The Reserve Bank (RBNZ) needs to cut the Official Cash Rate (OCR) by more than it has signalled this year, according to Kiwibank economists.
In Kiwibank's weekly First View publication, chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say they are hopeful that an economic recovery in the second half of this year should help businesses avoid further significant cuts to headcount.
"But should we not get the required rate relief from the RBNZ, the risk of further job losses only grows.
"It’s why we think the RBNZ will need to deliver more than they have signalled this year."
The Kiwibank economists have long been of the view that interest rates "were hiked too high, for too long, and we’re suffering the consequences".
They have reiterated their call for the OCR to be reduced to 3% this year.
At the moment the OCR is at 4.25%, having been progressively cut since August 2024 from its cycle-high of 5.5%.
RBNZ Governor Adrian Orr was surprisingly explicit in suggestions late last year that the bank would move the OCR down to 3.75% in its first review for 2025 next week. But after that, many market observers think the RBNZ will proceed cautiously.
In its latest Monetary Policy Statement issued in November, the RBNZ signalled it would be cutting the OCR only as far down as 3.5% by the end of 2025.
"When we last heard from the RBNZ, in November, they signalled another two cuts to 3.5% this year, and a very slow move to 3% deep into 2026/2027," the Kiwibank economists said.
"Why wait? Why muck around? That leaves conditions too tight for too long.
"We argue we need to get to 3% (neutral) this year. Especially with inflation already stabilising at 2%. Holding out for longer is just going to cause unnecessary and indeed avoidable damage to the labour market."
Official figures released last week showed that as of the December quarter the unemployment rate had hit a four-year high of 5.1%, up from 4.8% in the September quarter.
In BNZ's weekly Markets Outlook publication, head of research Stephen Toplis, says the OCR should be cut 25 basis points per meeting, following the 50 expected next week, until such time that the RBNZ "thinks it’s done enough".
"In theory, that should mean the cash rate falling to a level deemed as being below neutral, i.e one that is outright stimulatory," he said.
"The big debate, of course, is where is neutral? And how much lower than neutral do you need to go to get the desired outcome. For the most part, it doesn’t matter where we think neutral is. The Reserve Bank decides where rates go and will shift them according to where they think neutral is.
"On this basis, due attention needs to be given to Chief Economist Paul Conway’s recent speech in which he confirmed the RBNZ sees neutral as being in a 2.5% to 3.5% band meaning that a working assumption of 3.0% is a good bet.
"On this basis we have a low in the cash rate of 2.75% pencilled in. It’s the same pencil we have been using since first forecasting this low point in the rate cycle almost two years ago. Any number of reasons mean it might not land there but it still seems to us to be a good working assumption," Toplis said.
He said financial markets have already priced in "an aggressive rate cut trajectory".
"This means that if the RBNZ does not follow through with substantially lower rates then retail interest rates will begin to drift to higher."
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Financial stability should be the first mandate, which would require not fuelling borrow and spend, not allowing house price inflation, credit creation and mortgage terms above certain limits. Financial speculation on anything should not flow into the wider economy and only those gambling should be affected. Maybe inflation would be less of an issue if these elements were better managed.
"Financial speculation on anything should not flow into the wider economy and only those gambling should be affected"
Speculation on residential real estate has flow on effects onto the wider economy.
Look at the numerous other manias in residential real estate and the after effects.
The bigger the party, the bigger the hangover.
" a secondary objective of avoiding unnecessary instability to financial system, output, employment, rates"
Explanation from the RBNZ
I think the wonks might be starting to get scared re NZ property price levels...
Looks like clearance and liquidity is lower then current ask. No one can stop the next
leg lower now (even Onewoof says a flood of new listings) , but RBNZ can start to make it easier for
a new generation of buyers to throw themselves onto the Ponzi alter as a sacrifice to their elders..
What happens if they still refuse?
The warehouse, where everyone likes a bargain......
Spot on!
If you followed Jarrod Kerr he's like a broken record: he's been playing this same old tune since at least 2021. Exact same words, exact same tone, exact same message
The only new thing in this article is that someone from Interest picked on it. Wonder why now and if it's only by accident. Guess we'll find out
Jarrod Kerr calls RBNZ too hawkish every year doesn't he? If he were RBNZ governor we would be building houses from bundles of NZD notes.
https://figure.nz/chart/iaqm0DBcbX6qoPat-UKIbS5pwLLDvVwjL
Unemployment is relatively low and has only really been lower before major crashes (2004-2008,2019,2021), where low unemployment was making it hard for businesses to find workers which lead to wage inflation.
The RBNZ's mandate to control inflation with a secondary mandate to control inflation, if you want to see the effects of inflation on unemployment rates, look at Argentina.
Yet the unemployment rate does not account for those who lost their jobs and fled to Australia. If they had stayed, our unemployment rate would be higher.
