MPC In Strong Position To Ease “Calmly”

Governor Orr said that today’s 25bp rate cut was not a difficult decision as the RBNZ is now “confident” about inflation returning to target due to pricing behaviour adjusting to lower inflation and greater spare capacity. Also a 50bp move was discussed, but the MPC took the cautious approach and the revised OCR path reflects this. Future cuts will be data dependent.

• The significant change in forecasts was discussed and Orr said this was typical of turning points. The RBNZ had noted risks in both directions in May and that the growth risks had materialised. The possibilities are now more balanced.
• There is now a technical recession forecast for Q2/Q3 and Orr stated that the economy is currently in the “darkest period” and that while Q2 GDP is not yet available, high frequency data showed significant weakness, which is incorporated in the forecast. This data is covered in Box A of the MPS.
• The economy will normalise as inflation and rates come down and this is reflected in the RBNZ’s upward revisions to 2025 GDP.
• The recent government budget was neutral as spending reductions offset tax cuts (see MPS Box B). The RBNZ assumes that around 50% of tax cuts will be spent. Announced electricity price changes are in its CPI forecast and can be seen by the 0.9% q/q forecasts for Q3s from 2025, but the MPC doesn’t see this threatening price stability as inflation expectations are well anchored.
• See MPS here.