The Reserve Bank may pause its monetary policy easing in November as it watches for potential inflation flare-ups during the summer, according to a research firm.
In August, the central bank surprised commentators by lowering the Official Cash Rate from 5.50% to 5.25%, a year earlier than previously signalled.
Christina Leung, deputy chief executive at the NZ Institute of Economic Research, said she expected another cut in October but had “pencilled in” a pause in November.
“In our view, it makes sense for the Reserve Bank to be cautious now, and then cut by 50 basis points later on … than risk inflation reigniting, and having to hike, if it turned out the pace of easing was too aggressive.”
Leung said there had been growing expectations that interest rates would fall towards the end of the year, prompting households to opt for shorter-term mortgage rates. Nearly half of all mortgages are due for repricing in the next six months, up from 38% a year ago.
This shift towards shorter-term mortgage rates could lead to a faster transmission of monetary policy compared to when interest rates were rising.
“We should start to see the impact of that easing come through over the coming months, and that should help to continue to support economic activity,” she said.
Households have been “hunkering down and reducing discretionary spending”, which could be seen in weak retail spending data, but that might change quickly as mortgage rates fall.
Leung said many households would use the extra money, freed up by lower mortgage repayment and income tax rates, to do more retail spending.
“Generally, when New Zealanders have extra money, they go and spend it,” she said.
“So, there is potential for that rebound in demand to allow capacity pressures in the economy to reassert themselves and drive higher inflation.”
Ongoing job losses will discourage some spending but the Reserve Bank was likely to pause OCR cuts in November and resume in February, if the data shows the economy cool enough.
Other data
NZIER’s surveys have reported a broad economic slowdown, with a net 28% of firms indicating reduced business activity in the June quarter, and a net 35% expecting a deterioration in the general economic outlook.
Those numbers will likely look different in more recent quarters as the prospect of ongoing interest rate cuts has boosted business and consumer confidence.
But pricing intentions were promising, with businesses planning to lift prices falling even faster than those which were reporting higher costs.
Expectations for wage growth over the next year have declined from 5% a year ago to just 2.9%. Leung said she anticipated further declines as the labour market weakens.
Headline inflation was expected to fall within the target band this year, but non-tradable inflation was still elevated due to rising housing-related costs and energy prices.
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