“At the current pace of disinflation the RBNZ will shoot past its inflation target,” he added, pointing to this week’s Quarterly Survey of Business Opinion, which revealed rapidly softening economic conditions and accelerating disinflation.
The survey showed a drop in trading activity, a rise in staff reductions over hiring and a sharp contraction in price increases. (See chart)
StatsNZ's monthly selected price indexes – a key inflation indicator watched by the RBNZ in between quarterly CPI prints – was also steadily decreasing, McDermott added.
“They need to get to at least neutral, if not a little bit below, reasonably quickly and even 50bp in October, and 50bp in November will not get them there, and then we’ve got a massive wait until February.”
FRESH FORECASTS
Michael Reddell, independent economic commentator and former special adviser, economics, at the Reserve, expects the MPC to cut by 75bp cumulatively over the next two reviews. However, a 50bp cut will more likely occur after the RBNZ publishes a full set of forecasts in November, he said, noting the Committee will likely want to review quarterly CPI and labour market data due after next week’s meeting.
“One can make a case for moving 50bp now, but it looks to me as though to do so would require a different model than the RBNZ was articulating in August. The actual flow of data since August hasn't been overly weak, even discounting the weird [ANZ Business Outlook] confidence survey responses,” he said, pointing to the 10-point-increase to 61 in September. The result seemed premised on significant OCR cuts soon, not on domestic, or global structural improvements or private-led innovation, he added.
“But were I the MPC I doubt I'd see the need for a rush, when I had a full [monetary policy statement] coming in only a few weeks,” he said.
RBNZ overnight index swaps have priced in consecutive 50bp cuts at the next two meetings for a 4.3% OCR. The MPC is not scheduled to meet again until Feb 19.
Reddell added a 25bp cut next week is more likely until the MPC can confirm inflation had settled. “[50bp] would be a material departure from August, based on little or no weaker data,” he continued. “The RBNZ's December quarter OCR number seems specifically consistent with two 25bp cuts."