Everybody agrees the Reserve Bank should and will cut the Official Cash Rate by 50 basis points this week - but beyond that is where things get a bit tricky.
The Reserve Bank's Monetary Policy Committee is set to have its latest review of the OCR, currently at 4.25%, on Wednesday, February 19, amid universal expectation that the OCR will be reduced to 3.75%.
However, the nine-strong, 'Shadow Board' of experts - including economists, academics and business leaders - the NZIER regularly consults for opinions on what will happen to the OCR, while agreeing there'll be a 50bps point cut this week, have an an unusually wide range of views on just what should follow. Caution seems to be the watchword.
NZIER senior economist Ting Huang said regarding where the OCR should be in a year’s time, the majority of Shadow Board members picked an OCR ranging between 2.75% and 3.5%.
"This reflects the Shadow Board’s broad view that the RBNZ should take a more cautious approach to the pace of OCR cuts over the coming year," she said "In particular, several Shadow Board members had pointed out their concerns over the potential inflationary impacts of the US fiscal and trade policies and a lower New Zealand dollar. However, two members viewed that the central bank should reduce the OCR at a more rapid pace given the weak conditions in the New Zealand economy."
In terms of some of the individual views of the Shadow Board 'members', Motu senior fellow and professor at Victoria University of Wellington Arthur Grimes said it is important that monetary policy "does not overreact again, as it has done both on the downside and the upside in recent years".
"A gradual decline in rates is warranted," he said.
BNZ head of research Stephen Toplis said there is no doubt the OCR needs to continue falling.
"The only debate is how far and how fast. With inflationary pressures far from extinguished, the NZD [NZ dollar] weakening, the cash rate converging on neutral, and Trump-driven uncertainty elevated, the RBNZ may soon need to adopt a more cautious approach while still pushing rates inexorably lower," he said.
University of Otago associate professor Dennis Wesselbaum said these are very uncertain and volatile policy times – both domestic and foreign.
"Cuts [to the OCR] are still needed but one has to carefully monitor fiscal spending/debt in New Zealand and the US."
Boffa Miskell chief executive Kerry Gupwell said there is still a lot of uncertainty/hesitancy in the market.
"The Government needs to pick up the pace with its policy development and decisions. It feels like the first half of 2025 will still be somewhat subdued, which is not good news for those trying to maintain workforce capacity."
Victoria University of Wellington professor Viv Hall said it was pleasing to see modest further easing in core inflation and some non-tradables inflation.
"But there also remains considerable uncertainty for the neutral OCR and for forthcoming global inflation. On balance, I opt for a 50bp cut in the OCR for this round, and a somewhat cautious approach to the degree of easing over the next 12 months."
Business New Zealand economist John Pask said beyond the short term, the presence of very fluid international risks could impact NZ with respect to tradable inflation, "which would suggest that the Reserve Bank will tread carefully with regard to further cuts over the coming year".
Kiwibank chief economist Jarrod Kerr said inflation "is back in its box", and should average 2% from here.
"There are growing risks to the downside offshore. Our recovery is fragile and needs a neutral policy setting – which is closer to [and OCR of] 3%. And if any of these downside risks begin to dominate, then an easier policy prescription could be required."
16 Comments
Only the facts matter!
Ergo, "considerable uncertainty" is NOT a valid reason for NOT getting back to the neutral rate ASAP.
And the only pertinent fact at this time is that the currently restrictive OCR rate is creating greater unused / idle capacity within NZ as the economy shrinks.
Kraken you've clearly applied some subjective interpretation to my post. I said ought to be 0.75 cut now - that would take the OCR to 3.5. To be followed at the next review by 0.5, which would take the OCR to 3.0. Then to assess further at the third review which would likely take it to 2.5 or 2.75. Where does this need for an emergency meeting and a cut of 4.25 come from??
The interesting part about the upcoming meeting won’t be the outcome but the projections. Currently RBNZ projecting 3.55% in December this year, so no guarantee there will be even 0.25% more this year. I personally think there will be 3x0.25% consecutively to 3% then hold.
Do you think the RBNZ will go from 5.5% to 2.75% or lower without taking a breather to make sure they haven’t reignited inflation? That would be pretty risky. To be fair anything could happen with Orr in charge, but I was hoping he’d have learnt some lessons from his previous overly dramatic OCR decisions.
None of these experts take the real economy into account when assessing where rates should be. If NZ was producing reasonable growth, then inflation would be the only consideration. But with the current monetary setting continuing to choke the economy, we've got a long way to go to start producing any meaningful growth.
My prediction is that there will be a pause around mid year only to have to resume cuts as the economy drifts sideways.
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