/markets/us/feds-powell-before-congress-could-sh…
Unlike our Muppett who has destroyed the NZ economy out of pig ignorance and malice. Now it is totally trashed he will finally cut 6 months too late and make massive profit on the $20 Billion of foreign reserves he's amassed to "protect the exchange rate".
What an awful legacy, his name will be despised forever!
"Powell said that the so-called neutral level of interest rates, which neither stimulates nor restricts economic activity, is affected by slow-moving forces that aren’t always observable in real-time. The Fed has held the federal funds rate at a range of 5.25% to 5.5% since July 2023, which Powell sees as above the U.S. neutral rate.
“It feels like policy is restrictive, but not intensely restrictive,” Powell said. “So that suggests that the neutral rate of interest, at least as of now, has risen somewhat.”
So I don't think he is getting out the scissors anytime soon.
Harder & Higher for Longer baby!
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