Westpac chief economist Kelly Eckhold says there's a risk the Reserve Bank (RBNZ) may lower the Official Cash Rate (OCR) too far and will need to start increasing it again as soon as 2026.
In Westpac's Weekly Economic Commentary, Eckhold noted that RBNZ Governor Adrian Orr and other members of the RBNZ's Monetary Policy Committee (MPC) have indicated the RBNZ will cut the OCR by another 50 basis points [from the current 4.25%] at the February 2025 MPC meeting.
"Given the RBNZ expects to cut the OCR by a total of 75bp over all of 2025, this represents an unusual degree of front-loading of the remaining easing cycle," Eckhold said.
"The RBNZ has been unusually explicit about the size of the next move and seems to be setting a high bar for any deviation from the expected 50bps cut in February."
Echold said that Orr had indicated he saw the 'neutral' OCR as likely in a 2.5-3.5% range, although the range implied by the RBNZ’s 'indicator suite' suggests a range of 2.9-3.6%.
(Writer's note: the 'neutral' OCR is seen as the level at which the rate is neither restrictive nor stimulatory - the 'Goldilocks' rate, if you like.)
"We suspect there are a range of views within the MPC on where the neutral OCR lies and the performance of the economy from here will be the deciding factor," Eckhold said.
"Nevertheless, by indicating that after February the OCR will be cut more slowly, they are acknowledging that the neutral rate may be close," Eckhold said.
He said he thought the RBNZ's assessment of the neutral rate is "too low" and hence little further easing will be required after early 2025.
"I see significant downside risk to the exchange rate which will likely limit the scope for the RBNZ to ease too far in 2025 while global interest rates remain elevated," Eckhold said.
"Nevertheless, the RBNZ has a strong presumption of a 50bps cut in February which makes this the most likely outcome."
Eckhold said he expected OCR the easing cycle to conclude by mid-2025, "assuming no new economic shocks".
"If the RBNZ has underestimated the level of the neutral OCR significantly then there is a risk the RBNZ over-eases in 2025, potentially setting up the next tightening cycle in 2026," he said.
Meanwhile ASB chief economist Nick Tuffley said ASB has shifted to forecasting that the RBNZ will cut the OCR by 50bp in February 2025, rather than the 25bp it had previously assumed.
"As we noted in our initial Review of the November Monetary Policy Statement, the RBNZ’s forecasts for the OCR outlook imply a better than even probability of a 50bp cut for February.
"Importantly, the RBNZ’s public comments since the MPS release indicate that the RBNZ sees a 50bp cut in February as more of a base case.
"We take these comments at face value, though stress that the size of the next cut will still depend on how events unfold over an action-packed three months ahead of the February decision.
"Beyond February, we continue to expect the RBNZ will cut the OCR in consecutive moves of 25bp in April and May, finishing at 3.25%.
"However, the risk is that the pace of cuts in 2025 gets spaced out, noting that the RBNZ’s own modelling process implies this. The RBNZ will also be wanting to gauge the appropriate OCR settings after cutting the OCR at a relatively swift pace to date and (presumably) early 2025," Tuffley said.
13 Comments
Why do economists not see the need for a stimulatory OCR setting? Why is ‘neutral’ or ever so slightly restrictive the appropriate setting?
Acknowledge that there’s real risk of inflation kicking in to action again, but at present (and for likely much of 2025) the economy is in the doldrums. And inflation, at least for now, is tamed.
Listening to Paul Conway talk on Bernard Hickey's podcast, his gist seemed to be that they were only focusing on inflation and the economy was someone elses problem. That non-tradable inflation was still quite a bit above the long run average, and they wanted to see that coming down more before getting to neutral.
Seems pretty obvious what Orr is up to - he wants to speed up transmission of the OCR through to term deposit and mortgage rates (something that the banks have to do in tandem and plan for). They know they have properly messed up the last four years but they are too proud to be seen to panic. So, here they are using 'guidance' to try and get 75pt of loosening out of a 50pt cut.
No surprise here.
Central banking is a form of central planning of course, and central planning is well-understood to be a complete failure over the medium-long term.
We have had >50 years of fiat money alongside central planning from the central bank and by the govts own measure, CPI has shown significant inflation over that period. When you add in asset price inflation which is excluded for political reasons, the inflation is far worse.
Blaming Orr doesn't make sense, another central planner wouldn't have done much better. You only need to look at the performance of central banks around the world overtime to see that. It is a systemic and unsolvable problem.
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