MNI INTERVIEW: RBNZ To Cut By Year's End - Spencer

A slowing economy and easing by major global central banks could push the Reserve Bank of New Zealand to cut the Official Cash Rate earlier than assumed in its most recent forecasts, Grant Spencer, teaching fellow at Victoria University of Wellington and former deputy governor at the RBNZ, told MNI.

Spencer considered market pricing, for a 25-basis-point cut to the 5.5% OCR by the end of 2024, about right. The RBNZ’s communications following the Monetary Policy Committee (MPC)’s most recent decision to hold the OCR steady showed the Reserve wanted to contain inflation expectations and maintain term rates to avoid premature easing, particularly following Q1’s surprise nontradable inflation print, he added. (See MNI RBNZ WATCH: MPC Cites Risk Tolerance For Restrictive OCR)

“[The RBNZ] adjusted up its output gap, because they felt this was more than just an isolated issue with insurance or council rates,” he noted. "It adjusted the neutral rate estimate by 25 points and that meant their model would generate a higher-for-longer interest-rate track."

He added the Reserve’s “intuition” likely expected an earlier easing but “there's a certain mechanical way that the process works with their modelling and forecasting – they were caught between a rock and a hard place on that.”

While the RBNZ officials and the MPC hinted at another hike when the it last decided on the OCR in May, Spencer doubted they believed one would be necessary. “So they were trying to massage their forward track," he added, noting the Bank could not forego offering a prediction as other central banks do. “Certainly the RBNZ's hope and probably expectation is that it will be easing before indicated because the track doesn't see a cut until the end of next year.”

Moves by peer central banks to reduce their rates will also help drive New Zealand inflation lower, he added, pointing to the Bank of Canada's and ECB's recent cut, as this would place upward pressure on the New Zealand dollar.

The RBNZ’s Chief Economist Paul Conway told MNI shortly after the Reserve’s last decision that the Bank is watching moves overseas, but stressed the Bank would hold the OCR high for some time. (See MNI INTERVIEW: RBNZ Credible, Cuts Still Distant - Conway)

ACCELERATING WEAKNESS

Spencer believes New Zealand’s economy will weaken further as unemployment increases gain momentum. One-off inflationary impulses, such as via the insurance industry or local government council rates, could support headline CPI for some time, and the Reserve will need to look past these to gauge underlying inflation accurately, he added.

“They really need to see CPI down within the target range of 1-3% and I expect it could well be below 3% by the September quarter."

However, should another surprise keep inflation above 3% in the September quarter results, then the RBNZ will likely defer its first cut until early 2025, he noted.

Spencer told MNI in December the RBNZ would likely hold the OCR at 5.5% before cutting the rate in H2.