Economists are flocking to change their calls - with increasing numbers of them now forecasting that the Reserve Bank (RBNZ) will cut the Official Cash Rate (OCR) by 50 basis points in each of the next two reviews.
If correct, this means the OCR would end 2024 sitting on 4.25% down from the current 5.25%.
The catalyst for the big change in view has been the weak result in this week's NZIER Quarterly Survey of Business Opinion (QSBO). Shortly after that came out on Tuesday, BNZ economists picked a 50 point cut to the OCR next week.
Then in short order on Wednesday, economists from Westpac, ASB and HSBC all came out with forecasts that the RBNZ would cut the OCR to 4.75% in its next review on Wednesday, October 9 and follow this up with another 50 point cut in the final review for the year on November 27.
In explaining why ASB economists had changed their minds and their call, ASB chief economist Nick Tuffley and senior economist Mark Smith said they were "getting increasingly concerned by just how tight monetary conditions are, and how long they would remain restrictive if the RBNZ took a measured approach to easing".
"Inflation pressures look set to shrink very soon. The QSBO suggested that deterioration of the labour market has picked up steam and that pricing pressures have weakened considerably. It is a warning signal that inflation risks undershooting the 2% mid-point of the inflation target band. In contrast, the risk of high inflation proving to be sticky is much diminished," Tuffley and Smith said.
The ASB economists believe current OCR settings "are looking increasingly disconnected with the economic outlook".
They said still-tight monetary policy settings are "exerting a significantly contractionary impact on the economy".
"Moreover, looming fiscal tightening and rapidly- waning net migration will also weigh on demand.
"Even with consecutive 25bp cuts per meeting this disconnect will remain, with monetary policy settings still looking to be too tight given the state of the economy. A faster pace of OCR cuts would help narrow the gap from both sides. Cutting the OCR earlier and by more will also likely reduce the amount of monetary easing needed overall, all else equal."
Westpac chief economist Kelly Eckhold said a "key driver" behind the Westpac change in view has been the "strong signs that the forward inflation profile will be much more benign in aggregate than we have seen since 2021".
He said their current forecast for annual inflation as at the end of the September is for an annual rate of 2.4%, falling to 2.2% in the December quarter.
"There may be some downside risks to those short-term forecasts," Eckhold said.
He thought the RBNZ would be asking themselves "what are we waiting for?" when considering the case for maintaining the OCR at what are reasonably tight levels.
"If the answer to that question is 'not much' then the path ahead seems clear, especially given the RBNZ has a long gap between meetings from November 2024 to February 2025."
Eckhold said he hopes the RBNZ will provide a clearer set of parameters on how they would expect to operate monetary policy in 2025.
"We hope the RBNZ will avoid the temptation to cut rates too aggressively in 2025 unless well justified by the inflation and economic outlook.
"Making the point now that a faster removal of restriction implies less need to cut so deeply later would be a good way to try and deliver the 'hawkish cut' that could stabilise output and employment without driving house prices further out of reach of the public," Eckhold said.
HSBC chief economist Australia & NZ Paul Bloxham and economist Jamie Culling noted that back in August, the RBNZ flagged that "the pace of further easing will thus be conditional on ... confidence that pricing behaviour is continuing to adapt to a low inflation environment".
The HSBC economists said they saw the signal from the QSBO this week as likely to be enough to give the RBNZ confidence that pricing behaviour is indeed adapting, "opening the door for the RBNZ to provide more relief, faster, in the form of lower interest rates".
"Inflation is easing, demand is weak, and the jobs market is cooling, which all warrant less-restrictive monetary conditions," the economists say.
"In our view, the recent data, particularly the Q3 QSBO, represents another shift in pricing behaviour in the economy, which we see as likely to give the RBNZ enough evidence that behaviour is reverting back to a low inflation environment – a key focus the central bank had flagged at its August meeting in determining the pace of further monetary policy easing.
"We also expect that, following October, if the Q3 CPI and jobs market data weaken further, as we are forecasting, that the RBNZ could consider a follow-up 50bp cut in November," Bloxham and Culling said.
