MNI RBNZ WATCH: MPC Discussed 50bp Cut, Slashes Rate Outlook

MNI (MELBOURNE) - The Reserve Bank of New Zealand will take a gradual, smooth path to a lower rate environment following Wednesday's decision to cut the official cash rate 25 basis points to 5.25%, though the Monetary Policy Committee discussed a 50bp cut at its meeting at which it slashed its rate outlook, Governor Adrian Orr told reporters on Wednesday.

“Our projection says we are going back into a period of stable inflation subject to any other external shock and that means you will see lower nominal interest rates coming back into the economy," Orr said, adding the neutral rate is about 3%. The MPC had decided unanimously on the more cautious 25bp cut, he said.

The RBNZ’s move, and updated Monetary Policy Statement forecasts, represented an about-face from its higher-for-longer narrative pushed since it last hiked the OCR to 5.5% in May 2023. (See MNI INTERVIEW: RBNZ Credible, Cuts Still Distant - Conway) 

The market had attached a 58% chance of a cut at today’s meeting. (See MNI RBNZ WATCH: Hold Likely, But MPC To Consider Cuts) The move led RBNZ’s overnight index swaps market to fall 10-18bp across meetings, with 77bp of cumulative cuts expected by the November meeting. (See MNI: RBNZ Cuts Incoming, Ex Staffers Question OCR Predictions)

Orr added economic data will drive further cuts. “It is a reasonably safe first step of monetary easing," he continued. "We're in a strong position to move calmly."

UPDATED FORECASTS 

The RBNZ now expects Q3 GDP to decline 0.2% following a 0.5% contraction in Q2, down from May’s expectations for growth of 0.3% and 0.1% respectively, while it sees consumer price inflation falling to 2.3%, 70bp lower than predicted earlier. It also assumes a 4.4% OCR by mid-2025, compared to the 5.5% rate noted in its previous forecasts.

Orr pushed back against suggestions May's predictions had been inaccurate, arguing the economy had since entered a "turning point."  

"Our recent announcements have talked about the committee's growing confidence that rising spare capacity in the economy and changing price setting behaviours would reduce inflation and enable a future easing and monetary conditions," he stated. "We have reached that point where the Committee has been able to act." 

He said consumer spending had fallen considerably since the Reserve’s last forecasts."It's down in aggregate, but then you divide it per capita, it's down significantly," he cautioned. "To have such strong growth and migration and to have declining consumption is doing it tough." 

HIGH-FREQUECNY CONFIDENCE

The Committee had leaned on high frequency data to inform its policy decision, rather than wait on Q3 GDP and CPI figures, he said. 

"What we've seen since then is not only high frequency prices coming off ... but also that second category of more persistent prices in the economy are starting to fall, which again gives the Committee confidence that we're going to achieve our objective," he said. "But there'll always be those hardcore prices that don't respond to monetary policy for other reasons, and relative price shifts in the economy. We chatted about that and feel more comfortable with managing it if we're actually in a low inflation environment." 

The MPC meets again Oct 9.