MNI INTERVIEW: RBNZ To Ease Below Neutral By Q3 - Ex Official
MNI (MELBOURNE) - The Reserve Bank of New Zealand is likely to cut the 4.25% Official Cash Rate by 50 basis points at each of its next two monetary policy committee meetings and to reduce the rate to about 2.5% by Q3, easing earlier and more deeply than the central bank and market's forecasts, a former official told MNI.
Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve noted 2.5% would likely be below estimates of neutral.
“But below neutral is what you need when you've got a negative output gap, because that's how you get back to a steady state zero output gap, and unemployment at or around the NAIRU [non-accelerating inflation rate of unemployment],” he said, highlighting the RBNZ's most recent -1.5% output gap estimate.
RBNZ overnight index swaps markets have priced in a 3.06% OCR by November, while the Reserve’s most recent forecasts have the rate at 3.6% by the end of the year, with neutral between 2.5-3.5%. (See MNI RBNZ WATCH: RBNZ Charts Path Towards Neutral)
“When you raise interest rates by 500bp, you're probably going to have to bring them down at least 300bp,” Reddell noted, referring to the RBNZ’s rapid hiking pace which saw the OCR peak at 5.5% in 2023.
WEAKER DATA
“The PMI and PSIs... were both very weak," Reddell noted. Both measures printed below the expansion threshold over December. "Sure the lags are such that they’re still influenced by the previous OCR peak, but it is still above neutral and government fiscal policy will become more contractionary this year. Who knows what the world economy will do, but the domestic story will pressure the bank to cut a long way.”
A second consecutive 50bp cut at the March meeting would be consistent with a slower economic rebound, he added, noting persistent weakness in the housing market.
The depreciating New Zealand dollar, however, could risk the RBNZ’s easing plans if it continues to weaken, Reddell added, pointing to the NZD Trade-weighted Index which has lost about 5% over the last six months.
“If we saw another 5% fall on the TWI, that really would take it into territory that we haven't visited for 10 or 15 years,” he added, noting a drop of this size would reflect a serious domestic crisis relative to the rest of the world. “There is this uncertainty in all countries and in all markets as to where neutral is at the moment. Long-term bond yields have risen in the in the U.S., which makes sense. But does it make sense for [New Zealand] bond yields to be 4.5% when neutral is 2.5%? Not really. Or has the market really got some insight and wisdom that economists are mostly still missing?”