The drop in the annual inflation rate to 3.3% sees economists adopt a near-consensus view that the Reserve Bank will begin interest rate cuts in November. But an earlier start is seen as possible

Economists are now lining up strongly in favour of the Reserve Bank (RBNZ) beginning to cut the Official Cash Rate (OCR) in November.

This follows Wednesday's announcement that annual inflation as measured by the Consumer's Price Index fell to 3.3% in the June quarter from 4.0% in March.

Two sets of major bank economists, those from Westpac and the team from ANZ - the country's largest bank - both moved from forecasting the first OCR cut in February of next year to November of this year. This put them into line with other economists also forecasting a November start, although ASB changed its call on Wednesday evening and now expects an October start.

Financial markets have been pricing in the chance of cuts as early as next month, and some economists still see that as a possibility. Others point to labour market figures for the June quarter due out on August 7, which, if showing a marked rise in unemployment, could prompt the RBNZ to start cutting in October.

In response to an inflation rate that got as high as 7.3% in June 2022 the RBNZ has hiked the OCR all the way up from 0.25% in 2021 to a current 5.50% in an effort to get inflation back into its targeted 1% to 3% range - with an explicit target of 2%.

The RBNZ has three more reviews of the OCR planned this year before a three-month summer break. The reviews are scheduled for August 14, October 9 and November 27.

In its most recent set of forecasts in the May 2024 Monetary Policy Statement (MPS), the RBNZ didn't forecast beginning OCR cuts till the second half of NEXT year. However, in its most recent OCR review just last week the RBNZ made some unexpectedly 'dovish' remarks that suggested it had changed its mind about when the first cuts might come. We won't see what its updated view is till it issues its next MPS in August.

ANZ chief economist Sharon Zollner pointed out in a note issued on Wednesday that there is "an enormously wide gulf between the RBNZ’s May MPS forecast of no cuts until August 2025, and both market economists’ evolving forecasts and particularly (spectacularly) current market pricing".

"But the RBNZ is not afraid to change its mind when the facts change."

Westpac chief economist Kelly Eckhold said the latest CPI result "seems to vindicate the RBNZ’s view that inflation will soon be below 3%, giving them room to dial back restriction".

"Additionally, we think the RBNZ will be revising down its near-term economic view. We see what now look like significant downside risks to our -0.2% Q2 GDP forecast given weak PMI  [Performance of Manufacturing Index] data."

Eckhold said recent labour market indicators suggest "upside risks to the unemployment rate".  

"It's plausible the RBNZ is considering upgrading its unemployment rate forecasts again after a year or so of reducing them."

The RBNZ's current forecast is that unemployment rose in the June quarter to 4.6% from 4.3% in March and it has forecast peak unemployment of 5.1% by next June. However, other economists are increasingly viewing the peak as likely being higher than that.

Kiwibank's economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado said forward-looking indicators point to further moderation in price growth.

Inflation is on track to return below 3% in the current (September) quarter, "and (importantly) on its way to 2% in 2025", they said.

"Along with a further loosening in the labour market, the RBNZ should be in a position to deliver a rate cut by Christmas. We are sticking with the first cut to come in November, for now. But prospects of an even earlier cut are rising. It all depends on the data."

They expect a move down in the OCR to 3.75% next year, and below 3% in 2026.

"If we’re right, there’s plenty of room for longer dated interest rates to fall. And fall they will."

BNZ senior economist Doug Steel said the BNZ economists were sticking with their "central view" that the first OCR cut will come in November this year, "although we wouldn’t rule out an earlier move. A cut as soon as August remains a possibility".

"Beyond the precise timing of the first cut, our bigger picture view remains that the OCR is headed materially lower over the coming year or two," Steel said.

ASB senior economist Mark Smith said all OCR decisions over the remainder of 2024 are now ‘live’, although more confirmation of slowing inflation will be needed to force the RBNZ’s hand.

"The underlying softening in the pricing side data and increasing spare capacity in the labour market heightens the risk of RBNZ cuts coming as soon as next month," he said.

"Risks are strongly skewed towards at least 50bps [basis points] of OCR cuts being delivered over 2024 (75bps could be on the cards if data undershoots expectations), with a 25bp cut in November increasingly looking to be the bare minimum of what the RBNZ will need to deliver before year end."

Later on Wednesday ASB changed its call to expecting an October cut after digesting the RBNZ’s own core inflation readings released at 3pm.

“The various core inflation measures – including in the RBNZ’s sectoral factor model – fell noticeably. These developments give us confidence that inflation pressures are falling fast enough that the RBNZ doesn’t need to wait for the release of the Q3 CPI data,” Smith said.

“Ahead of the October meeting, the RBNZ will have the benefit of a couple of months of Selected Price Indices, Q2 GDP (which is shaping up to be weak), the next NZIER Quarterly Survey of Business Opinion, and an early take on the extent to which consumer spending fares with the benefit of the impending tax cuts. Collectively we expect the run of data to switch the RBNZ’s risk of regret from that of easing too quickly (running the risk of inflation settling above 3%) to the regret from keeping monetary conditions too tight for too long and the associated economic costs this would bring.

“The outlook is very data dependent, with every meeting from now on conceivably ‘live’. If the economy/inflation pressures prove to be more resilient than we expect, the RBNZ may end up holding for longer. However, we stress that an August OCR cut cannot be ruled out if other key near-term data – particularly the August 7 labour data and various inflation expectations measures – are weak enough.”

John Carran, investment strategist and economist at Jarden Wealth considers the most likely timing for the OCR cut will be in November.

"However, if June quarter labour market statistics show a weaker outcome than the Reserve Bank expected in its May MPS, we would expect the first OCR cut in October, with at least 0.5% of cuts by the end of the year."