MNI: RBNZ Cut A Coin Flip - Ex Staffers

There is a 50-60% chance that the Reserve Bank of New Zealand will cut its official cash rate next week as the economy slows, former staffers told MNI.

The steep slowdown makes a cut the right course of action for the RBNZ, which has held the OCR at 5.5% since a 25-basis-point hike in May 2024, said John McDermott, executive director at Motu Economic and Public Policy Research.

“[Q3] inflation will be well in the target band on the next print and the economy is crashing,” he said. “Optimal policy would be to shift the OCR to neutral by the end of the year… around 4%. So vital to start now.”

Headline inflation fell 70bp in Q2 to 3.3% y/y, 30bp lower than RBNZ forecasts, he noted.

“With inflation in Q3 in the band, although we don’t have official confirmation yet, the RBNZ should be cutting now,” McDermott added. “But that would be a big U-turn from May and it depends how scarred they are from inflation over the past couple of years.”

While RBNZ Chief Economist Paul Conway told MNI following the publication of May's Monetary Policy Statement that cuts were still some way off, the Bank’s rate path has been out of synch with market expectations for some time. (See MNI INTERVIEW: RBNZ Credible, Cuts Still Distant - Conway)

LABOUR WEAKNESS

A deteriorating labour market means a reasonable argument could be made for a 50bp cut next week, said Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, who argues it should also have reduced rates at the July meeting.

“Below the headlines, hours worked were very weak and the private sector wage inflation measure I focus on looks to be pretty much back to what one would expect in Q2 with inflation around target,” Reddell said, adding that the RBNZ will have to acknowledge significantly more disinflationary pressure. Pointing to recent labour market statistics, he assigned a 60% probability to an OCR cut.

Unemployment ticked up 20bp to 4.6% in Q2, in line with the RBNZ's May forecasts. (See chart)

“They may not move because of stubbornness, in which I would include wanting to see the next [Q3] CPI and their May mistake, but not moving next week would just compound mistakes made already,” Reddell said.

SLOWING ECONOMY

Weak job growth will impact consumer spending, retail sales and GDP, noted Geoff Mortlock, financial consultant and former financial stability advisor at the RBNZ.

"Confidence is very subdued, suggesting that investment and consumer spending will continue to be weak for a good while, and probably only change once interest-rate falls start to exert a positive influence on household and business cashflows," Mortlock added.

"Given the recent CPI data and wider indicators of weakening economic activity, plus a deteriorating international economic environment, my hunch is that the RBNZ will cut the OCR by 25bp next week. But I wouldn't bet on it. They might leave it unchanged and then cut the OCR the next time."