83 Comments
If this is anything like any other recent times recessions, we're going to need both engines full throttle. Looks like the RBNZ on the left wing about ready to go full throttle, and for the right? Still trying to figure out how the controls work, currently trying to put it in reverse.
Medical costs up as well. Health Insurance premiums up 9%, GP visit is now $70, a repeat prescription now $32 (up from $26, thats a 23% increase). Not only can you not afford to eat or live in your house, you cant afford to get sick either.
Non-tradeable (domestic) inflation is still 5.4% and shows no sign of coming down to 2% any time soon (or ever). But apparently that doesnt matter to the RBNZ. They might as well peg the OCR to the price of iPhones and be done with it.
One thing to remember with stats calculations (I tried to raise this when I worked there, deaf ears), is the basket doesn't change as economic realities do. So the basket assumes weightings for ice cream and cavier are the same when times are good vs when times are bad... which doesn't reflect reality. People will drop health insurance, delay GP visits, stretch medication, eat more beans, eat less meat/cavier etc when times are bad. CPI assumes its the same, always.
Know anyone that has bought new phones in the last year or so? Nobody I know, yet half of them would have when times were good... just look at the cliff sales have tumbled off lifestyle/luxury goods companies (most bike shops, electronics retailers etc). This is why real world inflation isn't really taken care of in the CPI and tradeable inflation isn't really representative of reality.
BUT, we all have to buy energy as price takers, just to survive.
Pre-covid RBNZ inflation targeting was trying to keep inflation up in the 2% band, rather than down. We were importing deflation.
Domestic inflation likely to stay higher than target (as it related highly to the cost of leverage) so long as tradable inflation falls below. If it doesn't, who knows - more punishment for bag holders.
But if we are on the interest rate profile you suggest, then it means the doom gloom merchants are right (the economy is in a bad way).
In which case the people you say are wrong, and like to belittle with silly childish name calling, are actually right.
You don’t drop rates because the economy is getting stronger.
How bizarre.
Average 1st home buyer mortgage balance 554k. Other owner occupiers average 309K. A 1% point interest rate cut will improve potential cashflow for those average borrowers by $106 and $60 per week respectively. Frees up 8k and 3k of pretax salary respectively.
Now that's a tax cut.
That's old-fashioned thinking - the modern way is to believe your children are incapable of supporting themselves and making sure you have a pot of gold to hand them once you die. It's emotionally far easier to do that than to ensure they are raised to be capable of making their own way.
This is the internet, you must pick a side; it can be the kitten stomping sheer bastardy of what other people, or the irrefutable correctness of whatever the hell I've decided is the right thing. You must make a choice. There is no middle ground. You cannot just unplug your router.
Many of these people are likely flush with cash from selling their properties at or near the peak, to those who are now undergoing mortgage stress with interest rates rising.
These very people were probably once all for interest rates falling. Until they cashed out their properties and transitioned to being savers of course, then they've become "long time savers" who have had to deal with punitive interest rate settings for the last 20 years.
Increasing oil prices will flow into everything as it did 2020-2022 (notwithstanding the wet North Island summer that gave a rotten price on fresh produce), resulting in inflation from, as we've seen, people having to spend more on the bare essentials. Adding more disposable income to mortgage holders and businesses doesn't help that trajectory reverse.
correct, it does cause inflation, but does increasing the OCR in this situation resolve the issue? does increasing the OCR in this situation lower the price of fuel? no it does not.
does lowering the OCR affect the price of fuel, at a surface level i would say no.
That is my point.
"Increasing oil prices will flow into everything" - is there any evidence of this? My counter evidence is:
- Fuel in Auckland has dropped almost a dollar from its highs a couple of years ago, shouldn't other prices have dropped significantly too?
- Often the fuel price changes dramatically throughout the year while CPI remains relatively static.
HM, if it is significantly affected then yeah it will filter through to higher costs, but paying more at the pump will also act as another hike, it’s a necessity for most & the extra cost on fuel will simply be taken from where else they would’ve spent it or saved it so in that respect it will have a continued downside to demand in a lot of areas of our economy. Will be interesting to see, brent crude currently still 12% lower than a year ago even with this jump up, it’s all crystal ball stuff…but I would be surprised if it sways the RBNZ’s next decision eh?
