MNI: External Risks To Accelerate RBNZ Easing Cycle - Ex Econs

MNI (SYDNEY) - The Reserve Bank of New Zealand will continue to ease the official cash rate towards neutral despite recent better-than-expected GDP figures, with an OCR at 2.5% likely by the end of 2025, much lower than current official and market projections, former RBNZ economists told MNI.

The RBNZ is likely to continue reducing the OCR cautiously by 25 basis points at each successive meeting until it reaches what it believes to be neutral, said Geof Mortlock, financial consultant and former financial stability advisor at the RBNZ, estimating this to be around 2.5-2.7%. “They'll be keeping a very careful eye on non-tradables inflation before they take the brakes off too hard on monetary policy,” he said. 

RBNZ overnight index swaps have the OCR at 3.3% by July 2025, while the Reserve’s projections see it at 4.4% within 12 months.

Should retail trade, the building sector and the outflow of New Zealand citizens continue, the RBNZ will certainly cut 25bp in October and November, he added. "I doubt they will accelerate it at a faster tempo than that, unless there are adverse developments of a more significant, exogenous nature,” he observed. 

EXTERNAL DRIVERS

The weakening Chinese economy posed the greatest risk, followed by a potential Australian recession, which could compel the Reserve to ease faster, he argued. 

Pointing to the Federal Reserve’s decision to cut its benchmark rate by 50bp, Mortlock said there is a risk global economic conditions could worsen rapidly over the next few months. “I think then [the RBNZ] would accelerate the tempo of cutting the OCR,” he continued.

The Reserve surprised in August, cutting the OCR 25bp to 5.25% and shifting its outlook and rhetoric to a far more dovish stance within its projections. (See MNI RBNZ WATCH: MPC Discussed 50bp Cut, Slashes Rate Outlook)

While recent GDP growth was better than expected, the RBNZ will place more importance on unemployment and CPI over the next six months as it plots its easing path, said Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, adding the Bank will want to see non-tradables falling in particular. 

“Headline inflation here is going to be quite weak thanks to world oil prices falling and all those different things are helpful at the margin,” he added. CPI will fall inside the target band by Q3 and while GDP was better then expected, growth per capita was still contracting by 0.5% q/q, he added. 

China's slowdown will also impact New Zealand due to its budget and current account deficits, unlike Australia, he added. “If China does move into a Japan-style deflation, then it's going to be bad for the world as a whole,” he warned. “It's still my central view that this large deflationary force will influence the world and the Chinese authorities seem reluctant to do very much about it. I will be really surprised if the OCR is not 2.5% or below by this time next year for a multitude of both domestic and international reasons.” 

CREDABILITY CONCERNS

Leo Krippner, research fellow at the Singapore Management University and former senior adviser at the RBNZ, said the Reserve will stick to a strong easing path to help shore up its credibility following last month’s course correction. “If they were to wrong foot the market again… they will obviously be due for another round of criticism,” he added. “If the data changes the projection, then your actions should change as well. But it wouldn't surprise me if they'd just like to keep things a little more smooth these days.”

He said August’s change was likely driven by a shift in focus from inflation to GDP concerns. “They seem to be more focused on growth,” he said. “If they switch, that's where they can get the potential for upset. If they flip back to be more worried about inflation because they've got better economic data, that would be the potential for them doing something that would upset markets.”