Westpac economists have changed their view and now see the Reserve Bank (RBNZ) cutting the Official Cash Rate (OCR) in both October and November.
In addition the economists think GDP could have sunk by as much as 0.6% in the June quarter 2024 and they reckon that unemployment is set to go higher and faster than they earlier though, reaching 5.6% next year (it was 4.3% as of the March quarter 2024).
In a brief preview of their new forthcoming economic forecasts, Westpac's chief economist Kelly Eckhold says recent data suggest that economic activity dipped "more sharply than previously expected" in the June quarter of 2024.
"This is evident in a raft of higher frequency indicators such as business and consumer confidence and the Purchasing Manager Indices. We think that GDP fell 0.6% in the June quarter. Given this weak performance, it looks likely that growth will continue to be subdued in the second half of 2024," Eckhold says.
GDP grew by 0.2% in the March quarter. But this followed on from economic contractions in four out of the previous five quarters. In terms of GDP per capita - remembering that the country has had a big recent inflow of migrants - this has contracted by more in recent times than during the aftermath of the Global Financial Crisis.
If the Westpac economists are correct with their pick, the 0.6% contraction in the June quarter would be the biggest we've seen in the current downturn, with the previous biggest being 0.5% in the December 2022 quarter.
Eckhold says that the Westpac economists are now seeing "definitive signs" that the labour market is adjusting more quickly to the "weak growth profile" that has been in place for some time.
"We now expect the unemployment rate to move more quickly to a higher peak of 5.6% in 2025. Recent data on filled jobs show this weaker trend has been firmly in place since early April and picked up in May and June."
Labour market data, including the June quarter unemployment figures, are being released on Wednesday (August 7), with the RBNZ having forecast a rise from 4.3% to 4.6%, while most major bank economists (including those at Westpac) expect 4.7%.
Eckhold says these weaker growth and labour market trends and expectations will give the RBNZ "comfort" that the path of inflation towards 2% is more assured than had been the case earlier in 2024.
Hence the expectation for an earlier cut to the OCR, which has been on 5.5% since May 2024. The Westpac economists had earlier picked a November start date for cuts, but now think the RBNZ will cut in both October and November.
The financial markets are certainly also expecting cuts to the OCR sooner rather than later. Markets have currently priced in a nearly 75% chance of a cut as soon as at the next OCR review on August 14, while a cut in October is more than fully priced in and more than three 25-basis-point cuts are priced in by November.
The RBNZ is charged with getting inflation into a 1% to 3% range, with an explicit target of 2%. Inflation has been outside the target range for three years. However, as at the June quarter, the annual rate of inflation as measured by the Consumers Price Index (CPI) was 3.3% down from 4.0% in the March quarter.
Eckhold says that combined with recent softer-than- expected headline inflation outcomes – which show that the 1-3% target range will likely finally be reached in the September quarter – "the RBNZ will have confidence to begin tempering the degree of [OCR] restriction".
"We don’t see the RBNZ panicking and embarking on a more sudden or protracted easing path," Eckhold says.
"Domestic inflation remains uncomfortably high, and this will continue to worry the RBNZ. We continue to see core inflation measures falling relatively slowly – albeit more surely – in the year ahead. So, while there is certainly a case for reducing the degree of restriction, we don’t see the RBNZ being keen on getting too far ahead of itself and moving quickly toward or into easy territory. Rather, we expect the RBNZ to take a measured and data dependent approach. The future path of the OCR will be determined by the data, and not the calendar."
The Westpac economists longer-term forecast for the OCR is unchanged, with the OCR to fall to 4.5% as at May 2025 and for it to reach "our current estimate of the terminal rate of 3.75% in early 2026", Eckhold says.
47 Comments
If a big war kicks off in the Middle East and the U.S. gets involved, the Fed's got a tough choice on its hands with interest rates. They could go either way, depending on how things shake out.
They might drop rates if the economy starts getting shaky. Wars can spook people and businesses, and that could slow down spending. If that happens, lowering rates could make borrowing cheaper and get the economy moving again.
