MNI INTERVIEW: RBNZ To Consider 75bp Cut - Former Economist
MNI (SYDNEY) - There is a 20-25% chance the Reserve Bank of New Zealand will opt to cut its 4.75% Official Cash Rate by 75 basis points next Wednesday, a former senior RBNZ economist told MNI, noting the lengthy wait before its next meeting in February.
“The partial inflation data out last week reinforces the sense that there's a pretty good chance core inflation keeps dropping,” said Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, pointing to Stats NZ’s recent selected prices index, which is used as a makeshift monthly CPI. “There’s a reasonable chance [CPI] is going to undershoot too. The confidence measures, job ads and all those sorts of things haven't rebounded compellingly. Prospects are still for a negative quarter of GDP in September and a deepening output gap.”
Still, the MPC is most likely to opt for another 50bp cut, he added, noting the argument for a 25bp reduction is weak. (See MNI RBNZ WATCH: MPC Cuts 50bp, Further Moves Depend On Data)
“Employment and participation was certainly on the weak side, and labour market indicators are generally still looking pretty sluggish," said Reddell, also a current Bank of Papua New Guinea board member. "When you bear in mind just how far the OCR is from best estimates of neutral, I don't think you'd be wanting to do 25bp at this point.”
EASING PACE
While the RBNZ is likely to cut aggressively towards neutral, it will need to start addressing more seriously where it thinks that level is, Reddell added. “There's really quite a disconnect between where long-term real interest rates are and where the Reserve's best estimate of neutral is,” he noted, pointing to the Bank's 3.8% neutral view.
“There is this genuine uncertainty about where things bottom and I think most market economists are talking in terms of 3.5%. That clearly would be inconsistent, utterly inconsistent, with the bank's own stated views on neutral. But equally, it's not impossible.” The Reserve could undershoot neutral anyway should it deem the output gap too wide, he argued.
Should government spending continue to fall next year alongside continued weak CPI, the MPC will cut 50bp again when it meets in February, he said. “Beyond that, you have to think there's a likelihood that things would slow down quite a bit, and they might even miss a meeting at some point,” he added.
UPDATED FORECASTS
The RBNZ will release its updated Monetary Policy Statement alongside the OCR decision next week. Reddell believes the forecasts will show a widening disconnect between the static GDP outlook and its downward revised inflation view.
“Because I think that is probably where they've been surprised this year, is by the extent of the disinflation that a given level of GDP has generated. The case for that change is not overwhelming, but I think if they were to move in that direction equally, you couldn't look at it and say, 'well, that's completely crazy. It's not consistent with the data.'”
The Reserve will need fresh fiscal and December GDP data, due after Wednesday’s meeting, for more meaningful updates, he added.