BNZ economists reiterate their longstanding prediction that the RBNZ will ultimately take the Official Cash Rate down to 2.75%

BNZ economists say the Reserve Bank should "keep a very steady hand on the tiller" this week  and go ahead with the earlier suggested 25 basis-point cut to the Official Cash Rate.

But the BNZ economists strongly reiterate their earlier view that the RBNZ will ultimately end up lowering the OCR to 2.75% - which is lower than most have predicted.

The RBNZ's latest OCR review is on Wednesday (April 9) and it is universally expected that the OCR will be lowered to 3.50% from the current 3.75%.

The RBNZ in its most recent forecasts in February, indicated a likely low point of 3.0%-3.25% for the OCR, but the BNZ economists have had a longstanding  pick that the OCR will ultimately be dropped to 2.75% in this easing cycle.

And BNZ's head of research Stephen Toplis says in the bank's latest Economy Watch publication, headlined: 'Trump's Terrifying Tariffs!' that BNZ economists have been picking a 2.75% low in the cash rate for almost two years now.

"One of the reasons why we kept to our non-consensus view was the fear that the tariff news out of the States could only be bad," he said.

"We’d not really pondered it being quite so tempestuous, but we feel our fears have been vindicated."

Toplis said it was the BNZ economists' "over-riding view" that what's being seen presents "a big headwind to growth no matter where it all finally ends up".

"On this basis we see no reason to change our view at this juncture but, like everyone else, we will be watching the evolution of this nightmare very closely, mindful that while it may argue for higher interest rates it could, yet, also present some downside risk," Toplis said.

"For the record, domestic financial markets have certainly taken on board the downside risk in finally pushing the expected OCR track sub 3.0%."

Toplis said it is hard to believe the RBNZ "will have any greater clue as to what is around the corner than do we or anyone else".

"And this is not a simple modelling exercise that can be run in the manner that some shocks might provide. Indeed, to start with this is yet another supply shock, and we know from recent past experience that central banks are not well placed to deal with such things," he said.

"In our opinion, the best thing that the Bank [RBNZ] could do is to keep a very steady hand on the tiller. This means following through with the 25 basis point cut it had suggested when it met back in February."

Toplis said where things might well change for the RBNZ is in the rhetoric about where to next.

"Surely the Bank [RBNZ] must acknowledge what is going on now and the uncertainty this brings. In so doing, we would not be surprised if its musings about where to next were left wide open," he said.

"Were this the case we would not read the text as indicating the Reserve Bank thought it had done enough - just that it was acknowledging that it would use the time between now and the May Monetary Policy Statement to try to make sense of what is going on."

Toplis said from a New Zealand perspective in response to the tariffs, we are going to have to be "more reactive to events than proactive in our analysis of the economy".

"Understanding risk will take precedence over a fraught forecasting process. Nothing is a given including the extent and the duration of the tariffs currently imposed on us," he said.

"...Probably the best we can say is that there is a clear risk we need to downgrade our growth expectations but there is two-way risk for inflation. One thing’s for sure, unintended consequences and unexpected reactions will come thick and fast."