But, they might also raise rates. Wars usually push up oil prices, which could lead to higher inflation. If the Fed thinks inflation’s about to go through the roof, they might hike rates to keep it in check. Plus, if everyone starts piling into the U.S. dollar and safe investments like Treasury bonds, the Fed might bump up rates to keep the dollar from getting too strong or the markets from getting too wild.
Of course, they might just sit tight for a while and see how things play out. They could hold rates steady at first, keep an eye on the situation, and then adjust as needed. It’s all about trying to keep the economy balanced without letting inflation or market chaos get out of hand.
So, yeah, it’s a tricky spot for the Fed, and they’ll be weighing up a lot of different things before making a move.
"...economists think..."
Which means very little, if anything at all. They have all been trained under the same System; they all think alike. And that's where they fall short. Show me the economist who foresaw an OCR of 5.5% just 3 years ago, when the OCR was 0.25%. There weren't any. Yet even commentators on this site saw a rising rate as the CPI pushed though 4%. But no. The Economic Thinking was still that "we might get a negative OCR is due course"
When push comes to shove, it doesn't matter what they think will happen. All that matters is what does.
And if that work is going into, say, infrastructure development, then that's what should happen. We need to transform our Private Debt into Public Debt. Not make one or both bigger. Just enable the transfer. The perhaps we can pay that down with the Productivity Burst that should result.
In summary - More and Cheaper Debt isn't the answer. It's what got us to this precarious place.
Anecdote:
I know a construction manager (rebuilding some of our roads of national importance, apparently) who keeps jumping from one major firm to another, and then back again after 6 months. And each time he's in great demand - at a higher wage level.
Now that might be a solitary case, but is it? Those who have the necessary skills will be fine. Those without, will need to acquire them.
This is often the case in major infrastructure projects in NZ. Being a small country, there are often only a handful of people capable of doing certain roles. I remember being on the tender committee for a major generator refurbishment project. There were five multinationals vying for the work but we all knew that in the end it would be the same group of 20 workers on the tools as they were the only people in the country with the necessary experience. All we were doing was deciding what colour overalls they would be wearing.
No matter when they cut in 2024, there is a large amount of HUMBLE PIE to be consumed by the RBNZ. But agree that start of cuts is more Likely This august or Nov, this Aug would be IMHO like writing a resignation letter for Orr..... hell the track still says late 2025 for cuts
I think the probem is the market wants cuts so we can all get on with borrowing cheaply to buyand sell houses that keep going up in price and spending our equity gain with retailers.
To keep that ponzi going we need simply to keep importing people and keeping credit costs very low.
The reality is that that isn't and never was sustainable.
And dropping the interest rates to stoke prices and increase borrowing again too soon will have consequences for many other parts of the economy.. not least inflation and exchange rates.
If we drop more than .5 before the end of the year I see rates needing to go back up in q1 25 to temper inflation and salary rises.
With what you’ve said you are saying that the impact of a cut higher than 0.5 will have an almost immediate impact causing inflation to spike in Q1? I would argue that the lag effect of the tightening will still be playing out in Q1 regardless of the size of any cuts over the next six months…hypothetically they could cut back to 0.25 in August & I still think it wouldn’t show up as inflationary till deeper into ‘25
The three previous quarterly inflation reads (0.5, 0.6, 0.4) where exactly within RBNZs target range. They will be very happy that inflation is steadying about where it needs to be to hit the mid-point of their target.
It's hard for me to call any cut (or raise) any time soon based on the data available. This is very high level tea leaf reading at Westpac to believe inflation is about to collapse and RBNZ would react instead of "wait and see".
And employment isn’t an explicit consideration any more.
at some point economic carnage and rising unemployment WILL affect financial stability, however.
That said, surely there’s a point where inflation is beaten where you might as well lower the OCR if a higher OCR isn’t really achieving anything other than causing economic and social pain…
My view (too often stated I know) is that the OCR has made no notable difference to measured inflation (CPI). Higher rates have done as much harm as good etc. But, boy are those high rates effective at crushing our high-private-debt economy. Look at the latest weekly job numbers.
