Kelly Eckhold says while the RBNZ appeared to promise an OCR cut next week almost unconditionally, decisions should always be based on the situation on the ground. 'No change with an easing bias would be the right thing to do'

Westpac chief economist Kelly Eckhold thinks the Reserve Bank (RBNZ) will cut the Official Cash Rate (OCR) next week. But he thinks it will be the wrong thing to do.

"The main case for cutting at this meeting is the RBNZ essentially promised it at the February Monetary Policy Statement. However, I believe moving more slowly is more likely to be appropriate notwithstanding those past communications," Eckhold wrote in a preview of the OCR decision, due on Wednesday, April 9.

Since becoming Westpac chief economist two years ago, Eckhold - whose previous work history includes stints as an adviser for the RBNZ and also as the manager of foreign reserves for the central bank - has frequently voiced views on the OCR that could be construed at the more 'hawkish' end of the spectrum.

The RBNZ is universally expected to reduce the OCR from 3.75% to 3.50% at its review next week. After the previous OCR review on February 19, then Governor Adrian Orr virtually promised further cuts at both the April and May OCR reviews. But subsequently Orr resigned and abruptly departed from the RBNZ and the central bank is now beginning the process of finding a replacement.

Between late 2021 and mid-2023 the RBNZ had hiked the OCR up all the way from just 0.25% to a peak of 5.50% in order to combat inflation that peaked at 7.3% in mid-2022. The RBNZ started to cut the OCR in August of last year as inflation moved back towards its targeted 1% to 3% band. As of the December quarter 2024, annual inflation was just 2.2%.

But in his OCR preview, Eckhold says an evaluation of the data flow in recent months "shows both an improving economy and robust inflation".

"Given the mandate is solely focused on inflation it’s hard to make the case for cutting rates at every meeting from here," Eckhold said.

"A cut at the May Monetary Policy Statement is likely still to be justified. But it's less clear further cuts would be required from there. Hence, we have reached the point where there is a difference between what I think the RBNZ will do as opposed to what they should do," he said.

Eckhold said the RBNZ has "put considerable weight" on a view that the 'neutral' OCR [the level at which it is neither restrictive nor stimulatory] is "around 3%".

"But this variable is unknown and unmeasurable in real time. Interest rates may also already be at neutral. Mortgage rates are likely at stimulatory levels now given rates between 1-3 years are around 5%. Stopping the easing cycle at either 3.5% or 3.25% may prove appropriate and would still deliver monetary conditions close to where they are today," he said.

"The exchange rate is also likely at stimulatory levels – evidence for that is clear in indicators of regional consumer demand and house prices."

Eckhold believes the 'neutral OCR' is an "unhelpful concept for policy formulation now the OCR is no longer at obviously tight levels".

He said another case for easing is concern on downside risks from the external outlook.

"Here I disagree that a proactive approach is appropriate. The starting point for the external sector is one of rude good health. If a negative shock is coming, the external sector is as well placed to deal with it as it could be. We have no idea if the global trade and tariff situation will meaningfully undermine the NZ economy. Any response to a negative external shock should be considered once the shock occurs and not before," Eckhold said.

"The exchange rate is playing the appropriate role as shock absorber. This should continue – cutting interest rates to somehow support asset prices to offset a permanent competitiveness loss from tariffs is unwise and inappropriate.

"How does pushing up NZ house prices to gee up domestic demand for a little while make NZ Inc better off right now? Especially when forecasts of inflation remain in the top half of the target range."

Eckhold concedes that conditions in the economy could deteriorate to the extent that inflation falls to the bottom half of the 1% to 3% target range.

"That would justify an easing bias to be acted on when the data shows this to be happening. Guessing it might happen when inflation is heading towards 3% is not consistent with the MPC’s mandate."

The RBNZ has already cut rates aggressively – pretty much as quickly as seen in the Global Financial Crisis, Eckhold said.

"We don’t have a crisis right now. Given the significant easing that’s already occurred, the stronger case is to step back and assess the impact of what’s already been done. No change in the OCR is appropriate," he said.

"While past communication appeared to promise a cut next week almost unconditionally, decisions should always be based on the situation on the ground. No change with an easing bias would be the right thing to do."