Governor Adrian Orr signalled two further 25bp cuts at the next two MPC meetings and the potential for a further 25bp reduction in the second half, in line with market pricing. MNI reported previously the -1.5% negative output gap found in the November MPS could drive the RBNZ to lower the OCR below 2.5% by Q3. (See MNI INTERVIEW: RBNZ To Ease Below Neutral By Q3 - Ex Official)
Hawkesby said the negative output gap, which widened to -1.7% in the bank’s February Monetary Policy Statement, had driven the OCR track lower, with the Reserve aiming for 3% at a faster pace. “That has been motivated by the fact that we think there's more spare capacity in the economy and that is what we think will drive domestic inflation back to target more quickly,” he continued. “Why aren't we lowering them even more quickly back to neutral? There is still lingering, domestically driven [services] inflation, which is persistent.” (See chart)
The New Zealand economy required a period of overcapacity to help better balance demand and supply following the inflation shock, which would “take the heat out of those domestic inflation pressures,” Hawkesby argued. “That really becomes the story of 2025 as … lower interest rates start to work their way through into the economy, and that's what we've got,” he said, noting quarterly GDP should pick up throughout the year, reducing the output gap back to zero. (See chart)
DATA DEPENDENCE
Hawkesby said the RBNZ had rapidly increased its focus on high-frequency data and now depends less on quarterly figures supplied by the official Stats NZ department to inform its decisions. Stats NZ’s monthly inflation report contains only 40% of the goods basket and does not trim out some volatile items, he noted.
"The RBNZ will focus on high-frequency indicators of economic activity, because that's going to give us the best feel," he continued. "What is that high-frequency data telling us about economic activity, and how much spare capacity there is, and how quickly or not they're recovering?"
The RBNZ will also study high-frequency indicators focused on inflation pressures, pricing intentions, and expectations, he said.