Wasn't that the whole point.
Raise ocr specifocally to smash the economy.
Outcome is higher unemployment (lower salary growth) and lessen spend.
Seems to have worked very well.
The question is have they succeeded in stopping inflation so if they start to lower the ocr will people stop raising prices and salaries... I think habit is still there.
I do not share your confidence in the relationship between consumer demand and prices. The data doesn't support it. Basic logic doesn't support it. The whole theory of change that central banks employ is broken. Some of them know it. Others believe it because what's the alternative? They might have to so some real work
I agree there may be better ways.
The real benefit of the current approach is not its effect but that everyone knows what to expect. So we can plan for it, take risks and hedge our bets accordingly.
If government and rbnz had been more conservative during the boom and pandemic we would now have a minor downturn and swing back. That's the real problem.
If we start to change our ways or complicate our response then there will be more bias involved and unexpected issues.
Simple and a big hammer is actually predictable and thus good.
If they had done nothing the inflation rate would have still dropped but probably not as quite as quickly. Labour shortages from boarder closure etc was the main driver behind higher wage demands. There has also been a lot of supply issues due to international events and adverse weather events etc. The OCR doesn’t do much to fix that. My view is they have overcooked it quite a bit. The ocr needed to be raised to neutral or slightly above.
Westpac is trying to talk their book, they need people thinking that we are about to see a drop soon so some mortgages get printed! I can't see RBNZ touching anything until the next CPI report comes out in October. there is more nontradable inflation to wash through from local authority rates rises that fall into july quarter. This is looking like an average of 16% across nz ( https://wellington.scoop.co.nz/?p=161482) I don't have time to look through and see what in the non-tradables basket would be moderating that increase in this quarter.
Any cut in the OCR will too late to save the struggling businesses and workers. Just as it takes 6 to 12 months for higher rates to bight, so too with lower interest rates. The damage has been done. More company collapses, more forced sales, more people out of work.
House prices are now so low, that building new ones cannot compete. Why pay top dollar for a new place, plus furnishing costs, not to mention 15% GST on every door handle, light fitting and blade of grass? Cheaper and easier to buy a used house, at the current depressed prices, with no GST.
The RBNZ must be watching international markets and crapping themselves right now.
Still international cuts will make their life easier to cut, but equity crash risk off on NZD may take us down towards low 50c , then knock OCR down by a few emergency 50bps and kiwi will be in the dunny
In the GFC I think I can remember NZDJPY moving 8 big figures one evening.
All of the SILLY talk about soft landings etc etc - it's never happened. Whenever there is any significant disturbance to the global economy (oil price spike, GFC, Covid, war, etc), central banks step in and cause asset price booms and then big crashes. You'd have thought more people might be questioning why our go to price stability mechanism creates such instability!
A soft landing after the GFC? We didn't get working age unemployment back below 5% until 2017!!! The US are having one now, yes.
I had a consultant approach me out of the blue today to ask if I have any work he could help me with. I don’t really know him, he’s had his own consultancy with a couple of staff for 20 years. His work has completely dried up. He told me it’s worse than the GFC. He’s had to let his staff go.
I know it’s an anecdote, but it’s getting ugly out there.
Enough anecdote (single data points) and you get evidence (set of data).
Of course it's not random data points so not "reliable" but I'll take all the anecdote you got from on the ground examples.
I'm watching a new build go up on my walk to and from work. Teams of trades smashing it out, never less than 5 guys on site. Site cleared, foundations and services in - quick as. Framing up today. Couple years back would have taken months to get to this point with breaks as worked on other jobs at the same time. Question is do they have one go on to?
If they drop OCR the NZD will crash even more, governments have to give currency some backbone or a massive crash will happen very quickly, this could already be happening people also waking up to crypto nonsense people running for exits many will lose huge amounts of cash
Cutting the OCR this year won't have any impact as the average interest cost of mortgages is still increasing as fixed terms roll into higher rates and won't peak until Christmas - which also means in 2025 mortgage holders will be paying peak interest rates in the monetary cycle. Still lots of head winds yet
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