MNI INTERVIEW: RBNZ Could Cut Next Year - Ex Dep. Governor

The Reserve Bank of New Zealand may need to cut the Official Cash Rate some time within the second half of 2024, much sooner than it projects, as the economy slows faster than forecasted, a former policymaker told MNI.

The OCR will likely remain at 5.5% before easing should the economy continue to perform within the RBNZ's latest forecasts, said Grant Spencer, teaching fellow at the Victoria University of Wellington and a former deputy governor at the Reserve. "But there's a risk it will have to tighten, and there is also a risk the economy will slow faster over the first half and I would expect some easing of policy in the second half," he told MNI.

The MPC held the OCR at 5.5% last week, its fifth consecutive pause. However, its communication, Governor Adrian Orr’s public comments and updates to its November Monetary Policy Statement forecasts were seen as hawkish and implying a potential additional 25bp increase some time in 2024. Spencer accurately called the May increase to 5.5% and the subsequent pause. (See MNI INTERVIEW: OCR At 5.5% Before Pause - Ex-RBNZ Deputy Gov)

He added the RBNZ will avoid any indication of a cut to limit complacency. “It will keep communications tight and the Bank’s OCR track will remain on a hardline until it sees a significant change next year – that’s sensible monetary policy,” he added.

The RBNZ's updated forecasts have not factored in a chance of an OCR cut until Q1 2025. (See chart)

HAWKISH TURN

Spencer noted the RBNZ's belief that total aggregate spending across the economy had grown more than expected led to this week’s hawkish shift and its evolved take on immigration and fiscal policy, which it now views as more inflationary. Total aggregate consumption had grown though demand per capita had fallen, while the gap between aggregate demand and supply had widened more than the Reserve had anticipated, he added.

The RBNZ had previously emphasised the supply-side benefits to high immigration levels, but its recent communications and forecasts suggested it now believed the elevated numbers had added significantly to demand, particularly as the housing market bottomed and rental prices increased, Spencer explained.

“The MPC is concerned any pickup in demand pressures is going to frustrate efforts to reduce inflation, which could lead to more tightening – things are on the right track, but the Bank is worried about the risk of reversion to more inflation pressure,” he added.

FISCAL CHANGE

Spencer said the Reserve had also changed its tone on the fiscal outlook, noting government spending was not falling as much as initially predicted. The RBNZ previously refrained from commenting on the interest-rate impact of the government’s fiscal stance, he added.

A centre-right coalition recently formed government following October’s general election. While it has not released detailed policy costings, it has vowed to provide fully-funded tax cuts and reform the RBNZ, reducing its mandate to a single price stability goal among other changes.

Spencer said the Reserve opted not to call out fiscal policy when the previous government failed to reign in high levels of spending following Covid. “In recent years, the RBNZ has been very cautious on saying anything that might signal government spending is excessive or needed to play a bigger role in containing inflation pressure,” he added. The change in government and the concern over rising aggregate demand pressure may have prompted the RBNZ’s shift on fiscal policy, he continued.