Overnight index markets have fully priced in a 50bp move next week and pricing implies a 3.1% OCR by November, though former RBNZ staff believe easing may have to be even deeper and faster.
The RBNZ itself sees neutral anywhere between 2.5-3.5%. Governor Adrian Orr signaled more cuts ahead following the MPC’s last meeting in 2024. (See MNI RBNZ WATCH: RBNZ Charts Path Towards Neutral)
INFLATION EXPECTATIONS
Longer-term Inflation expectations have fallen from the last quarter of 2024, with the two-year down 6 points to 2.06%, while the five-year fell 11 points to 2.13%, according to the RBNZ’s Survey of Expectations released this week. The results showed wage inflation expectations decreasing about 32bp to 2.49%.
The results aligned with Q4 CPI data that showed 2.2% y/y inflation, 10bp higher than expected though flat against Q3. Non-tradeable inflation, a key area of concern for the central bank, grew at 0.7% q/q, 10bp lower than expected.
LABOUR WOES
Unemployment rose 30bp to 5.1% over Q4, in line with market expectations and the RBNZ’s most recent forecast, Stats NZ data showed this month. The underutilisation rate increased to 12.1% from 11.6%, while the employment rate dropped to 67.4% from 67.7%. Wages meanwhile increased 3.3%, the data showed.
The sharp increase in unemployment, coupled with the last two quarters of negative economic growth, has driven the RBNZ’s rapid pivot to easy policy since its initial 25bp cut in August. (See MNI INTERVIEW: RBNZ To Accelerate Cuts If Needed-Conway)
A former RBNZ official told MNI last month the Reserve could reduce the rate below neutral to 2.5% by Q3 to stimulate the economy, pointing to a negative output gap. In its last set of forecasts, the RBNZ noted the output gap was likely -1.5%.
The Reserve will also provide a fresh set of forecasts within its latest Monetary Policy Statement following the Monetary Policy Committee's decision next week, which will give strong signals on the future OCR path.