It also doesn’t reflect the rising underutilisation rate among employed workers, which is a better indicator regarding the health of the labour market.
does not account for those who lost their jobs and fled to Australia
Do you have any information that indicates that is actually what happened?
Alternately people left their jobs to move to OZ and that left jobs in the market to be filled.
You hear people leaving for better pay, better job opportunities, lower cost of living, I can't recall being made redundant a common one.
There'll be a variety of situations for why and when people leave for the land of Oz, but with so many job cuts/roles disetablished, it is hard to imagine it doesn't skew the data somehow. When a role is disestablished, it doesn't mean there is automatically another to be filled somewhere - smaller pool.
Fair point, Stats NZ does not collect specific data on why New Zealanders are leaving. Many articles cite unemployment as an economic driver but don’t go into specific breakdowns.
Alternately people left their jobs to move to OZ and that left jobs in the market to be filled.
In theory this would also reduce the unemployment rate by providing more opportunities for job seekers/unemployed still in NZ. But the unemployment rate is still rising even though more working aged people are leaving NZ.
Thousands of Kiwis have left their country for Australia, and others have become disenchanted by the job search and given up looking for work. If those people had stayed in NZ, and were counted among the unemployed, NZ's unemployment rate would be much higher.
Not everyone is hurting. Seems to be a lot of businesses for sale that are apparently very profitable my own business is still in the black and we added to staff last year.
It all comes back to debt. We have zero. Rather than buying jetskis during covid, we stacked cash.
Really think that is a big part of it.
My business is definitely a bit slower than the boom Covid years (some of that slower trading, some of that a deliberate lifestyle choice brought about by my priorities shifting after becoming a parent for the first time) but overall it's chugging along pretty well.
However, I do know other competitors and peers in my industry and lots of them are hurting because:
a) During the boom time they expanded too quickly (work was flooding in, needed more staff, hired any old person for probably too much money, old staff who were better then wanted even more money). I've kept my operation to myself and a couple of subcontractors who fill niche roles, and I'll never deviate from that I don't think.
b) They borrowed and/or spent lots. Of course the director needs a financed Audi RS6 to drive to client meetings and his wife who does the accounts needs a Range Rover. Of course every staff member needs a top of the range Macbook Pro and iPhone when really a fleet of cheap Macbook Airs would do.
Which part of The Economy is on life support? Unless all organs are functioning as designed, and in unison, there will be imbalances that affect the health of the whole.
One minute the patient is overdosing, the next suffering withdrawal symptoms. Inject more, inject less. Maybe it's the medication that's harmful. Maybe the doctors and their practices are no longer fit for purpose. Maybe the purpose is no longer adequate.
Economic growth, GDP growth can only be a byproduct not the goal. Address the various elements and we might see the desired outcome.
There is also the point where something has grown as much as it can and must die to allow the birth of something new to take it's place.
Banks want interest rates to drop more so they can lend more. So an opinion of a bank is not exactly impartial imo. IMO inflation could be the way up due to the weak NZ dollar and escalating prices of essentials which seem to be far more than inflation such as rates, power and insurance. NZs interest rate is already lower than Australias
This annoys me, Kiwibank are the slowest to cut rates and have higher rates than the big 3. The rates they offered us are advertised rates (standard we have 16% equity), my workmate who has less equity has considerably better offers from ANZ. It's almost worth paying back the cashback and switching.
Kiwibank's economists are not wrong.
I'd like to see Kiwibank pushing for tighter LVRs and DTIs as well. Especially for 'investors'.
The RBNZ is wrong to hold the OCR higher than is neccessary when inflation is within band. There is simply no justification for this at all. I'm still expecting 0.5% at the next one. Then either 0.5% followed by 0.25%. Or three 0.25%.
And ... I'll be praying for tighter LVRs and DTIs for 'investors' !!!
I wouldn’t be surprised to see restrictions eased, or removed, hate the “ponzi” as much as possible…they’ll kick the can…it’s the only vehicle big enough to get the economy going…it’s a shit idea, but I’m surprised how many on here are adamant it won’t happen again.
Why do RBNZ change rates most often in increments/decrements of 0.25, 0.5 ,0.75 etc regardless of what current rate is?
The actual percentage change is greater in the lower bounds of rate (logarithm) Eg 0.25bps from 3.0% is a lot more significant than 0.25bps change from 5%.
Maybe if they adjusted rates proportionality depending on where they were we wouldn't get such extreme swings in outcomes?
Were they still doing 0.25bps changes when rates were 7% or whatever?
Interest rates need to stay high enough to keep putting downward pressure on housing. All the banks forcast increased house prices in the second half of 2025. This is exactly what the country doesn't need. The bank sector wants to create more money to loan into housing which will bring short term gains but just add to the housing Ponzi in the long term.
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