Normally when something bad happens (e.g. Covid / GFC), the RBNZ aggressively drops rates. Although maybe they have learned that bad things can create both disinflation and inflation.
They should just ignore it and make the 0.5% drop that would otherwise be on the cards.
I doubt we see an oil crisis like the 70s.
The countries in conflict with Israel are pariah states with either no meaningful oil production or are heavily sanctioned.
There's plenty of supply from other countries like Canada, US, Iraq, Saudi Arabia etc who have no interest in messing with Israel.
The price fluctuations we see are mostly down to nervousness without substance.
Indeed, it's a bit like the doomy gloomies and their prediction of the exchange rate crashing if the RBNZ cut before the Fed. Sure, it blipped down hard for a day or two then everybody realized nothing had fundamentally changed and it recovered and actually surged.
That's false optimism.
India and China source much of Iran's energy outputs and the Israel/US retaliation will certainly target Iran's energy infrastructure. If this were to happen, two of the world's largest economies will have no option but to increase their purchases from the commodity markets, sending oil prices soaring.
"Eckhold said he hopes the RBNZ will provide a clearer set of parameters on how they would expect to operate monetary policy in 2025."
That would be nice.
I'm particularly interested in how the RBNZ will use DTIs and LVRs if they cut hard (as NZ Inc. needs them to do).
I'm also particularly interested in how the RBNZ interprets the last GDP rate which was nowhere near as bad as they predicted. (They were wildly out btw.)
'm particularly interested in how the RBNZ will use DTIs and LVRs if they cut hard (as NZ Inc. needs them to do).
How do we think the enforcement of the DTI's will be managed? So we have faith that the banks will adhere to it or will they push the boat knowing that if they take on ___ more mortgages above their limit, they will have the corresponding number discharging soon after.
Yes, this is the challenge - putting money back in peoples' pockets (by reducing mortgage costs) without blowing up the housing ponzi. It's almost like relying primarily on one lever to control a complex economic system is a bit foolish.
For what it's worth, i think they should put prohibitive limits on investor borrowing for existing properties (with matching discount rates for new builds) and be prepared to tighten LTVs. A lot of people talk about the amount of stock available, but there will also be a lot of pent up demand. for many, they will see this as their opportunity to get on the housing ladder (or a few more rungs up it).
"For what it's worth, i think they should put prohibitive limits on investor borrowing for existing properties (with matching discount rates for new builds) and be prepared to tighten LTVs."
I agree.
What they could do is to balance the advantages that LL have over OOs (via carried forward losses) by reducing the 100% rate of interest deductibility down to 80% (or whatever the magic number is in NZ). Many other countries do this. Or the opposite, which is giving a tax deduction for OOs for the interest they pay. The former works far better. But neither approach does nothing much for renters.
So yes. Use LVRs and/or DTIs. (Sorry banks. Your gouging days must end. Here's an idea - Lend more to productive businesses instead. Yeah, I know. It's much harder work, ay?)
Money coming into the economy in the last 12 months...
- about $2,800 per person from net bank lending
- about $1,300 per person from Govt deficit spending
Money flowing out the economy...
- $4,000 per person into offshore savings - thanks to our persistent current account deficit
If you want to see a graph of this over time, here you go.
We have only seen inflows and outflows balance like this once before in modern times - in 2009. Our economy cannot sustain this position because people with money like to save that money. This means that current account balances are now emptying. Thankfully, back in 2009, the Key / English Govt opened the deficit spending taps and by 2016 (yes, 2016) unemployment was back down to a reasonable level. Can you see this Govt deciding to get amongst it fiscally?!?
So BNZ (dovish), Westpac (hawkish-ish) and ASB (middle of the road) have all called for 50bps. Just waiting on ANZ (hawkish/erratic).
Does anyone know why the RBNZ hold their review the week before the Q3 CPI? They've complained about the lack of timely data, so this scheduling mismatch seems inexplicable to me.
I've been calling this for probably 6 months now - that once the September 2023 quarter dropped out we would be close to 2% and the RBNZ would look stupid having an OCR well above neutral. No bank economist or NZ media saw this coming until now, quite pathetic isn't it...
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