MNI INTERVIEW: RBNZ Will Cut Harder If Needed - Conway
MNI (SYDNEY) - The Reserve Bank of New Zealand will make more aggressive cuts to the 4.25% Official Cash Rate track than recently outlined in its forecasts should GDP growth underperform Chief Economist Paul Conway told MNI, though he pushed back against any suggestion that this Wednesday's meeting should have delivered a 75-basis-point reduction.
“The projections are conditional on the economy evolving as anticipated,” Conway said in an interview. “And if it doesn't, we'll be back, and we will set a different path for the normalisation of interest rates.”
While the Monetary Policy Committee’s 50bp cut this week, in line with October’s similar reduction, was widely expected as underlying measures of inflation fall consistently towards the Reserve’s 1-3% target midpoint and the economy slows, some economists had expected it to at least consider a 75bp cut, but Conway pointed to concerns with persistent, non-tradeable inflation.
“A lot of that fall in inflation in the last quarter was driven by tradables,” he said, noting non-tradeable inflation remained high at 4.9% y/y in Q3. “We've got excess capacity in the economy, we're confident that it's coming down, but it's not riskless.” (See MNI RBNZ WATCH: RBNZ Charts Path Towards Neutral)
Domestic inflation could have remained persistent had the RBNZ cut 75bp, he continued. “On balance, the Committee is confident with the 50bp and with signaling that there's more to come,” he added, pointing to Governor Adrian Orr’s flagging of a further 50bp cut at the next meeting on Feb 19. “I think it's well considered and it's a confident ease. We've got inflation back in the band, it's at 2% and we expect it to stay there.”
GROWTH CONCERNS
While the Reserve has eased 125bp since August, its updated forecasts show average mortgage rates will only fall 60bp from 6.4% over the next 12 months.
Conway said average rates would be impacted by various factors, such as borrowers choosing to fix with different tenors as the interest-rate cycle advanced. The lower pass-through should not impact RBNZ growth forecasts significantly, as monetary policy works through a range of channels, not just mortgages, he explained.
But the MPC would lower rates at a faster pace should GDP surprise to the downside, Conway added.
The RBNZ’s latest forecasts have the economy growing 0.3% in Q2, up from Q1’s 0.2% fall. Stats NZ will release Q3 GDP data on Dec 19.
“There's obviously significant uncertainty around those forecasts,” Conway said, noting GDP was just one variable the Reserve monitored. “If the whole economy turns out weaker than what we're portraying in yesterday's MPS, then it would imply a different OCR track.”
The RBNZ expects the OCR to fall back towards neutral – which it estimates to be between 2.5-3.5% – sometime by the end of 2025.
TRUMP IMPACTS
Donald Trump’s trade policies will cause global price volatility if implemented, but the Reserve will look through this and only adjust policy if inflation expectations begin to adjust, in a similar approach to that which would be taken in response to an oil shock, Conway said.
"We're certainly not going back to the Great Moderation, where macro economies were relatively stable," he argued. "There's plenty of shocks coming at us and we can't forecast that. We can't base an OCR call on those events until we learn more about what they actually look like. And our view is that the best place for us to be to lean into those upcoming events is with inflation at the midpoint of our target band."